Access to Information and Specialization in Urban Venture Capital Markets

Abstract

Venture Capital firms act as a control point between the flow of both capital and valuable business information. Venture capitalists believe that each city develops its own specialized sector and similar businesses are located in similar places. Four characteristics of Venture Capitalists that distinguish them from traditional investors, information asymmetry, this is where the venture capitalist will work in order to reduce the asymmetry of information and hence builds a setting in order to speed the commercialization of new technology. Long time horizon, this is where the investor doesn’t want to liquidate in the short-term horizon, and want sustained growth over a longer period of time. Investment in stages, the Venture Capitalist will invest in stages, firstly to decrease information asymmetry and then will decide whether to abandon or increase investment. Finally, the interdependence between investor and investee, the investors completely relies on the investee for profits, hence, complex contracts are made in order to motivate the entrepreneur in order to produce profits. Venture Capitalists also have a specialization of risk, in where they can only take on 2 out the 5 given or apparent risks. Venture Capitalist firms will often invest in a specialized market, in which, information asymmetry is low, in order for them to make satisficing decisions. They also have market Specialization analyses, in which they can analyze the size of the capital pool and markets in each country and city and therefore can decipher whether they have large or small markets. They also have Market specialization data.