Designing a public-private co-investment mechanism to foster venture capital

In this paper we develop a co-investment mechanism for promoting early investment in Start-up Firms. Focusing on the (uncertain) payoffs earned by a Public Venture Capitalist (PVC) and an Independent Venture Capitalist (IVC), we model each of the alternative mechanisms as an investment timing real option and illustrate that co-investing might be the most effective mechanism to foster investment in Entrepreneurial Firms. Grounded on this theoretical framework, we list a set of both public policy and managerial implications.