The Mechanism Design Research Of Venture Capital Industry Governance

After 30 years economics reform, the Chinese heavy cost economics growth mode should be replaced by the innovational and economical growth mode. So innovation strategic has been the basic strategy of China. Venture capital investment system must be the key institution that develops the innovation economics in China. If the Chinese economics reforming need to be better, the government must reform the capital market to help the innovative firm to raise the money to develop and to better the governance structure of the firm. Then the government must build a muti-level capital market system. The venture capital just belongs to the first level in the muti-level capital market system. China has become the best investing place in the past several years. The international famous venture capital firms have earned much money in China, but the nongovernmental venute capital investing firm has been indevelopped because of being unfamiliar with the operation of the VC and the government over-control. So just under this background, we research the mechanism of the venture capital investing process. And through the contract theory method, we found that the following result:1. About the venture capital raising research(1)The incentive compensation research of the venture capital fundAfter summing the American and European VC fund compensation, we think the VC fund compensation should be the linear compensation contract including a call option. And by the contract economics analysis, we found that if investor of VC fund design a fit executing price, the linear compensation contract including a call option can be more effective to incentive the VC fund manager and control the risk of operating the fund, but the linear compensation contract would be worse.We found a two periods incentive compensation of the venture capitalist by generalizing the bargaining power and considering the incentive of the young venture capitalist making the reputation, and we find that the incentive of the young venture capitalist making the reputation can replace the explicit incentive compensation in urging the venture capitalist to work hader, but the reputation incentive is weaker when the VC has founded his reputation.Then we found that the reputation incentive still work under the compensation contract being unobverserable, and the probability of the VC replacing the investor in the next raising fund cycle is positive relative to the incentive of the reputation.(2)About the venture capital fund governance structureFrom the prospective of the matching between the venture capital investment incentive and the governance of the different firm , we find that only the limited partner venture capital fund can overcome the profit divending shortcoming according to the invested money in the fund ,and the limited partner venture capital fund can afford enough incentive to the VC through distributing more proportion profit to the VC which is more than the porportin of the VC investing in the beginning .Finally, the the limited partner venture capital fund can effectively control the risk of the fund manager operating the fund through the inlimited liability of the venture capitalist .We construct a venture capital fund systemtical governance structure which including intern governance system and extern governance system.we think the intern governance system should include the incentive mechanism,monitoring mechanism,restricting mechanism,and the risk controlling mechanism ,and make the VC work hard and control the risk of the fund operation .At the same time, the government should relax the regulation for the venture capital entrance,and enhance the tax benefit of the limited partner venture capital fund to make more money operated by the limited partner venture capital fund .And the government should construct the individual bankruptcy law , make the unlimited liability of the Venture catpitalist become feasible . Finally, the government should found the innovational firm IPO market and the regional property trading market.2. Venture capital investing firm governance structure research(1) Venture capital investing firm manager replacement and control right, cash claim right matching researchThe Venture entrepreneur always acquire the control interest, but the control right would decrease the cash flow of the firm. So the VC and The Venture entrepreneur have interest conflict about whether the entrepreneur should be replaced by the professional manager during the venture capital investing firm developping period. At the same time, the venture capital investing firm developpment state is greatily uncertain, so the investment contract is incomplete, and the control right about the replacement of the entrepreneur during the developpment of the firm is very important. We construct a two dimension property governance model , and find that under debt financing or the equity financing , the single control and the joint control can not make the entrepreneur choose efficient level control interest and realize the efficient level replacement of the entrepreneur in all state when the financing contract is incomplete .However, the two dimensions property governance structure -the convertible preffered stock matching the contingency control right can make the manager choose efficient level control interest and realize the efficient replacement of the entrepreneur in all state ,even the investment contract is incomplete.(2) Control right of venture capitalist intervening the operation of the firm and the financing tool choiceThe VC always acquire some control right about intervening the operation of the Venture capital investing firm to bind the participating restrain of the VC.But the VC only concern the cash of the firm. And when the state of the firm in the future is hard to confirm to the third part (especial for the legal system), the financing contract is incomplete. Through a incomplete contract model, we find that under the pure-debt financing, VC intervene too much, and under the pure-equity financing, VC intervene too few than the efficienct intervening level .However, under the convertible preferred equity financing, VC implements the first-best intervening level.This show that the convertible preferred equity is the only efficient financing tool make the VC implement the control right intervening the firm.3. Research on the control right of the venture capital exitting the firmThrough a incomplete contract model, we analize the efficiency problem about the three stypes controlling the exitting way of the venture capital investing in the firm: the VC control, the entrepreneur control, and the joint control. We find that three kinds of control riht are all feasible, but joint control is more effecient than unilateral control, especially when the cash-flow increment generated by IPO is not so more than the cash-flow by transferring of shares, or when the cost of supervising the enterprise and the capital liquidity cost are high, or when the enterprise has certain mortgage value.Our research about the venture capital investment governance has the following innovation:(1)About the VC fund compensation research innovationThe past research regard the venture capital fund compensation contract as the pure linear contract , but we think it as the linear contract including call option ,because the third element of the compeansation– the distribution way of the profit is also important. Through research, we find that to the pure linear compensation contract, the linear contract including call option is more efficient in incentiving the Venture caitalist to work hard and making the venture capitalist control the operation risk of the VC fund. Furtherly, we study the two period compensation contract when Venture capitalist has the incentive to build the reputation in the early career.and we find that the implicit incentive to build reputation will replace partly the explicit compensation incentive under observable contract or inobservable contract condition, and the probability of the VC replacing the investor in the next raising fund cycle is positive relative to the incentive of the reputation under inobservable contract.(2)About the VC fund governance structure research innovationWe construct a venture capital fund systemtical governance structure which including intern governance system and extern governance system.we think the intern governance system should include the incentive mechanism,monitoring mechanism,restricting mechanism,and the risk controlling mechanism ,and make the VC work hard and control the risk of the fund operation .(3)The venture capital investing firm government innovation basing on the incomplete contract theoryOur study about the venture capital investing firm governance structure extend the one dimension property governance model to the two dimension property governance model—the cash claim right and the control right under the incomplete contract prospective . At the same time, we consider the detailed control right distribution problem in the venture capital investing firm governance structure research , such as the control right about replacing the entrepreneur of the venture capital investing firm, the control right intervening the operation of the the venture capital investing firm, the control right for the exiting way of the venture capital . We find that:1)Only the two dimensions property government structure- the convertible preferred equity properly matching the contingency control right for replacing the entrepreneur of the venture capital investing firm can implement the entrepreneur choose the efficient control right interest and replace efficiently the entrepreneur during the developpment of the firm.2) From the perspective of incomplete contract, we study the efficiency of the venture capitalist intervening the operation of the venture capital investing firm under the pure-debt financing or the pure-equity financing or the convertible preferred equity. And we find that the convertible preferred equity financing dominates the pure-debt financing and the pure-equity financing and the convertible preferred equity financing implements the first-best efficiency.3) Under an incomplete contract framework, we will discuss the efficiency of three types of control mechanism on making exit decisions respectively controlled by venture capitalist, the entrepreneur of the venture capital investing firm, and joint control .Our research shows that the joint control is better than unilateral control in choosing the effective approaches in exiting the firm. Under the circumstances when the cash-flow increment generated by IPO is not so more than the cash-flow by transferring of shares, or when the cost of supervising the enterprise and the capital liquidity cost are high, or when the enterprise has certain mortgage value, joint control can better assure the exit of venture capital in case of liquidation while both parties cannot reach consistent agreement in decision-making.