Does agency theory or stewardship theory apply to the venture capitalist-entrepreneur relationship?

Abstract

Individuals, who have great ideas they want to realize, face the problem of how to be able to raise capital. Instead of just giving up their wish to establish a company that could be successful they can get the financial support from venture capitalists. In return for their financial help to the entrepreneur, venture capitalists normally demand a high return on their invested capital. Although this may seem as a very easy way to raise capital, venture capital funding is surrounded by a number of risks and special caution has to be taken to prevent any big losses. The main problem facing the venture capitalist is the asymmetric information between the venture capitalists and the entrepreneur and we have examined this problem through the agency and stewardship theories. Depending on how the two different parties act toward each other and how they see themselves in context of the organization, this will have effects on the success for the venture. For this thesis we have chosen to do a case study of Chalmers Innovation and had an interview with their investment manager Per Stenman. We have also used secondary data to outline a theoretical framework, which we will use to test the probability to how the actual process is executed. Our findings are that venture capital firms use contracting to prevent the problems that can occur with agency theory and with the help of contracting a principalstewardship relationship will emerge where no agency costs occurs. For further research it would be interesting to investigate the entrepreneur’s perception of the collaboration as well as interview other venture capital firms and see if there are differences in how they work