Portfolio Size and Information Disclosure: An Analysis of Startup Accelerators

We study the information-gathering role of a startup accelerator and consider the accelerator's incentives to choose a portfolio size and disclose information about participating ventures. We show that in a rational-expectations equilibrium, the resultant portfolio size is smaller than the first-best (efficient) level, consistent with some real-world observations. We further show that when some signals are uninformative and the portfolio consists of mostly high-quality ventures, the accelerator may choose to disclose only positive signals (and conceal negative signals) about its portfolio firms — a strategy we refer to as partial disclosure. Moreover, coupled with pursuing this strategy of partial disclosure, we demonstrate that the accelerator may possess incentives to exit its portfolio firms early.

[1]  William L. Megginson,et al.  Venture Capitalist Certification in Initial Public Offerings , 1991 .

[2]  R. Barro,et al.  Rules, Discretion and Reputation in a Model of Monetary Policy , 1983 .

[3]  Robert E. Verrecchia.  Information quality and discretionary disclosure , 1990 .

[4]  Manju Puri,et al.  Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence , 2000 .

[5]  Hayne E. Leland,et al.  INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION , 1977 .

[6]  The Size of Venture Capital and Private Equity Fund Portfolios , 2007 .

[7]  Entrepreneurial Financing, Advice, and Agency Costs , 2009 .

[8]  Paul A. Gompers.  Optimal Investment, Monitoring, and the Staging of Venture Capital , 1995 .

[9]  Patrick Bolton,et al.  WORKING PAPER SERIES THE CREDIT RATINGS GAME , 2011 .

[10]  Morten T. Hansen,et al.  Networked incubators. Hothouses of the new economy. , 2000, Harvard business review.

[11]  R. Dye.  DISCLOSURE OF NONPROPRIETARY INFORMATION , 1985 .

[12]  P. Fulghieri,et al.  Size and Focus of a Venture Capitalist's Portfolio , 2004 .

[13]  Michael Waldman,et al.  Planned Obsolescence and the R & D Decision , 1996 .

[14]  Paul R. Milgrom,et al.  Good News and Bad News: Representation Theorems and Applications , 1981 .

[15]  David J. Denis.  Entrepreneurial finance: An overview of the issues and evidence Journal of Corporate Finance , 2004 .

[16]  Antoinette Schoar,et al.  The Consequences of Entrepreneurial Finance: Evidence from Angel Financings , 2014 .

[17]  W. A. Sahlman,et al.  What do venture capitalists do , 1989 .

[18]  Catherine Casamatta,et al.  Financing and Advising: Optimal Financial Contracts with Venture Capitalists , 2002 .

[19]  Anat R. Admati,et al.  Robust Financial Contracting and the Role of Venture Capitalists , 1994 .

[20]  V. Kanniainen,et al.  The Optimal Portfolio of Start-Up Firms in Venture Capital Finance , 2000, SSRN Electronic Journal.

[21]  Ming-Deh A. Huang,et al.  Proof of proposition 2 , 1992 .

[22]  Y. K. Kwon,et al.  Disclosure When The Market Is Unsure Of Information Endowment Of Managers , 1988 .

[23]  Thomas Hellmann.  Entrepreneurs and the Process of Obtaining Resources , 2007 .

[24]  Paul A. Gompers,et al.  Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies , 1997 .

[25]  V. Kanniainen,et al.  Start-Up Investment with Scarce Venture Capital Support , 2001, SSRN Electronic Journal.

[26]  W. A. Sahlman,et al.  The structure and governance of venture-capital organizations , 1990 .

[27]  Rodney McAdam,et al.  The Networked Incubator , 2006 .

[28]  Yuk-shee Chan,et al.  On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information , 1983 .

[29]  Marco Pagano,et al.  Collateral Versus Project Screening: A Model of Lazy Banks , 2001 .

[30]  Josh Lerner,et al.  Venture Capitalists and the Oversight of Private Firms , 1995 .

[31]  Franklin Allen,et al.  The Market for information and the Origin of Financial Intermediation , 1990 .

[32]  Roman Inderst,et al.  Financing a Portfolio of Projects , 2006 .

[33]  Klaus M. Schmidt,et al.  Convertible Securities and Venture Capital Finance , 2001, SSRN Electronic Journal.

[34]  Sanford J. Grossman.  The Informational Role of Warranties and Private Disclosure about Product Quality , 1981, The Journal of Law and Economics.

[35]  Douglas J. Cumming,et al.  The Determinants of Venture Capital Portfolio Size: Empirical Evidence , 2006 .

[36]  Francesca Cornelli,et al.  Stage Financing and the Role of Convertible Securities , 2003 .

[37]  Tim S. Campbell,et al.  Information Production, Market Signalling, and the Theory of Financial Intermediation , 1980 .

[38]  Darian M. Ibrahim.  The (Not So) Puzzling Behavior of Angel Investors , 2007 .

[39]  Paul R. Milgrom,et al.  Relying on the Information of Interested Parties , 1985 .