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Author: Sharat Raghavan Publisher: ISBN: Category : Languages : en Pages : 105
Book Description
This dissertation analyzes contracts and organizational form decisions in the empirical setting of venture capital investments. The first chapter asks how entrepreneurs and venture capital investors are affected by a specific design feature of investment contracts. Participating preferred rights, which are venture capital contract terms that give investors returns greater than their intrinsic ownership, are used extensively despite possible deleterious effects on founder incentives. Using a novel data set of venture capital investment contracts from 2004-2009, I ask three fundamental questions about these rights: when are they used, who uses them, and what are their consequences? The findings indicate that (i) lower inflows of venture capital funding increase the use of participating preferred rights; (ii) less experienced investors and certain industry sectors utilize participating preferred rights more often; and (iii) firms with participating preferred rights are less likely to raise a subsequent financing at a higher valuation and less likely to exit through an IPO or acquisition, suggesting that the incentive implications of these rights may affect firm performance. These results are robust to specifications that attempt to control for the endogeneity of the contract right. The findings provide important insights for entrepreneurs and investors who are weighing the consequences of certain contractual forms. The second chapter broadens the analysis to other contractual rights to asks how investors and entrepreneurs allocate ownership and venture capital investment rights in competitive markets. Using the same data set of venture capital financings from 2004-2009, I find that changes in market competition, or venture capital supply, affect contractual terms in significant ways. Competition not only affects firm valuations, but how actual firm ownership is divided between entrepreneurs and investors. Additionally, certain contractual rights shift in response to venture capital scarcity. Specifically, the results suggest that (i) entrepreneurs own more of the firm in periods of high venture capital inflows, (ii) entrepreneurs give up cash flow rights in periods of low venture capital inflows, and (iii) the incidence of control rights are not significantly affected by venture capital inflows. Similarly, the results are robust to specifications that attempt to control for the endogeneity of venture capital inflows. The third chapter (co-authored with Eric J. Allen) focuses on a potential inefficiency of organizational design, specifically when a startup chooses to organize as a C-corporation rather than as a limited liability company (LLC). We examine the previously documented anomaly of loss-generating startup firms organizing as C-Corporations, as opposed to the theoretically more tax efficient alternative - the LLC. While prior research examines the potential reasons for this divergence between theory and practice, this is the first study that actually attempts to quantify the foregone tax benefits incurred by the current system. We examine a sample of venture backed firms that reached the Initial Public Offering stage between 1996 and 2008. We find that the vast majority of these firms have accumulated tax losses at issuance, on average $33 million, and that the associated potential tax benefit is significant. We also examine a subsample of firms that were, at one time, organized as pass-through entities prior to going public. We find that, while the majority switched to the C-Corporate form upon the entrance of a venture capital investor, a small number were allowed to retain their pass-through status until issuance. Their existence provides further evidence that the alternative form's lack of adoption must be attributable to some aspect other than technical limitations that would prevent venture capital investment.
Author: Sharat Raghavan Publisher: ISBN: Category : Languages : en Pages : 105
Book Description
This dissertation analyzes contracts and organizational form decisions in the empirical setting of venture capital investments. The first chapter asks how entrepreneurs and venture capital investors are affected by a specific design feature of investment contracts. Participating preferred rights, which are venture capital contract terms that give investors returns greater than their intrinsic ownership, are used extensively despite possible deleterious effects on founder incentives. Using a novel data set of venture capital investment contracts from 2004-2009, I ask three fundamental questions about these rights: when are they used, who uses them, and what are their consequences? The findings indicate that (i) lower inflows of venture capital funding increase the use of participating preferred rights; (ii) less experienced investors and certain industry sectors utilize participating preferred rights more often; and (iii) firms with participating preferred rights are less likely to raise a subsequent financing at a higher valuation and less likely to exit through an IPO or acquisition, suggesting that the incentive implications of these rights may affect firm performance. These results are robust to specifications that attempt to control for the endogeneity of the contract right. The findings provide important insights for entrepreneurs and investors who are weighing the consequences of certain contractual forms. The second chapter broadens the analysis to other contractual rights to asks how investors and entrepreneurs allocate ownership and venture capital investment rights in competitive markets. Using the same data set of venture capital financings from 2004-2009, I find that changes in market competition, or venture capital supply, affect contractual terms in significant ways. Competition not only affects firm valuations, but how actual firm ownership is divided between entrepreneurs and investors. Additionally, certain contractual rights shift in response to venture capital scarcity. Specifically, the results suggest that (i) entrepreneurs own more of the firm in periods of high venture capital inflows, (ii) entrepreneurs give up cash flow rights in periods of low venture capital inflows, and (iii) the incidence of control rights are not significantly affected by venture capital inflows. Similarly, the results are robust to specifications that attempt to control for the endogeneity of venture capital inflows. The third chapter (co-authored with Eric J. Allen) focuses on a potential inefficiency of organizational design, specifically when a startup chooses to organize as a C-corporation rather than as a limited liability company (LLC). We examine the previously documented anomaly of loss-generating startup firms organizing as C-Corporations, as opposed to the theoretically more tax efficient alternative - the LLC. While prior research examines the potential reasons for this divergence between theory and practice, this is the first study that actually attempts to quantify the foregone tax benefits incurred by the current system. We examine a sample of venture backed firms that reached the Initial Public Offering stage between 1996 and 2008. We find that the vast majority of these firms have accumulated tax losses at issuance, on average $33 million, and that the associated potential tax benefit is significant. We also examine a subsample of firms that were, at one time, organized as pass-through entities prior to going public. We find that, while the majority switched to the C-Corporate form upon the entrance of a venture capital investor, a small number were allowed to retain their pass-through status until issuance. Their existence provides further evidence that the alternative form's lack of adoption must be attributable to some aspect other than technical limitations that would prevent venture capital investment.
Author: Hyunsung Daniel Kang Publisher: ISBN: Category : Accounting Languages : en Pages :
Book Description
My dissertation is focused on developing a better understanding of the technology and innovation strategies of corporations and their impacts on firm performance. I am particularly interested in corporate venture capital (CVC), which serves as a strategy for accessing external technology for corporate investors and as an alternative source of financing and complementary assets for start-ups. I have investigated the conditions under which corporate investors and start-ups achieve the strategic goals by establishing CVC ties, and on estimating the technological and financial gains created by the CVC ties. Specifically, I have concentrated on when and where CVC ties are established in order to maximize economic value. The former relates to a timing issue, whereas the latter is a space issue of CVC investments. In the first essay, I examine corporate investors' decisions to establish CVC ties and their subsequent strategic actions. Consistent with the real options perspective on CVC investments, I find that CVC investments can help corporate investors effectively search for and select future acquisition or licensing partners by reducing asymmetric information and uncertainty that may characterize markets for technology. Specifically, CVC investments facilitate the external acquisition of technology by substituting for a corporate investor's absorptive capacity, as reflected by its upstream research capabilities. CVC investments instead complement the portfolio of internally generated new products, since they allow highly productive corporate investors to shift their focus onto exploratory initiatives with the objective of selecting future technology and partners. Finally, CVC investments facilitate exploratory investments in distant technological areas that are subsequently integrated through licensing or acquisitions. These findings contribute to emerging research on the organization and financing patterns of external R & D activities. In the second essay, I investigate the nature of the relationship between technological spillovers and capital gains created by CVC investments for corporate investors. Using a simple equilibrium model and data from the global bio-pharmaceutical industry between 1986 and 2007, I find that these technological spillovers and capital gains are complements. This complementarity is enhanced when CVC investments are made in post-IPO and technologically diversified start-ups. Beyond providing a broad benchmark for heterogeneous returns on CVC investments, this study has important implications for corporate investors and start-ups. In particular, to the extent that capital gain is greatly determined by changes in the market values of start-ups, it implies that CVC investments can create value for start-ups as well as corporate investors. These mutual benefits can be greatly determined by when (e.g., post-IPO start-ups) and where (e.g., technologically diversified start-ups) CVC investments are made. In the third essay, I analyze the contextual factors that impact the probability of start-ups' obtaining financing through independent venture capitalists and corporate investors. The systematic empirical evidence based on a three-stage game theoretic model suggests that start-ups that possess better evaluated technology tend to be financed through independent venture capitalists, rather than corporate investors. In contrast, start-ups tend to be financed through corporate investors, rather than independent venture capitalists, when their intellectual properties are effectively protected and their research pipelines contain multiple products. These findings provide a theoretical basis to explain why several types of investors co-exist in the entrepreneurial financing market. Moreover, the existence of such determinants indicates that, although investors traditionally have been viewed as the powerful partner that dominates the investment decision, start-ups are also active decision makers in investment ties.
Author: Roy Kenneth Roth Publisher: ISBN: Category : Languages : en Pages :
Book Description
In this dissertation, I study how the structure and conventions of the venture capital market affect the behavior of both investors and entrepreneurs. The venture capital market is characterized by high-risk investments with the potential for extreme rewards. The current structure and conventions of the market have developed at least in part to mitigate the level of risk faced by the investors. Characteristics of the market include convertible preferred securities, staged investment and board representation for investors among other features. In the first chapter of this dissertation, I study the effects of stage financing on effort provision and firm value, weighing the advantages of upfront financing against the incentive to misuse the capital for personal reasons. In the second chapter, I study how the use of convertible preferred securities and board representation affect the level of risk chosen by venture capital-backed firms. Both chapters primarily deal with the market structure as given, thus, the focus of this dissertation is on understanding the effects of the current market structure on real decision-making, rather than providing justification for observed conventions. In so doing, I uncover insights not previously available and meaningfully contribute to the existing literature. In the first chapter, I explore the optimal staging path for venture capital-backed companies. Staging investment allows a portion of the risk inherent to financing new ventures to be mitigated, as some portion of the needed funds can be withheld until after initial progress is realized. As a result, companies that show poor intermediate signals can be abandoned, saving investors from likely losses. Additionally, despite investors' representation on the board of directors, some misbehavior by the entrepreneur may not be preventable ex-post. Hence, there is value in limiting the amount of capital that the entrepreneur has access to while the firm is young and opaque, as this limits the amount that can be misused. These factors create a motive for stage financing. However, providing a larger amount of capital upfront can also provide flexibility and operational efficiencies that increase the potential value of the project. Weighing these effects against each other leads to an internal optimum level of staging, where some capital is provided upfront but a portion is withheld until further information is revealed and the firm matures. The entrepreneur's preferred level of capital raised initially exceeds the level that maximizes the value of the firm. I further explore how the solution changes when the entrepreneur disagrees with investors over the likely value of the project. Specifically, I study how the solution is affected when the entrepreneur is more optimistic about the distribution of project outcomes than are investors. This creates two separate effects that oppose each other. On one hand, optimistic entrepreneurs are less likely to misbehave and waste capital, lowering the cost of providing capital upfront and increasing the optimal amount raised initially. On the other hand, optimists believe that the price they can get for their equity will be higher in the future, increasing the perceived cost of upfront financing and decreasing its optimal level. I illustrate that in low information settings the former effect dominates while in high information settings the latter dominates. These findings provide insight into the staging decision not previously available. In Chapter 2 I focus on the incentives for risk-taking facing both entrepreneurs and investors. In venture capital financing, investors take convertible preferred stock which is senior to the common stock held by the entrepreneurs. Traditional economic logic would then imply that the entrepreneur has a stronger incentive for risk-taking than does the investor, by virtue of the security design. However, I show that this is not always the case. I explore how the incentives of the decision-making investors, the general partners of venture capital funds, are affected by the fact that they manage funds of other peoples money. Hence, their compensation profile is not linearly related to fund value. In particular, general partners are compensated with a mixture of fixed and performance sensitive income. I show that the performance sensitive component, carried interest, introduces a kink into the payoffs of the general partners which induces a preference for risky strategies in certain situations. My model predicts two key scenarios where, despite holding a senior security, general partners are more risk-seeking than entrepreneurs. First, general partners are risk-seeking late in the life cycle of their funds if prior performance has been poor. This is similar to the "gambling for resurrection'' effect in firms near default. Furthermore, in many cases, the possibility of future poor performance is sufficient to induce the GP to prefer high-risk strategies even early in the life of the fund, before intermediate progress has been realized. These findings are empirically relevant and shed light on which parties are the driving forces behind the level of risk selected by startup firms.
Author: Francesca Tenca Publisher: World Scientific ISBN: 9811221995 Category : Business & Economics Languages : en Pages : 165
Book Description
This book synthesises current knowledge on entrepreneurial finance. It provides a comprehensive and up-to-date overview of the state-of-the-art in entrepreneurial finance, with a focus on its ecosystem and main players. It analyses different channels of funding for young and growing ventures, namely debt financing, venture capital, business angels, and new forms of alternative finance, highlighting their advantages and disadvantages from an entrepreneur's perspective. It further discusses the characteristics of financial markets in entrepreneurial finance, examining financial gaps and public policies.This book is ideal for students in entrepreneurship, innovation, finance and business at the graduate and post-graduate levels. Entrepreneurs and policymakers interested in financial issues related to start-ups and new ventures will also find this book interesting.
Author: Darek Klonowski Publisher: Routledge ISBN: 1136210709 Category : Business & Economics Languages : en Pages : 587
Book Description
Entrepreneurial finance is a discipline that studies financial resource mobilization, resource allocation, risk moderation, optimization in financial contracting, value creation, and value monetization within the context of entrepreneurship. However, without proper strategic consideration the discipline is incomplete. This book examines how the activity of entrepreneurial finance can be enhanced via a concentration on value creation and through improved strategic decision-making. The most unique feature of the book is its focus on value creation. For entrepreneurs, value creation is not a one-off activity, but rather a continuous cycle of incremental improvements across a wide range of business activities. Entrepreneurial value creation is described in four comprehensive stages: value creation, value measurement, value enhancement, and value realization, referred to as the C-MER model. This book focuses on what creates value rather than merely presenting value creation in a straight accounting framework. At the same time, deliberate and tactical planning and implementation ensure that the firm does not ignore the components necessary for it to survive and flourish.Vigorous strategic deliberations maximize the entrepreneurial firm’s chances of making the right business decisions for the future, enable the firm to manage its available financial and non-financial resources in the most optimal manner, ensure that the necessary capital is secured to progress the development of the firm to its desired development level, and build value. While financial considerations are important, the field of strategic entrepreneurial finance represents a fusion of three disciplines: strategic management, financial management, and entrepreneurship. This orientation represents a natural evolution of scholarship to combine specific domains and paradigms of naturally connected business disciplines and reflects the need to simultaneously examine business topics from different perspectives which may better encapsulate actual entrepreneurial practices.
Author: Dan H. Vo Publisher: ISBN: Category : Languages : en Pages :
Book Description
In many developed countries angel capital investment is the main source of external financing for high growth early-stage entrepreneurial companies. In spite of its importance, research in the angel capital market is still very limited. This is partly due the fact that data on angel capital investment is rare and unsystematic. This dissertation attempts to learn more about this important but not well-understood angel capital market. In particular, the first essay looks at the relationship between angels and venture capitalists in financing start-up ventures. This essay juxtaposes a complements hypothesis--angel financing is a springboard for venture capital, against a substitutes hypothesis--angels and venture capital are distinct financing methods that ought not to be combined. The result shows that companies that obtain angel financing subsequently obtain less venture capital, and vice versa. On average venture capitalist make larger investments, but this alone cannot explain the substitutes pattern. In addition, this essay reports that companies funded by venture capital perform better than angel backed companies, as measured by successful exits or revenues. Mixing angel and venture capital funding tends to be associated with worse performance. The second essay studies the role of geographic distance between the angel investors and the investee companies on the angel investment performance. This essay conjectures four possible channels that can explain the relationship between distance and the return to angel investment. It shows that distance has a positive relationship with the return to angel investment. Examining the effect of distance across different categories of angel investors, across angel investor's locations, and across company's location, this essay finds evidence that this positive relationship is mainly driven by the "objectivity effect", which suggests that distant investors can evaluate the prospect of a company more objectively than close-by investors, who tend to be more biased in their judgments. The third essay examines why entrepreneurs find it generally hard to find angel investors. This essay modifies the standard search model introduced by Pissarides to explain this phenomenon. In this model, angels hide to force entrepreneurs to engage in a costly search. The result shows that angel investors adopt the hiding strategy to screen out low-productivity entrepreneurs who would otherwise inundate angels. Interestingly, social surplus is often increased when angels hide, though in some circumstances surplus may fall.
Author: Rassoul Yazdipour Publisher: Springer Science & Business Media ISBN: 1441975276 Category : Business & Economics Languages : en Pages : 255
Book Description
Advances in Entrepreneurial Finance brings together contributions from researchers from the fields of entrepreneurship, behavioral finance, psychology, and neuroscience to shed new light on the dynamics of decision making and risk taking by entrepreneurs and venture capitalists (VCs). Every new venture requires access to capital at competitive interest rates, and much has been written on general entrepreneurship by management scholars and financial contracting by financial economists using traditional finance theory with all its highly restrictive assumptions regarding decision makers’ cognitive capabilities and behavior. But recent developments in behavioral finance can now be applied to understand how entrepreneurs and VCs perceive risk and uncertainty and how they decide and act accordingly. Showcasing the latest research, this volume demonstrates that findings from the behavioral and neuroscience arenas can and do explain decision making by entrepreneurs and venture investors in the real world. Consequently, such findings have practical implications not only for entrepreneurs, venture capitalists, and their advisors, but also all government agencies and NGOs that want to support product and technological innovation, capital formation, job creation, and economic development.
Author: Janet Smith Publisher: Stanford University Press ISBN: 0804770913 Category : Business & Economics Languages : en Pages : 746
Book Description
Entrepreneurial Finance applies current financial economics research and theory to the study of entrepreneurship and new venture finance.
Author: Sharat Raghavan
Author: Sharat Raghavan
Author: Hyunsung Daniel Kang
Author: Roy Kenneth Roth
Author: Francesca Tenca
Author: Darek Klonowski
Author: Dan H. Vo
Author: Oliver Mäschle
Author: Jacek Piosik
Author: Rassoul Yazdipour
Author: Janet Smith