Role of private equity investment in technology start-ups

A central theme in entrepreneurial finance deals with the challenges imposed by the information asymmetry and technology uncertainty and how private equity investors alleviate information imperfections to facilitate entrepreneurial innovation and growth. The present thesis centered on the private equity industry offers three complementary essays interrelated issues that are under explored relating to managerial processes in the private equity industry. The first essay analyzes herd behavior in investment decisions made under uncertainty. Motivated by the real world context of private equity investments, the essay presents a theoretical model of sequential decision making to understand whether the true causality of herd behavior. Is herd behavior always Bayesian rational or does non-Bayesian conformance behavior equally promote herd effect. The theoretical prediction of the model is tested in a laboratory experiment. The experiment results are in line with the theory in most cases. Nevertheless, in modest number of observations decisions are non-Bayesian where subjects undermine private information and conform to the public information. Interestingly the intensity of non-Bayesian decisions becomes stronger when the distribution of heterogeneous rational agents is not uniform. The essay presents a stylized model to explain the shift in the rate of non-Bayesian herd behavior. The second essay examine whether venture capitalists\u27 positive impact on venture innovation declines over the finite life span of the private equity funds. The essay employs a two-arm bandit model to analyze the investment tradeoff between exploration of uncertain innovation that may generate higher innovation outcome and exploitation of known innovation. The empirical analysis based on VC-backed biotechnology ventures founded between 1985 and 2004 reveal a significant shift in the VC impact on innovation outcome of the portfolio ventures as the fund approaches its maturity. The third essay examines the possible influence of private equity investments, in particular angel groups and venture capital investments, in shaping the innovation outcome of technology ventures and in realizing successful exits. The essay considers the theoretical and empirical implications of angel group investment and VC investment and teases apart the separate influences of angels and VCs towards ventures\u27 innovation strategy and successful exit. Empirical analysis conducted on a novel dataset of 350 technology ventures reveals striking insights about the relative contribution of each. The methodologies employed econometrically control for identification issues in the dynamic multi-stage nature of external capital financing