Venture Capital and Sequential Investments

We present a dynamic model of venture capital financing, described as a sequential in­vestment problem with uncertain outcome. Each venture has a critical, but unknown threshold beyond which it cannot progress. If the threshold is reached before the completion of the project, then the project fails, otherwise it succeeds. The investors decide sequentially about the speed of the investment and the optimal path of staged investments. We derive the dynamically optimal funding policy in response to the arrival of information during the development of the venture. We develop three types of predictions from our theoretical model and test these predictions in a large sample of venture capital investments in the U.S. for the period of 1987-2002. First, the investment flow starts low if the failure risk is high and accelerates as the projects mature. Second, the investment flow reacts positively to information that arrives while the project is developed. We find that the investment decisions are more sensitive to the information received during the development than to the information held prior to the project launch. Third, investors distribute their investments over more funding rounds if the failure risk is larger.Venture capital, Sequential investment, Stage financing, Intertemporal returns

Venture Capital and Sequential Investments

We present a dynamic model of venture capital financing, described as a sequential investment problem with uncertain outcome. Each venture has a critical, but unknown threshold beyond which it cannot progress. If the threshold is reached before the completion of the project, then the project fails, otherwise it succeeds. The investors decide sequentially about the speed of the investment and the optimal path of staged investments. We derive the dynamically optimal funding policy in response to the arrival of information during the development of the venture. We develop three types of predictions from our theoretical model and test these predictions in a large sample of venture capital investments in the U.S. for the period of 1987-2002. First, the investment flow starts low if the failure risk is high and accelerates as the projects mature. Second, the investment flow reacts positively to information that arrives while the project is developed. We find that the investment decisions are more sensitive to the information received during the development than to the information held prior to the project launch. Third, investors distribute their investments over more funding rounds if the failure risk is larger.Venture capital, Sequential investment, Stage financing, Intertemporal returns

Venture Capital Financing, Moral Hazard and Learning

We consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an ine¢cient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting.venture financing;optimal stopping;dynamic financial constraints;share contracts;security design

Value-adding and Monitoring Activities of Venture Capital:A Synthesis Literature Review

This article provides a synthesis overview of the corporate governance literature related to the venture capital (VC) investors (or venture capitalists: VCs) bring to their portfolio companies, especially from the investment structuring to the exit date. The relationship between VC investors and investee firms has been studied mainly from the perspective of Agency Theory, through control mechanisms and incentives adopted by VC investors. However, this paper draws attention to the nature of non-financial value-added and analyzes the importance of cognitive and relational dimension of governance between the different types of VC investors. The studies reviewed in this article focus on two primary areas of inquiry: (i) active involvement of venture capitalists, (ii) venture capitalists monitoring. While much has been learned in each area, this review highlights several areas in which our understanding of the issues remains incomplete. Keywords: Venture Capital. Private Equity. Value-added and monitoring. Governance.

Trust and Control: The Value Effect of Venture Capital Term Sheet Provisions as Risk Allocation Tools

The parties to a venture funding agreement are in a state of coopetition. The parties account for perceived risk in the entrepreneur-investor relationship through varying levels of control demanded from and trust afforded to the other party. The level of risk perceived by each party may differ along individual aspects of the prospective equity deal. The provisions of the term sheet delineate the subjective risk perceptions of each party to the transaction by allocating control or trusting a party with decision-making rights. When negotiating term sheet provisions, a party should seek to understand and recognize the risk perceived by the other party and attempt to afford the level of control or trust necessary to achieve a relational agreement that provides the greatest value for the parties collectively. An optimal allocation of control and trust adequately captures the perceived risk of each party, promotes cooperation between the parties, and ultimately facilitates the performance of the business venture. Understanding the subjective risk perceptions of each party to the investment transaction will facilitate the objective of negotiating a term sheet that maximizes the value created for all parties

Trust and Control: The Value Effect of Venture Capital Term Sheet Provisions as Risk Allocation Tools

The parties to a venture funding agreement are in a state of coopetition. The parties account for perceived risk in the entrepreneur-investor relationship through varying levels of control demanded from and trust afforded to the other party. The level of risk perceived by each party may differ along individual aspects of the prospective equity deal. The provisions of the term sheet delineate the subjective risk perceptions of each party to the transaction by allocating control or trusting a party with decision-making rights. When negotiating term sheet provisions, a party should seek to understand and recognize the risk perceived by the other party and attempt to afford the level of control or trust necessary to achieve a relational agreement that provides the greatest value for the parties collectively. An optimal allocation of control and trust adequately captures the perceived risk of each party, promotes cooperation between the parties, and ultimately facilitates the performance of the business venture. Understanding the subjective risk perceptions of each party to the investment transaction will facilitate the objective of negotiating a term sheet that maximizes the value created for all parties

Investigating challenges and barriers facing construction of small, medium-sized enterprises in credit accessibility in the South African construction industry

Abstract: This study sought to investigate the challenges and the barriers facing Small and Medium –Sized Enterprises in South Africa construction industry in their quest to access credit from financial institutions for their business purposes. This study utilizes a combination of primary data emanating from structure survey questionnaires supplemented by secondary source of data from an extensive literature review, in order to present insightful commentary about credit accessibility with Construction SMEs in South Africa. The study was a cross-sectional survey that used semi-structured questionnaire to collect data from the sample. 50 questionnaires were distributed to Construction Company in Gauteng Province in in Johannesburg through a convenience sampling technique. The key barriers were identified include informational barriers, lack of managerial ability within construction SMEs. Limitation of the study have been note and recommendations for developing innovative approaches to making credit accessibility to construction SMEs in South African been discussed. The study contributes to the body of knowledge in the area of financing construction firm in developing countries in general, and in South Africa in particular

Macroeconomic impact on venture markets : Does the correlation exist?

Venture capital industry has been historically extensively researched due to its expanding size and the growing overall interest in it. However, macroeconomic perspective by its impact to the ventures growth potential and performance has been less at the center of previous studies. This study has concentrated on the macroeconomic environment and analyzed the potential consequences of its variations to the venture capital markets performance. The focus in the study has been on the United States venture capital markets due to its globally largest size, thereby providing strongest basis for finding significant outcomes within the research area. Furthermore, major risks affecting ventures are identified and key means for their management in the industry are presented. This study has identified multiple remarkable factors for risk mitigation at the portfolio level within the venture capital markets. The empirical section of the research process is conducted by gathering data from approximately 26 years of specific macroeconomic variables and United States venture capital variables. The empirical research is executed by utilizing regression analysis. The venture capital variables in the regression analysis consist of total amount invested, number of deals and average deal size within the United States venture capital markets. The macroeconomic variables chosen for the regression analysis consist of United States 10-year treasury bonds yield, Russell 2000 index, initial public offerings, unemployment rate and industrial production index. Overall, the principal era of interest and focus within the study includes the most recent covid crisis and previous economic crisis. The empirical findings of the accomplished analysis states that the United States venture capital markets are significantly correlated with the surrounding macroeconomy in certain aspects. Transitions within macroeconomy significantly affects the risk levels of ventures and therefore leads to risk mitigation or alternatively risk augmentation depending on investors risk preferences and defined risk-to-reward ratio. This provides essential insight to the venture capitalists decision making process regarding execution of ventures during perceived economic environment and eases evaluation of potential investments future growth prospects.Riskipääomasijoittamisen toimialaa on historiallisesti laajasti tutkittu sen laajenevan koon ja kasvavan yleisen kiinnostuksen vuoksi. Makrotaloudellinen näkökulma sen vaikutuksesta riskisijoitusten kasvupotentiaaliin ja suorituskykyyn on kuitenkin ollut vähemmän aiempien tutkimusten keskiössä. Tässä tutkimuksessa on keskitytty makrotaloudelliseen ympäristöön ja sen muutosten mahdollisiin vaikutuksiin riskipääomamarkkinoiden suoriutumisessa. Tutkimuksessa on keskitytty Yhdysvaltojen riskipääomamarkkinoihin sen maailmanlaajuisesti suurimman koon vuoksi, mikä tarjoaa vahvimman perustan merkittävien tulosten löytämiselle tutkimusalueella. Lisäksi tunnistetaan suurimmat riskisijoituksiin vaikuttavat riskit ja osoitetaan keskeisimmät keinot niiden hallintaan toimialalla. Tässä tutkimuksessa on havaittu useita merkittäviä riskien lieventämiseen vaikuttavia tekijöitä riskipääomamarkkinoiden salkkutasolla. Tutkimusprosessin empiirinen osuus on toteutettu keräämällä tietoja noin 26 vuoden ajalta tietyistä makrotaloudellisista muuttujista ja yhdysvaltalaisista riskipääomamuuttujista. Empiirinen tutkimus on toteutettu regressioanalyysiä hyödyntämällä. Regressioanalyysin riskipääomamuuttujat koostuvat sijoitetusta kokonaismäärästä, sopimusten määrästä ja keskimääräisestä kaupan koosta Yhdysvaltojen riskipääomamarkkinoilla. Regressioanalyysiin valitut makrotaloudelliset muuttujat koostuvat Yhdysvaltain 10 vuoden valtion joukkolainojen tuotosta, Russell 2000 indeksistä, listautumisanneista, työttömyysasteesta ja teollisuustuotantoindeksistä. Kaiken kaikkiaan tutkimuksen tärkein kiinnostuksen ja keskittymisen aikakausi sisältää viimeisimmän koronakriisin ja aiemmat talouskriisit. Saavutetun analyysin empiiriset havainnot osoittavat, että Yhdysvaltojen riskipääomamarkkinat korreloivat merkittävästi ympäröivän makrotalouden kanssa tietyiltä osin. Makrotalouden siirtymät vaikuttavat merkittävästi riskisijoitusten riskitasoon ja johtavat siten riskien lieventämiseen tai vaihtoehtoisesti riskien kasvattamiseen sijoittajien riskimieltymysten ja määritellyn riski-tuottosuhteen mukaan. Tämä antaa olennaisen kuvan pääomasijoittajien päätöksentekoprosessista koskien riskisijoitusten toteuttamista koetun taloudellisen ympäristön aikana, ja helpottaa potentiaalisten sijoitusten tulevien kasvunäkymien arviointia

Financing Innovation

We review the recent literature on the financing of innovation, inclusive of large companies and new startups. This research strand has been very active over the past five years, generating important new findings, questioning some long-held beliefs, and creating its own puzzles. Our review outlines the growing body of work that documents a role for debt financing related to innovation. We highlight the new literature on learning and experimentation across multi-stage innovation projects and how this impacts optimal financing design. We further highlight the strong interaction between financing choices for innovation and changing external conditions, especially reduced experimentation costs

Nothing Ventured - Nothing Gained? Empirical Evidence on Venture Capital Financing in Switzerland

Venture Capital, Entrepreneurship, Syndication