Moreover, the agency costs associated with investing in early stage firms are more pronounced. Adverse selection costs are also greater for younger firms without an established track record. VC participation in fact certifies the quality of the entrepreneurial venture. Therefore, our null hypothesis is that venture capitalists will maintain early stage investments over a longer duration in order to reduce costs associated with hidden action and hidden information between the entrepreneurial firm and its new owners and therefore maximize the value of the firm upon exit. One caveat is in order.
Moral hazard is significant among early stage firms.
The data in section 4 provide insight into the relative importance of this alternative hypothesis. Longer investment duration enables the VC to minimize the pronounced agency costs between high-technology entrepreneurial firms and their new owners, and therefore maximize the value of the firm upon exit. Duration will therefore be independent of technology insofar as agency costs among high-technology firms are trivial. Rather, the duration of technology investments is typically influenced by a plethora of other factors. This alternative to the null hypothesis on the relation between technology and investment duration will be tested in the empirical analysis in section 4.