131Chapter 7: Venture Capital Firms and The Monitoring of Entrepreneurial Firms: The Case of Japan

This study investigated the effects of VC firms’ affiliations, investment amount per portfolio firm, the number of portfolio firms per investment manager, performance-based compensation, and managerial ownership on the monitoring of their portfolio firms in Japan. It was found that the affiliated VC firms are less likely to send outside directors to their portfolio firms and are less likely to use the hands-on investment approach. Those VC firms that are more active in monitoring through board representation tend to invest a greater amount per portfolio firm on average and their management are shareowners of their VC firms. Those that monitor their portfolio firms through staged investment tend to use performance-based compensation for their investment managers. These findings are generally consistent with the agency theory rationale.