The Venture Capital Cycle

Paul Gompers and Josh Lerner wrote the standard academic treatment of venture capital, organised around what they call the cycle: raising a fund, investing it, and exiting the investments to return capital, after which the cycle repeats.

The fundraising material covers the limited partnership structure and why it dominates, the compensation arrangement of management fee and carried interest and what each incentivises, the covenants limited partners impose and what they reveal about the agency problems they anticipate, and the determinants of fundraising success. Gompers's work on grandstanding, in which young firms take companies public earlier than optimal in order to establish a record for their next fund, is here.

The investing material covers staged financing, in which capital is committed in tranches contingent on milestones, and why this is the central control mechanism; syndication and its several possible motives; board representation and the allocation of control rights through preferred stock terms; and the specialisation of firms by stage and sector. The exit material covers the initial public offering and its timing, the relationship with underwriters, the lock-up, and acquisition as the more common outcome. The book is empirical throughout, based on the authors' research programme, and it is where the quantitative findings about venture capital originate. It predates the growth of very large funds, the extension of private company lifetimes and the current market structure, so the institutional description is dated while the analytical framework is not.