Entrepreneurial Finance: Based On Effort Complementary

Enterprise plays a vital part in the market economy. One of the most notablefeatures in the market economy is the constant evolution of the enterprise, which is thebasic element of market. And the evolution experiences a process of birth, growth,maturity, expansion or death. The economy is developing in such a dynamic process.Apparently, the establishment of new business is the driving force for sustainabledevelopment for market economy. Just take China as an example, with the developmentof social economy; the entrepreneurial practice has become more and more active in theenvironment of market economy, which forms a significant solution to the employmentrate in the country with such a large population. Entrepreneurial activity plays a moreand more important role in the economic growth, which attracts more and morescholars’ attention. And the business development needs a new capital marketenvironment, namely the venture financing market, which makes the venture financingbecome another research focus.The venture financing is the cross plate of entrepreneurial management andinvestment risk. The entrepreneurial management emphasizes the key role ofentrepreneur in enterprise, while risk investment believes in the important role ofventure investors. Investors provide not only fund but also management support for theventure, namely the enterprise turn to investors for money and wisdom, and the effortsof entrepreneurs and venture capitalists have complementary effect.But according to the literature review of enterprise contracts, research focus on theentrepreneurs who promote the venture with the use of funds from investors, and rarelymentions the contribution of investors. The current studies mainly focus on theentrepreneurs who make use of the funds from venture investors to promote theirventure enterprise, and rarely mentioned the contribution to management in theentrepreneur enterprise. Even if some scholars referred to in the venture capitalmanagement contribution in their research, they have preference for the individualeffort, neglecting complementary effect. So this article analyze the enterprise financingcontract concerning the efforts of complementary, putting forward the complementaryeffect between business entrepreneurs and venture capitalists. The main contents of thispaper include the following four aspects: The single stage and multistage contractarrangement based on the efforts of the complementary; bilateral signal monitoring mechanism analysis based on the complementary effect; the choices of financinginstruments; the financing object selection based on the complementary effect. Throughthe above four aspects of research, we got the following conclusions:Firstly, the arrangement of venture investment contracts based on thecomplementary effect, from incomplete information to incomplete information, andfrom single phase to multi phase. In the single stage investment contract, the moral riskbringing by the incomplete information made the entrepreneurs and investors to choosea less effort level. At the same time, the output efficiency of entrepreneurs and venturecapitalists will affect the distribution proportion and choice for effort, thus affecting theincome and the change of effect; the variation of enterprise complementary coefficientdoes not affect the distribution ratio and individual efforts, but has a great influence onthe complementary efforts, total revenue and total effect. Similarly, in the contractarrangement of multiple stages, incomplete information brings the moral risk,prompting entrepreneurs and investors to choose a lower effort level. And we just takethe two stage investment model as an example. As the role of investors began to emergein the second stage, and the distribution ratio of the second stage is larger than the oneof first phase, which means investors can have a larger share of proceeds in secondstages. But the different complementary coefficient can still influence the effort level ofthe two phases. When the profits caused by complementary can offset the cost of theadditional effort, investment cooperation contract would like to increase complementaryinputs in second stages, and the exponential growth of the utility can promote theenterprises to maximize the benefits. By the comparison of the single stage investmentcontract and the multi-stage investment contract we can find that, due to some basicconcepts of reputation model was introduced by the multiple stage models, theperformance of this stage can affect the efforts of the next phase, forming a supervisionand restriction mechanism. Through a comparative analysis, we found that the overallutility of the multi-stage investment contract is larger, and the venture investors andentrepreneurs tend to put more effort than in the single stage.Secondly, signal monitoring can promote the cooperation level and the efficiencyof venture enterprises, while increasing the output. Therefore the signal monitoring is aneffective way for the cooperation, and has the guiding role in the business cooperationpractice. Through the analysis, we found that:①when entrepreneurs or investorsmonitored separately, it can stimulate the cooperation level between the two sides; atthe same time, signal monitoring for investors is a dominant strategy, the entrepreneurs will accept signal monitoring considering the" financing wisdom" and othercomprehensive factors;②bilateral signal monitoring is an effective behavior, but notalways better than unilateral supervisory;③as for the monitoring consequences forindividual effect and complementary effect, complementary effect monitoring can hasboth monitoring effect and increasing effect.④Under the effect of the combined output,signal monitoring can still promote the efficiency, and enterprise participants need tomake a choice between efficiency and output, and while the complementary coefficienthave a significant influence on the joint monitoring efficiency, we should select theappropriate monitoring objects and the corresponding control mechanism based on thecomplementary coefficient.Thirdly, as a powerful tool to inhibit bilateral moral hazard, to have a financialcontract arrangement like convertible bond has attracted a lot of scholars’ interests, butwhen considering the profits for different phases and the complementary effect ofentrepreneurs and investors, a variety of commonly used financial tools can become thebest choice. Through the study, we found that:①when the entrepreneur has completelybargaining power in the contract, common stocks, bonds, preferred stock andconvertible bond can be executed to be the only optimal contract;②when thecomplementary effect of entrepreneurs and investors is very low, and for entrepreneur,the ordinary bonds is the optimal contract;③when the complementary effect ofentrepreneurs and investors is moderate, as the cost of investor’s capital is relatively low,the convertible bond is optimal for entrepreneurs. But as the cost of capital is relativelyhigh, the ordinary bonds is optimal for entrepreneurs;④when the complementary effectof entrepreneurs and investors is high, as the investor’s cost of capital is relatively low,the ordinary shares is the best choice; as the investor’s cost of capital is relatively high,the preferred stock is the optimal one.Fourthly, entrepreneur chooses a bank loan, angel or venture capital investorsaccording to economic and behavioral factors, to obtain the optimal selection offinancing object. Through the study, we found that:①when the complementary effectis low, entrepreneurs with lower capital restraint would choose venture capital;②whenthe complementary effect is moderate, entrepreneurs with lower capital restraint wouldhave a choice of angel capital, but along with the requirement of capital return increase,entrepreneur turned to select the venture capital financing;③when the complementaryeffect is too high, entrepreneurs with lower capital restraint would choose the angel capital financing. And whatever the extent of complementary effect is, entrepreneursunder a comparable big capital constraint will choose the bank financing.