Preliminary Draft

Abstract: Why do prestigious companies choose to fund new product develop-ment by venture capital instead of doing so in their own Research & Develop-ment Laboratories? In this note, we consider the launching of a start-up to be associated with waste. The inventor has to deal with much of the bureau-cratic proceedings himself to get the start-up off the ground, and such dealing with bureaucracy and paperwork is wasteful (a handicap). One reason might be asymmetric information of the quality of the inventor. Only the most pro-ductive of the inventors are able to lead start-up ventures, and overcome the problems associated with getting a new venture off the ground. We character-ize the conditions for a unique separating contract (among the different contracts that a Þnancing company could offer), such that the high type inventor launches a start-up company and the low type scientist remains in in-house development