Christian Rauch’s research while affiliated with American University of Sharjah and other places

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Publications (37)


What Drives Startup Valuations?
  • Article

June 2024

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11 Reads

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1 Citation

Journal of Banking & Finance

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Christian Rauch



Figure 4. Zenefits pricing path
Fraud in startups: what stakeholders need to know
  • Article
  • Full-text available

June 2022

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657 Reads

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12 Citations

Journal of Financial Crime

Purpose This paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and stakeholders in the context of startup corporate governance. Further, this paper uses the examples of WeWork and Zenefits to explain how a failure of stakeholders to demand an external audit from an independent accounting firm in early stages of funding led to an opportunity for fraud. Design/methodology/approach The methodology used is a literature review and analysis of startup valuation combined with the Fraud Triangle Theory. This paper also provides a discussion of WeWork and Zenefits, both highly visible examples of startup fraud, and explores an increased role for independent external auditors in fraud risk mitigation on behalf of stakeholders prior to an initial public offering (IPO). Findings This paper documents a number of fraud risks posed by the “fake it till you make it” ethos and investor behavior and pricing in the world of entrepreneurial finance and VC, which could be mitigated by a greater awareness of startup stakeholders of the value of an external audit performed by an independent accounting firm prior to an IPO. Research limitations/implications An implication of this paper is that regulators should consider greater oversight of the startup financing process and potentially take steps to facilitate greater independence of participants in the IPO process. Practical implications Given the potential conflicts of interest between VC firms, investment banks and startup founders, the investors at the time of an IPO may be exposed to the risk that the shares of the IPO firms are overvalued at offering. Social implications This study demonstrates how startup practices can be extended to the Fraud Triangle and issue a call to action for the accounting profession to take a greater role in protecting the public from startup fraud. This study then offers recommendations for regulators and standards entities. Originality/value There are few academic papers in the financial crime literature that link the valuation and culture of startup firms with fraud risk. This study provides a concise explanation of the process of valuation for startups and highlights the considerations for stakeholders in assessing fraud risk. In addition, this study documents an emerging role for auditors as stewards of proper valuation for pre-IPO firms.

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How do financial contracts evolve for new ventures?

June 2022

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27 Reads

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6 Citations

Journal of Corporate Finance

While previous research has characterized the key features of contracts between entrepreneurs and venture capitalists, little is known about the contracts' evolution over time and across funding rounds. We overcome significant data challenges to compile a novel panel dataset of U.S. early-stage ventures that includes the main financial and control rights offered to investors at each (equity) funding round. We find that there is a ‘default contract’ with a distinct combination of rights that the majority of companies gravitate to. This default contract is typically implemented in the initial Series A funding round and rarely deviated from in later rounds. Whenever deviations do occur, terms are usually revised in favour of investors, and not entrepreneurs. Due to this stickiness of the default contract, for successful startups we argue that post-money valuations in later rounds can be a reasonable proxy for the economic value of the firm.






Private Equity Portfolio Company Fees

June 2018

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144 Reads

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64 Citations

Journal of Financial Economics

In private equity, general partners (GPs) receive fee payments from companies whose boards they control. Fees amount to $20 billion evenly distributed over time, representing over 6% of equity invested by GPs. They do not vary with business cycles, company characteristics, or GP performance. Fees vary significantly across GPs and are persistent within GPs, even after accounting for fee rebates to limited partners (LPs). GPs charging the least raise more capital postfinancial crisis and are backed by more skilled LPs. GPs increase fees prior to going public. We discuss how these results could be explained by optimal contracting and tax arbitrage.


Citations (23)


... Examples of internal pressure are maintaining appearances (Othman et al. 2023), personal financial needs (OSHIP) (Khamainy et al. 2022). While the external pressures are stakeholder and societal pressure (Ding et al. 2023), pressure to meet a financial target is high (Brazel et al. 2021), avoiding getting caught (Teichmann 2023b), the fundraising and valuation processes of startups (Gleason et al. 2022). ...

Reference:

DECODING THE DYNAMICS IN FINANCIAL FRAUD
Fraud in startups: what stakeholders need to know

Journal of Financial Crime

... To reduce information uncertainty and moral hazard resulting from principal-agent problems VC and PE investors but also LPs turn to sophisticated contracting (Fu et al., 2022;Kaplan & Strömberg, 2003). Given the increase in geopolitical uncertainty and the increasing importance of geopolitical factors, VC and PE contracting may have changed as well. ...

How do financial contracts evolve for new ventures?
  • Citing Article
  • June 2022

Journal of Corporate Finance

... Penelitian ini memiliki perbedaan dengan penelitian-penelitian sebelumnya terkait dengan topik valuasi bisnis startup dan kecurangan yang timbul dalam valuasi bisnis startup secara luas. Gleason et al. (2021) menyimpulkan bahwa terdapat beberapa faktor yang menjadi resiko yang dihadapi para stakeholders pada startup secara umum yang meliputi budaya rahasia informasi dan lemahnya tata kelola perusahaan. Beberapa isu terkait dengan valuasi startup (proses valuasi startup dilakukan pada fase funding dan startup tidak diwajibkan untuk melaporkan hasil valuasinya, masalah dalam mengukur growth yang realistis sehingga menciptakan ilusi dalam pertumbuhan startup, dan pemberian convertible preferred shares bagi para investor yang prominen), terdapat etos "fake it till you make it" yang berkembang dalam startup, dan independensi dari auditor eksternal ketika startup melakukan IPO. ...

Fraud in Startups: What Stakeholders Need to Know
  • Citing Article
  • January 2021

SSRN Electronic Journal

... Besides traditional VC investors, investment banks, mutual funds and sovereign wealth funds have also leapt into startup financing. Mutual funds have been the most active of all new VC market entrants, with estimate ranges showing that 14 separate mutual fund families invested between $7bn and $10bn into over 250 startups since 2009 (Kwon et al., 2020;Imbierowicz and Rauch, 2021). They do so with the hope that the startups will be successful in permitting them to achieve a successful exit in the form of an initial public offering (IPO) or acquisition at the highest possible valuation. ...

The Pricing of Private Assets: Mutual Fund Investments in ‘Unicorn’ Companies
  • Citing Article
  • January 2020

SSRN Electronic Journal

... The cost of equity measures the rate of return a company must earn on equity investment. Capital costs are the actual costs a company incurs to obtain funds from various sources (Phalippou et al., 2018). Preferred stock, common stock, debt, or profits can provide funds for accumulated investments or operational projects. ...

Private Equity Portfolio Company Fees
  • Citing Article
  • June 2018

Journal of Financial Economics

... To meet the new capital requirements, banks may need to issue new shares, which can dilute the holdings of existing shareholders. This can lead to resistance from current shareholders and potential internal conflicts (Berger, Imbierowicz, & Rauch, 2016). Banks may turn to debt financing to meet capital requirements, but this increases their leverage and financial risk. ...

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis
  • Citing Article
  • January 2012

SSRN Electronic Journal

... Phalippou supported the concept that management contracts may allow private equity managers to charge high compensation fees and use the confusing characteristics of such agreements to cover their poor performance [7]. Related research has been concluded in previous articles by GP compensation was already painted in many previous articles by Robinson and Sensoy and Phalippou et.al [8,9]. ...

Private Equity Portfolio Company Fees
  • Citing Article
  • January 2015

SSRN Electronic Journal

... Estos fondos se especializan en comprar participaciones en empresas a otros fondos de PE. Degeorge et al. (2016) reportan que las salidas vía SOB estarían cerca del 40% de todas las salidas de inversiones de PE. Phalippou et al. (2016) analizan en detalle los distintos tipos de comisiones que suelen cobrarse en fondos de PE tipo Leveraged Buyout 10 (LBO) establecidos a través de un limited patnership. Al momento de crear el fondo, se firma un contrato entre el GP y los LP, llamado Limited Parternship Agreement (LPA). ...

Private Equity Portfolio Company Fees
  • Citing Article
  • January 2015

SSRN Electronic Journal

... merger, share exchange) or asset acquisition with or from a targetcompany that is un-identified as of the IPO date. Many SPACs 1 that were created in the US and Europe are 1 See: Orlick (May 2021), Klausner, Ohlrogge & Ruan (2020), and Ignatyeva, Rauch & Wahrenburg (2013). See: Harroch, et. ...

Analyzing European SPACs
  • Citing Article
  • November 2013

The Journal of Private Equity

... Board interlocks create a network for exchanging ideas, knowledge, and experience, which improves the quality of board decisions (Berger, Imbierowicz, and Rauch 2016) and CSR participation (Dicuonzo et al. 2022). Bonini et al. (2022) and Elms and Pugliese (2023) argue that holding multiple directorships within the same sector improves the directors' engagement in governance duties and increases board effectiveness. ...

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis: MONEY, CREDIT AND BANKING
  • Citing Article
  • June 2016

Journal of Money Credit and Banking