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The influence of capital market laws and initial public offering (IPO) process on venture capital
Abstract
This paper is concerned with the influence of capital market laws and initial public offering (IPO) process on venture capital. It discusses the impact of US federal state laws and Securities and Exchange Commission (SEC) regulations to the venture capital markets, arguing if the rules and regulatories are burdensome to entrepreneurs and new-growth businesses. The impact of Sarbanes-Oxley Act and the future Investment Act on venture capital funds and entrepreneurial companies going public are also discussed. The paper proposes the model of venture capital financing describing the process from fund raising to investment exits, the linkages of the venture capital market to the financial/capital markets and the related capital market laws. The policy implications on SEC regulations essential to the development of venture capital industry are suggested.
... Venture capital is an important source of external financing for SMEs, as these enterprises, by virtue of their size, have difficulty accessing bank loans (Sonius et al., 2015;Wonglimpiyarat, 2009). In the case of venture capital, equity financing is directed to start-up or emerging companies, where the investor has a high level of risk in the investment, but on the other hand, also a high potential for growth of the company, which is associated with above-average appreciation of the investment. ...
... However, despite the considerable importance of SMEs in the growth of global economies and businesses themselves, access to capital financing for these entities is difficult (Cosh, Cumming & Hughes, 2009;Reverte & Badillo, 2019;Sonius et al., 2015), especially in terms of bank loans (Sonius et al., 2015;Wonglimpiyarat, 2009). This is where business angels come into play, providing equity financing beyond the "3F" or "FFF", i.e. founder, friends and family, and thus closing the financing gap for innovative businesses in the SME sector (Conti et al., 2013;Wetzel, 1984), thereby contributing significantly to the growth of individual economies from a macroeconomic perspective. ...
In this paper, the demographic and investment profiles of business angels operating in the Czech Republic are evaluated based on a sample of 78 angel investors. This is the first attempt to use data on investor activities from the Pitchbook database, which has become increasingly popular in academic research. Beyond the framework of descriptive statistical analysis, a multidimensional statistical investigation using cluster analysis was conducted. The results show that there are two groups of angel investors in the Czech Republic. The first group is represented by investors who predominantly have a large active portfolio, as well as the number of total completed investments. On the other hand, the second cluster is made up of investors who conduct a smaller number of investments and are also in the position of the founder of a start-up. Not surprisingly, there are two main locations of angel investors in the Czech Republic, Brno and Prague. Both categories of typical investors are united by some demographic characteristics; for example, the market is dominated by middle-aged men with a completed Master’s degree in Economics who invest in start-ups in the field of information and communication technologies. The main contribution of the paper consists in evaluating the demographic and investment profiles of angel investors operating in the Czech business environment. The results of the research have implications for upcoming research, the informal venture capital industry, and public policy beyond the Czech business environment, while developing tools for fostering an angel ecosystem. In today’s globalized world, the boundaries of angel investors are often blurred. Just as start-ups have ambitions to expand internationally, informal venture capitalists are increasingly making cross-border deals. From the perspective of both investee firms and policy makers, it is thus important to know the profiles of not only domestic but also foreign business angels, e.g. with regard to the setting of public support for foreign capital inflows.
... Trappey et al. (2007) analysed the internationalization process model for investment decisions and expanded it to two investment decision models. Wonglimpiyarat (2009) proposed a process model to analyse the influence of capital market laws and an initial public offering process on venture capitals. Abrache et al. (2005) proposed a new bundlebased formulation for portfolio balancing in the financing market. ...
... studied alternative alliances between banks and insurance companies and used an expert panel and analytic hierarchy process in searching the best alliance model. investigated the financial alliance compromise structure between the executives and supervisory authorities of (Ballestero and Pla-Santamaria, 2004;Derigs and Nickel, 2004;Çanakoğlu and Özekici, 2008) Pension fund (Dupa cová and Polívka, 2008; Josa-Fombellida and Rincon-Zapatero, 2010) Investment decision (Trappey et al., 2007;Wonglimpiyarat, 2009) Portfolio balance (Abrache et al., 2005) ...
The share of gross domestic product from the service industry reflects the competitiveness of a nation; the service industry in the USA accounts for around 80% of its gross domestic product, and it has been increasing gradually. Continual innovations and advances in enabling technologies for the service industry are crucial for developed countries to sustain their leading positions in the globalized economy. To clarify future research directions of operations research (OR) in the service industry, the state of art of OR has been examined systematically, the new requirements of OR are identified for its applications in service industries in comparison with those in manufacturing industries, and the limitations of existing methodologies and tools have been discussed. This paper was intended to provide an updated review on how OR has been applied in the service sector in recent years and what directions the study of OR will be carried forward in the near future. Under a proposed research framework, recent OR‐related articles were collected from 17 leading OR journals and classified into the five most active sectors, that is, transportation and warehousing, information and communication, human health and social assistance, retails and wholesales, and financial and insurance services. The conclusions on the limitations of existing studies and the demanding ORs in the service have been drawn from our summaries and observations from a comprehensive review in this field. Copyright © 2013 John Wiley & Sons, Ltd.
... По существу, IEO можно определить как форму привлечения инвестиций в виде реализации на базе криптобиржи фиксированного количества токенов, выпущенных путем разовой или ускоренной эмиссии [17]. В этой процедуре обнаруживается сходство как с краудфандингом, так и с торговлей фьючерсами, которые сегодня являются активом сами по себе и не так сильно зависят от товара, на основе которого они выпускались. ...
Nowadays, the law is being transformed as a regulator of relations. The idea of strengthe-ning the regulatory role of technologies in the field of streamlining public relations is making much headway in the world. This trend is most pronounced in the area of regulation of private relations. The way of such access to the market as crowdfunding is becoming increasingly widespread. The issuing of the so-called secured tokens is becoming popular for both small businesses and private investors. The trust in new ways of attracting investments is condi-tioned by the applied technology - the use of blockchain as a decentralized transparent data-base management system. Under these conditions, there is such a phenomenon as the democ-ratization of property relations. Every individual receives unlimited opportunities to invest via technologies. Thus, legal scholars all over the world face the question about the role of the law and law in these relations? We believe that we are dealing with such a worldwide trend of regulating public relations as the socialization of the law. Specific examples of issuing tokens in Russia and abroad show the main global trends in the transformation of private law. The platformization of economics leads to the tokenization and democratization of property relations. In this aspect, the aim of lawyers should be to create a comfortable legal environment for the implementation of projects aimed at democratizing property relations in Russia. The socialization of private law is aimed at achieving social jus-tice and is manifested in the creation of mechanisms to protect the rights of the weak party and rules to protect private investors. Globalization requires the study of both Russian and foreign law. To confirm their hypothesis, the authors conducted a detailed analysis of the legislation of Russia, Europe and the United States to identify the norms allowing to see the process of socialization of law in the above field. The generalization of Russian and foreign experience showed that when searching for proper legal regulation, the states elect one of the policies. In some countries, direct regulation of ICOs and related emission relations are being created, in others, it is about the extension of the existing legislation to a new changing tokenization relationship. The European Union countries are seeking to develop common rules to create a regulatory environment to attract investors to the crypto industry and protect them. Asian countries are predominantly developing national legislation in isolation from one another, but most of them are following a unified course to encourage investment in crypto assets while introducing strict rules against fraud on financial markets. The emphasis on the protection of the rights of investors or shareholders, token holders by setting a framework, including private law mechanisms, can be called common to all approaches. This is the aim of private law on the way to social justice.
... Bolagen är professionellt uppbyggda och följer etablerade strategier för sina placeringar. Det finns relativt mycket forskning om formellt riskkapital, ofta inriktad på typiska attribut som exempelvis optimal portföljstorlek (Buchner m.fl., 2017), regleringars inverkan på riskkapitalinvesteringar (Wonglimpiyarat, 2009), exitstrategier (Neus & Walz, 2005), syndikering 13 (Wright & Lockett, 2003), professionalisering (Hellmann & Puri, 2002) och beslutsfattande (Zacharakis & Shepherd, 2005). ...
– En studie av programlogik i två nationella riskkapitalinstrument
Under programperioden 2014–20 har två riskkapitalinsatser med finansiering från Europeiska regionala utvecklingsfonden (ERUF) lanserats, en ”grön fond” och en holdingfond (fond-i-fond). Tillväxtanalys studerar i den här rapporten insatsernas programlogik. Vilka problem är de nya instrumenten tänkta att lösa? Vilka är målen med insatserna och hur tydligt formulerade är de?
... Venture capital 1 (VC) plays an important role in economic development (Florida et al., 1990). It is the source of funds that typically finance the new rapidly growing companies through equity participation (Gompers andLerner, 2001, 1998;Wonglimpiyarat, 2009). Additionally, venture capital is very useful in many economic activities like innovation (Arque-Castells, 2012;Faria and Barbosa, 2014;Hirukawa and Ueda, 2011;Kortum and Lerner, 2000;Lahr and Mina, 2016;Levillain et al., 2014;Obrimah, 2015), entrepreneurship (Grilli and Murtinu, 2014;Sahlman, 1990), job creation (Keuschnigg, 2004;Puri and Zarutskie, 2012), SMEs 2 (Berger and Schaeck, 2011), service sector growth 3 (Carvell et al., 2013), and adds value to portfolio companies through the provision of both managerial skills and competencies (Hellmann and Puri, 2002). ...
This paper examines the long-run relationship between venture capital investment and per capita economic growth in the 19 European Economic Area (EEA) countries for the period 1989-2014. We use three different indicators of venture capital (VC) investment, namely VC at early stage investment, VC at later stage investment, and VC total investment. Using cointegration technique, the study warrants the support of long-run relationship between VC investment and per capita economic growth in a few cases, typically with reference to a particular VC indicator and per capita economic growth we use. Using vector auto-regressive (VAR) model for testing the Granger causalities, the study acknowledges mixed evidence of the relationship between the venture capital investment and per capita economic growth in the selected EEA countries, both by individual country and at the panel setting. In some instances, venture capital investment leads to per capita economic growth, lending support to supply-leading hypothesis (SLH) of VC investment-growth nexus. In other instances, it is the per capita economic growth that regulates the level of venture capital investment, lending support to demand-following hypothesis (DFH) of VC investment-growth nexus. There are also circumstances, where venture capital investment and per capita economic growth are mutually interdependent. That is the situation where both are self-reinforcing and offer support to feedback hypothesis (FBH) of VC investment-growth nexus. In addition, there are also instances, where the venture capital investment and per capita economic growth are independent of each other. This is the situation where both are neutral and offer support to neutrality hypothesis (NLH) of VC investment-growth nexus. To summarize, Granger causality results vary from country to country within the EEA countries, depending upon the type of venture capital investment and per capita economic growth that we use in a particular empirical exploration process. The policy implication of this study is that the economic policies should recognize the differences in the venture capital investment and per capita economic growth in order to maintain sustainable development in these EEA countries.
... Thus, it is likely that the investments encouraged by more IPO activity, as argued above, would be focused in technology firms. First, technology firms are taken-for-granted to be the intended purpose of IPO reform because the intent of these reforms is to provide financial incentives to entrepreneurs to that might ignite innovations (Wonglimpiyarat, 2009). Second, technical firms reach IPO faster than other firms, increasing opportunity costs and reducing risk compared to other industries, (Gompers & Lerner, 2010; Kukies, 2002). ...
We examine how institutional changes that lower the barriers to successful exit influence the rate of IPO, and the initial capitalization and performance of subsequent ventures. Such IPO market reforms are widespread, but their effectiveness is unclear. We take advantage of a quasi-natural experiment in which the IPO listing requirements in Japan were dramatically reduced. Using a unique database of over 30,000 new firms incorporated after 1982, we find that IPO market reform is a powerful institutional lever that increases the rate of IPOs, attracts capital, and improves the performance of some ventures. But it is also a blunt instrument that influences only some industries, triggers poor performance among firms where it has an effect, and improves performance for only elite entrepreneurs. Overall, we find that IPO market reform is a complex institutional change. We conclude with contributions at the nexus of institutional theory and entrepreneurship that indicate where and for whom institutional change will be effective, and indicate that lowering barriers to successful exit like IPOs amplifies the performance variance among new firms.
Venture capital (VC) is a key catalyst for nurturing start-up firms with high-growth potential to undertake innovative endeavors that contribute to national wealth. Existing literature concentrates on the impact of venture capital on firm-level performance. Unlike much of the earlier work, we conduct a macro study examining short-term and long-term relationships between VC investment, the state of the financial sector, and economic growth in 20 European single market countries between 1989 and 2015. We show that major transformations (political, economic, financial and institutional) over the sample period in the Eurozone region have resulted in the data series used in the study (economic growth, financial sector development, and VC investment) to be non-stationary. As such, the vector error-correction model (VECM) and Granger-Causality test are used to examine short-term and long-term relationships between VC investment, financial development, and economic growth for the sample countries. The findings suggest that economic growth strategies and financial sector reforms are critical for a vibrant venture capital industry. In the short term, there are bi-directional relationships between some of the variables. These results suggest that plans to create a vibrant venture capital industry will reinforce financial sector development and economic development, creating a more sustainable economic development model for countries in the Eurozone region.
This is the first paper in China aiming to quantitatively distinguish monitoring and screening in VC investment in China's financial market. DID model with four distinct matching methods verifies the co-existence of monitoring and Screening. Quantitatively, the screening effect consists of 29%-42% in total value difference. Controlling screening through Heckman Correction, our empirical tests reveal the endogenous over-valuation problem in earlier studies. After controlling endogenous screening, we find that VC in China tends to expand their investment pool irresponsibly to gamble for the high probability of at-least-one-success.
We construct the largest-to-date VC investment network data in China (1999-2013). Using standard network indexes and MRQAP technique, we confirm the significance of investment experience and native background in forming network. Moreover, the empirical results indicated that it is the position in the network (Structural Hole) rather than the scale of network (Social Capital) that makes network valuable, a contrary conclusion to the case in the United State.
Access to capital is an area of greatest concern for the survival and development of most firms. Although entrepreneurs provide almost two-thirds of the seed and start-up capital for their new ventures (Bygrave and Hunt 2005), individual resources only last so long; by the time a firm is ready for expansion, the need for additional capital is often relatively large. There is a particular need for equity capital (Aernoudt et al. 2007), and research has demonstrated that early-stage equity capital is the scarcest resource for emerging enterprises (Tucker and Lean 2003). Business angels and venture capital have become the institutionalized forms of equity capital available for early-stage financing. In general, business angels invest in earlier phases than do venture capitalists, but both sets of actors have developed investing models, the venture capital one being more formalized and standardized, although the basic principles remain common to both. Furthermore, business angels may have additional motives apart from profit-maximizing for investing, such as altruism (Maula et al. 2005). In recent years, business angels have become somewhat more formalized through the increased use of syndication and business-angel networks. Although there is growing research in the fields of both venture capital and business angels, there is relatively little research into business-angel networks (exceptions include Aernoudt and Erikson 2002; San José et al. 2005; Sörheim 2005). In addition, there is an overall scarcity of studies of business angels focusing on the investing process, so-called second-generation studies (Freear et al. 2002).
Public stakeholders and the private equity industry. A critical appraisal The role played by government and regional public agencies hasn't been much discussed in existing academic literature. Our analysis brings to the fore that indirect public supports have a positive impact on private equity. Conversely, the role of support direct remains ambiguous. The investment of state or local governments may both be essential in tackling the problem of the equity gap and harmful by crowding out private actors.
Studies about interfirm relationships within the venture capital industry are usually focussed on syndication networks. Little is known about the relations venture capital firms have in order to obtain complementary knowledge needed to make and manage investments, something this case study provides insight to. It is found that venture capital firms in the Netherlands mainly use actors other than their syndication partners for this. Dutch venture capital firms seem to be careful sharing knowledge with each other due to the competition they face. Learning may however take place when they syndicate deals, but this seems to be only a by-product since financial motives are the main reason to cooperate. The knowledge relations venture capital firms have, are located as geographically dispersed as their syndication partners and both relations are mainly social in nature. Evidence is found that a large number of knowledge relations positively influences the funds’ performance, as measured by number of successful exits, assets under management, and number of employees.
Venture capitalists not only finance but also advise and thereby add value to young entrepreneurial firms. The prospects of venture capital backed firms thus depend on joint efforts of entrepreneurs and informed venture capitalists, and are subject to double moral hazard. For this reason, managerial support and the number of portfolio companies tend to be inefficiently low. This paper investigates how tax policy can possibly contribute to a more active style of venture capital investments. An optimal tax policy is derived that moves the private equilibrium towards a first best allocation. Copyright 2004, Oxford University Press.
This paper proposes a simple partial equilibrium model to investigate the effects of government policy on venture capital backed investments. Giving up an alternative career, entrepreneurs focus their effort on a single, high risk venture each. Venture capitalists acquire an equity stake and offer a base salary as well. In addition to providing incentive compatible equity finance, they support the venture with managerial advice to raise survival chances. We analyze several policy measures addressed at venture capital activity: government spending on entrepreneurial training, subsidies to equipment investment, and output subsidies at the production stage. While these measures stimulate entrepreneurship, only cost-effective government services can improve welfare. Copyright Kluwer Academic Publishers 2001
ABSTRACT : This paper looks at how well Finland performs in high growth entrepreneurship and uses data from the Global Entrepreneurship monitor to benchmark Finland against other European countries. It is found that Finland’s prevalence rate of high growth entrepreneurial activity lags significantly behind most of its European and all of its Scandinavian peers. That this weak performance in high-growth entrepreneurship goes hand in hand with Finland being a world leader in per capita investment in R&D may be described as a paradox. The reasons underlying the underperformance of Finland remain however unclear. At this point, explanations should be sought in culture, industrial traditions and systemic experience in high growth entrepreneurship.
The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank-and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.
Three principal aspects of venture capital (VC) are empirically explored: fundraising, investing, and exiting those investments. Despite the recent attention to VC, misconceptions abound that the authors attempt to correct. Throughout, the discussions are based on examinations of a large sample of firms, VC funds, and investments. Three themes are elaborated in the volume: (1) The great incentive and information problems venture capitalists must overcome; (2) the interrelatedness of each aspect of the VC process and how it proceeds through cycles; and that (3) the VC industry adjusts slowly to shifts in the supply of capital or the demand for financing. The VC partnership is the intermediary between investors and high-tech start-ups. The fundraising aspect is examined in terms of its structure, means of compensation, and the importance of the structure of the limited partnership form used by most VC funds. The need to provide incentives and shifts in relative negotiating power impact the terms of VC limited partnerships. Covenants and compensation align the incentives of VC funds with those of investors; covenants and restrictions limit conflicts among investors and venture capitalists. Supply and demand and costs of contracting determine contractual provisions. VC contracting may not always be efficient. During periods of high demand and capital flows, partners negotiate compensation premiums. The investing aspect is discussed in terms of why investments are staged, how VC firms oversee firms, and why VC firms syndicate investments. Four factors limit access to capital for firms: uncertainty, asymmetric information, nature of firm assets, and conditions in the financial and product markets. These factors determine a firm's financing choices. Asymmetries may persist longer in high-tech firms, thus increasing the value of delaying investment decisions. Exiting VC investments is examined, in regard to the market conditions that affect the decision to go public, whether reputation affects the decision to go public, why venture capitalists distribute shares, the performance of VC-backed firms, and the future of the VC cycle. Exiting investments affects every aspect of the investment cycle. Venture capitalists add value to the firms in which they invest. The VC cycle is a solution to information and inventive problems. (TNM)
This paper examines whether a truly global market for venture capital and private equity is emerging or whether the current situation of segmented national markets is likely to endure. We document very rapid growth in venture capital fund raising and investment over the past decade in the United States, Western Europe and in certain Asian countries, but not in Japan or in most developing countries. We compare contracting practices, investment patterns and returns between the U.S. and Europe, and find that there has been considerable convergence between these two large VC markets, particularly during the past five years. This convergence is likely to continue. Nonetheless, we conclude that the major national markets will remain effectively segmented and suggest that venture capital will continue to be much more important in common law countries than in civil law countries for the foreseeable future.
This paper speaks to the hypothesis that young venture capital firms take companies public earlier than older venture firms in order to establish a reputation and successfully raise capital for new funds. Consistent with the extant literature, evidence from a sample of 85 IPOs on the LSE over the period 1992-99 suggests that companies backed by young venture firms are indeed younger at IPO than those backed by more established firms, and young venture firms have shorter board representation. There is little evidence to suggest greater underpricing for young VCF investments, nor do young VCFs hold relatively small equity stakes. Older VCFs raise larger follow on funds, but there is no significant differential in timing of those funds. Overall, this study suggests that there is insufficient evidence as yet to unambiguously support the significance of grandstanding as a feature of the UK venture capital industry.
This paper reviews the existing literature on venture capital and private equity. The paper emphasises the importance of examining venture capital in the light of recent developments in corporate finance and its distinctiveness from other forms of finance. In order to understand current developments, the paper adopts a framework which combines industry/market and firm levels of analysis. Existing literature is reviewed using this framework. Industry level issues relate to rivalry between firms, the power of suppliers and customers, and the threats from new entrants and substitutes. Firm level issues concern deal generation, initial and second screening, valuation and due diligence, deal approval and structuring, post-contractual monitoring, investment realisation, and entrepreneurs’ exit and recontracting with venture capitalists. This is followed by a review of the evidence on the performance of venture capital firms. The paper suggests potentially fruitful areas for further research including the extension of analysis to cover all stages of venture capital investment, examination of the inter-linkages between industry and firm level issues and between stages in the venture capital process, as well as further analysis of deal structuring issues and investment realisation and recontracting.
This paper examines recent trends in the venture capital market and current research that explores the impact of these trends. High returns in the venture capital industry caused by the surging market for venture-backed initial public offerings and recent reductions in the capital gains tax rate have led to dramatic increases in venture capital commitments. This rise in fundraising has had dramatic effects on various segments of the venture capital market which may indicate overheating. The terms and conditions of venture capital limited partnerships have changed reflecting the growth in demand for venture capital services. The share of profits retained by venture capitalists has increased while the restrictiveness of the partnership agreements has eased. Venture firms are raising substantially larger funds with increasing pressure to find investments, thereby moving to later stage investments. The price of investments has also responded to the growing desire to increase investment. Finally, institutional investors are increasingly looking internationally for new investment opportunities in venture capital to avoid potential market excesses.
The paper studies the effects of tax policy on venture capital activity. Entrepreneurs pursue a single high risk project each but have no own resources. Financiers provide funds, covering investment cost plus an upfront payment, in exchange for a share in the firm. The contract must include incentives to enlist full effort of entrepreneurs. Venture capitalists also assist with valuable business advice to enhance survival chances. The paper develops a general equilibrium framework with a traditional and an entrepreneurial sector and investigates the effects of taxes on the equilibrium level of managerial advice, entrepreneurship and welfare. It considers differential wage and capital income taxes, a comprehensive income tax, progressive taxation as well as investment and output subsidies to the entrepreneurial sector.
A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas and technical competence, but lack own resources as well as commercial experience. Venture capitalists (VCs) provide start-up finance and managerial support. Both types of agents thus jointly contribute to the firm's success, but neither type's effort is verifiable. We find that the market equilibrium is biased towards inefficiently low entrepreneurial effort and venture capital support. In this situation, the capital gains tax is particularly harmful. The introduction of a small tax impairs effort and advice and leads to a first-order welfare loss. Several other policies towards venture capital and start-up entrepreneurship are also investigated.
Venture capitalists (VCs) not only finance but also add value to start-up companies. Advising firms is time consuming and creates a trade-off between intensity of advice and portfolio size. We jointly determine the optimal number of portfolio companies and the intensity of managerial advice. Diminishing returns to advice per firm call for a larger portfolio. With progressively increasing managerial effort cost, however, a larger number crowds out advice to each individual firm. As they receive less support, entrepreneurs request a larger profit share, making further portfolio expansion eventually unprofitable. Comparative static analysis shows how optimal portfolio size responds to venture returns and other parameters.
I develop and test the hypothesis that young venture capital firms take companies pubic earlier than older venture capital firms in order to establish a reputation and successfully raise capital for new funds. Evidence from a sample of 433 IPOs suggests that companies backed by young venture capital firms are younger and more underpriced at their IPO than those of established venture capital firms. Moreover, young venture capital firms have been on the board of directors a shorter period of time at the IPO, hold smaller equity stakes, and time the IPO to precede or coincide with raising money for follow-on funds.
Venture capitalists, representing informed capital, screen, monitor and advise start-up entrepreneurs. The paper reports three new results on venture capital (VC) finance and the evolution of the VC industry. First, there is an optimal VC portfolio size with a trade-off between the number of companies and the value of managerial advice. Second, advice tends to be diluted when the industry expands and VC skills remain scarce in the short-run. The delayed entry of experienced VCs eventually restores the quality of advice and leads to more focused company portfolios. Third, as a welfare result, VCs tend to provide too little advisory effort and to invest in too few companies. Testable implications are also discussed.
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between investors and venture capitalists and between venture-capital firms and the ventures in which they invest. The agency problems in these organizations and to the contracts and operating procedures that have evolved in response are emphasized. Venture-capital organizations are contrasted with large, publicly traded corporations and with leveraged buyout organizations.
This paper sets out to analyze the influence of different types of VCs on the performance of their portfolio firms around and after IPO in Germany. Our main finding is that market participants did not correctly assess the role played by the different types of VCs. Firms backed by independent, international and reputable VCs outperform other IPOs, and their share prices fluctuate less than those of their counterparts. Thus, independent, international and reputable VCs were able to add value by achieving a lower post-IPO idiosyncratic risk and a higher return. In contrast, firms backed by public VCs showed relative underperformance.
This paper analyses the determinants of venture capital for a sample of 21 countries. In particular, we consider the importance of initial public offerings (IPOs), gross domestic product (GDP) and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs. We find that IPOs are the strongest driver of venture capital investing. Private pension fund levels are a significant determinant over time but not across countries. Surprisingly, GDP and market capitalization growth are not significant. Government policies can have a strong impact, both by setting the regulatory stage, and by galvanizing investment during downturns. Finally, we also show that different types of venture capital financing are affected differently by these factors. In particular, early stage venture capital investing is negatively impacted by labor market rigidities, while later stage is not. IPOs have no effect on early stage venture capital investing across countries, but are a significant determinant of later stage venture capital investing across countries. Finally, government funded venture capital has different sensitivities to the determinants of venture capital than non-government funded venture capital. Our insights emphasize the need for a more differentiated approach to venture capital, both from a research as well as from a policy perspective. We feel that while later stage venture capital investing is well understood, early stage and government funded investments still require more extensive research.
This paper discusses the role of public policy towards the venture capital industry. The model emphasizes four margins: supply of entrepreneurs due to career choice, entry of venture capital funds and search for investment opportunities, simultaneous entrepre-neurial effort and managerial advice subject to double moral hazard, and mark-up pricing when the successful firm introduces a new good. The paper derives an optimal policy that succeeds to implement a first best allocation in decentralized equilibrium. It also considers short- and long-run comparative static and welfare effects of piecemeal reform with regard to the capital gains tax, innovation subsidy, public R\&D spending and other policy initiatives.
We examine the determinants of venture capital fundraising in the U.S. over the past twenty-five years. We study industry aggregate, state-level, and firm-specific fundraising to determine if macroeconomic, regulatory, or performance factors affect venture capital activity. We find that shifts in demand for venture capital appear to have a positive and important impact on commitments to new venture capital funds. Commitments by taxable and tax-exempt investors seem equally sensitive to changes in capital gains tax rates that decreases in capital gains tax rates increase the demand for venture capital as more workers are incented to become entrepreneurs. Aggregate and state level venture fundraising are positively affected by easing of pension investment restrictions as well as industrial and academic R&D expenditures. Fund performance and reputation also lead to greater fundraising by venture organizations.
Public programs to provide early-stage financing to firms, particularly high-technology companies, have become commonplace in the United States and abroad. The long-run effectiveness of these programs, however, has attracted little empirical scrutiny. This paper examines the impact of the largest U.S. public venture capital initiative, the Small Business Innovation Research (SBIR) program, which has provided over $6 billion to small high-technology firms between 1983 and 1995. Using a unique database" of awardees compiled by the U.S. General Accounting Office, I show that SBIR awardees grew significantly faster than a matched set of firms over a ten-year period. The positive effects of SBIR awards were confined to firms based in zip codes with substantial venture capital activity. The findings are consistent with both the corporate finance literature on capital constraints and the growth literature on the importance of localization effects.
After more than two decades of dramatic growth in the venture capital industry, the recent sharp decline in venture capital activity has raised concerns about the implications for technological innovation. This article argues that venture capital may have a powerful impact on innovation, but this effect is far from uniform. ; The author uses a supply and demand framework to consider the cyclical nature of the venture industry and explore why shifts in opportunities often do not rapidly translate into increased fund-raising. The discussion shows how the structure of venture funds and the information lags in the venture investment process may increase the tendency of the venture capital supply, when it finally adjusts to shifts in demand, to react excessively. ; In considering the implications of these shifts for innovation, the author considers both field-based and statistical evidence. This analysis shows that venture capital's impact on innovation is positive overall but is likely to differ at various times in the cycle. ; The study concludes that, although venture capital has made important contributions to technological innovation and economic prosperity, effective government policies should not seek merely to spur venture financing. Instead, the author urges policymakers to encourage private investment and address gaps in the private funding process, such as industrial segments that have not historically captured the attention of venture financiers.
Venture capital limited partnerships are an attractive arena to study cross-sectional and time-series variations in compensation schemes. We empirically examine 419 partnerships. The compensation of new and smaller funds displays considerably less sensitivity to performance and less variation than that of other funds. The fixed base component of compensation is higher for younger and smaller firms. We observe no relation between incentive compensation and performance. Our evidence is consistent with a learning model, in which the pay of new venture capitalists is less sensitive to performance because reputational concerns induce them to work hard.
A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
Venture capital has emerged as an important intermediary in financial markets, providing capital to young high-technology firms that might have otherwise gone unfunded. Venture capitalists have developed a variety of mechanisms to overcome the problems that emerge at each stage of the investment process. At the same time, the venture capital process is also subject to various pathologies from time to time, which can create problems for investors or entrepreneurs. This article reviews the recent empirical literature on these organizations and points out area where further research is needed.
Principles of Corporate Finance McGraw-Hill International Editions Venture Capital at the Crossroads Venture capitalist value-added activities, fundraising and drawdowns
- R A Brealey
- S C Myers
- W D Bygrave
- J A Timmons
Brealey, R.A., Myers, S.C., 1996. Principles of Corporate Finance, 5th Ed. McGraw-Hill International Editions. Bygrave, W.D., Timmons, J.A., 1992. Venture Capital at the Crossroads. Harvard Business School Press, Boston, MA. Cumming, D., Fleming, G., Suchard, J., 2005. Venture capitalist value-added activities, fundraising and drawdowns. Journal of Banking & Finance 29, 295–331.
European Second-Tier Markets for NTBFs: A Study Carried Out for the European Commission
- G Bannock
J. Wonglimpiyarat / European Journal of Operational Research 192 (2009) 293–301 Bannock, G., 1994. European Second-Tier Markets for NTBFs: A Study Carried Out for the European Commission. Graham Bannock & Partners, Ltd, London, UK. Barnes, E., Cahill, E., Mccarthy, Y., 2003. Grandstanding in the U.K. Venture capital industry. Journal of Alternative Investments 6 (3), 60– 80.
Government-business forum on small business capital formation, Securities and Exchange Commission, Second roundtable discussions: Current challenges to smaller companies under disclosure and corporate governance rules
- H Makens
Makens, H. 2004. Government-business forum on small business capital formation, Securities and Exchange Commission, Second roundtable discussions: Current challenges to smaller companies under disclosure and corporate governance rules, 20 September 2004.
IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital The Entrepreneur's Guide to Going Public The determinants of venture capital funding: Evidence across countries
- T Hellmann
Hellmann, T., 2000. IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital. Stanford University, Mimeo. James, B.A., 1994. The Entrepreneur's Guide to Going Public. Dearborn Trade, Chicago, IL. Jeng, L.A., Wells, P.C., 2000. The determinants of venture capital funding: Evidence across countries. Journal of Corporate finance 6, 241–289.
Law, finance and innovation
- Armour