Venture capital: A model of search and bargaining

This paper develops a model of the venture capital market, focusing on the search process that matches capitalists with entrepreneurs, and the bargaining problem that splits the surplus between them. Venture capitalists repeatedly go through the following cycle: (1) fund raising; (2) search for a project/partner; (3) implementation; (4) exit from the project. The analysis focuses on project selection when there are match-specific costs and returns, decisions to enter the market in the first place, investments during implementation, and fund size. The model is consistent with the stylized facts and provides a tractable framework for formalizing descriptive and institutional studies of this market.