The Venture Capital Cycle

In The Venture Capital Cycle, Paul Gompers and Josh Lerner correct widespreadmisperceptions about the nature and role of the venture capitalist and provide an accessible andcomprehensive overview of the venture capital industry. Bringing together fifteen years ofground-breaking research into the form and function of venture capital firms, they examine thefund-raising, investing, and exit stages of venture capitalists. Three major themes run throughoutthe process: venture investors confront tremendous information and incentive problems; venturecapital processes are inherently interrelated, and a complete understanding of the industry requiresa full understanding of the venture cycle; and, unlike most financial markets, the venture capitalindustry adjusts very slowly to shifts in the demand for and the supply of investment capital.Thissecond edition has been thoroughly revised in light of recent research findings, and includes sixnew chapters. The first part, on fund-raising, now includes a chapter that examines what determinesthe level of venture capital fund-raising and how tax policy influences the demand for venturecapital. Three new chapters in the second part, on investing, examine what kind of distortions areintroduced when the venture capital market goes dramatically up, a question prompted by the1999-2000 market bubble; demonstrate that the venture capital industry does indeed spur innovation,an important determinant of economic growth; and examine whether and under what circumstancesgovernments can be effective venture capitalists. Two new chapters in the third part, on exitingventure capital investments, discuss whether venture capital firms affiliated with investment-banksare prone to conflicts of interest with public offerings and how lockups on initial public offeringsare used to limit conflicts of interest.