The venture capital contract and the institutional theory in a Spanish setting

Abstract

Purpose: This paper examines the principles of the Institutional Theory in order to increase the understanding of the contractual covenants that Spanish Venture Capital Firms use in their relationship with the portfolio companies.

Design/methodology/approach: The study is based on the data obtained by means of a postal survey addressed to the 70 Spanish VCF registered in the ASCRI (Asociación Española de Entidades de Capital Riesgo) in June, 2002 with a response rate of 68.333%. As a theoretical framework we base on the Institutional Theory and agency problems that venture capitalists-entrepreneurs are faced.

Findings: The results show that contractual covenants are standardized, being the most common those that require the entrepreneur to provide economic and financial information to venture capitalists in order to control the investment once it has been made. However, between public and private Venture Capital Firms there is some heterogeneity in the design of contracts due to the coercive pressures exerted by the government on public entities; private sector remains the strongest in the application of standard terms.

Research Limitations: Although survey data might create potential biases and possible measurement problems, we consider that our sample has large enough coverage of the venture capital industry (68.33%) that, although cautiously, valid conclusions can be drawn.

Originality/value: To the best of our knowledge, this study is one of the first empirical contributions which analyze financial contracts of VCF in Spain. A better understanding of covenants included in venture capital contracts can help to Spanish firms to understand the particular terms and restraints of VCs before providing capital. Moreover, VCF can use the information from this study to better understand their contractual arrangements.