Knowledge and venture funding: complementarities and financial contracts

In this article I analyse venture capital finance using the tools provided by the literature on the economics of innovation, in particular the notion of localised technological knowledge and the resource-based theory of the firm, to build a model of financial contracting. This entails that, instead of looking exclusively at financial indicators or monetary incentives, I will deepen the knowledge connection between the venture capitalist and the financed firm, as the benchmark to understand the potential of this source of finance. Consistent with evidence regarding venture funding, the model portrays a separation between a financial and a non-financial part of the venture investment, which is reflected in a “dichotomy” among the investors. In fact, the model shows that the success of a venture program is strictly linked to the knowledge flow inspired and reinforced by the complementarities between the knowledge bases of entrepreneur and venture capitalist, instead to a particular financing scheme as sustained by most of the literature. The model can also suggest a new methodology to analyse other intermediaries, always exploiting the central role of knowledge in designing financial contracts. Copyright 2007 , Oxford University Press.