A Probabilistic Theory Of Entrepreneurial Financing

Edmund H. Mantell

This paper develops a theory of the entrepreneurial financing by venture
capitalists. It focuses on the activities of the entrepreneur at the incipiency
of the investment process: namely the solicitation event. The temporal series of financial commitments elicited from venture capitalists are assumed to have the characteristics of random variables. It is shown that the aggregate capital commitment secured by an entrepreneur in a finite time has stochastic properties corresponding to those of a statistical renewal process. The paper derives limiting conditions on the probability that entrepreneurís project will be aborted because of his failure to secure adequate funding commitments in a finite time. The entrepreneurís attitude towards risk determines the tradeoff between the expected aggregate capital commitment and the risk of abortion of the project.

Key Words: Entrepreneurial solicitations; Venture capital financing; Stochastic processes; Probability of entrepreneurial insolvency.
JEL Classification Numbers: G24, G31, G32.