Funding New Ventures : Some Strategies for Raising Early Finance

This research provides formal insights into how new firms facing a number of potential investors might effectively raise funds at early stages, especially when a firm is small and/or a marketable product has not yet been developed. In the principal-agent framework, the firm can be seen as the principal, maximizing its revenues, and the potential investors aim to minimize payment for a share in ownership. The firm auctions incentive contracts to investors to secure seed money, while parting with a (minority) share of ownership. The effects of increased competition among investors on project size (research spending) and contractual design (incentive, fixed-price or cost-plus contracts) are examined and policy implications discussed