Asymmetric Information And Moral Hazard

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Information problems such as asymmetric information and moral hazard are critical for innovative ventures, which can have a hard time forecasting future cash flow. The banks are usually less informed then the venture capitalists, which creates higher demands for returns from the entrepreneur in order to break even. (Masako Ueda, 2004, p. 601) The value added venture capitalists have a better understanding of the technical milestones and are therefore better equipped to monitor new ventures, which reduce the information problems. They may be willing to finance innovations that investors without expertise wouldn’t. Understandably, not all venture capitalist have technical expertise, but they can make up for this with a good network of experts. (Douglas Cumming, 2010, p. 307) However, when a venture capitalist and an entrepreneur meet, the idea is to inform the venture capitalist about the project, but this gives the investors a chance to undertake the project by themselves, without the original inventor involved. This threat of being excluded from the project forces the entrepreneur to share some interest in the company with the venture capitalist. The entrepreneur can avoid this threat it they find funding in banks. There are two main factors that they have to consider when they are choosing how to finance their project, the asymmetric information problem between the entrepreneur and the bank and their level of protection regarding their intellectual properties. Hence, the
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