Overcoming Asymmetric Information in Venture Capital Finance

Venture capital investors aim to invest in potentially prosperous companies with highyielding projects, operating in innovative industries. In return for their investments, they gain an ownership stake in their portfolio companies. In addition to providing capital, they also contribute their management expertise and personal network to guarantee the success of the enterprises. Significant value creation can be achieved through the active participation of both the entrepreneur and the investor. In the following research we are committed to exploring mechanisms that facilitate mutual interest and participation of all parties during VC investments. The first part of the research – based on international literature – presents problems emerging during the investments, such as adverse selection and moral hazard situations, and also investigates some of the mechanisms used by the parties for problem solving. The second part of the research presents the results of in-depth interviews conducted with some VC managers of Hungarian VC funds. Findings include the rare use of convertible securities, or the frequent use of staged financing or options connected to certain predefined conditions or sanctions. This study was written following the findings and conclusions of the master thesis Sejla Aman [2014]: Information asymmetry in venture finance.*

Journal of Economic Literature (JEL): D82, D86, G23, G24.