Evaluating the Venture Capital Fund Agreement

Abstract

The purpose of this paper is to demonstrate how probabilistic simulation can be used to assist prospective general partners (GP) and limited partners (LP) of a venture capital limited partnership fund to evaluate alternative investment strategies for the proposed fund. The model presented in the paper is based upon observed characteristics of the venture capital market reported in the finance, economics, and management science literature. The body of the paper is organized as follows. In Section II we review the structural characteristics of the model. In Section III we present the results, in terms of ending wealth, obtained from simulating the fund's operations over its life under selected alternative investment strategies. In Section IV we show evaluations of the fund's simulated results under expected return, mean/variance and four moment approaches. In Section V, we present conclusions and implications of the results for financial management.

Citation

Brophy, D.J. and Haessler, M.R. (1994), "Evaluating the Venture Capital Fund Agreement", Managerial Finance, Vol. 20 No. 1, pp. 53-64. https://doi.org/10.1108/eb018460