Abstract not found

This paper develops a theory of how angel and venture capital markets interact. En-trepreneurs first receive angel then venture capital funding. The two investor types are ‘friends ’ in that they rely upon each other’s investments. However, they are also ‘foes’, because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We also ex-amine the role of legal protection for angel investments.

ABSTRACT. In order to commercialize their ideas, most entrepreneurs need to cooperate with another party. When there are significant and irreversible investments at stake, how far should an entrepreneur develop his idea before selling it? This question is important for entrepreneurs in a variety of contexts, such as research alliances, technology licensing, and VC financing. I study this question in the context of the U.S. movie industry, in which the screenwriter decides to sell a storyline versus a complete script. I first build a formal model, in which the writer and the buyer interact to transact an idea. The model incorporates important features of a market for ideas: uncertainty, information asymmetry, expropriation risk, and the heterogeneous observable quality of the seller. I then test the model’s predictions on a novel sample of 1,638 original movie ideas sold in Hollywood between 1998 and 2003. The data include sale stage, the writer’s characteristics, and the eventual outcome of the sale. I find that, consistent with the theory, the likelihood of a complete script sale has a non-monotonic relationship with respect to the writer’s observable quality. The results also suggest that for writers of relatively low observable quality, affiliation with a reputable agency (the intermediary) is most effective in reducing information asymmetry; for writers of better observable quality, however, other

Abstract not found