Risk management in the venture capital industry: Managing risk in portfolio companies

Managing risk is one of the main activities of venture capital companies. Despite the fact that this topic is of high practical relevance, only little research was published on risk management performed by venture capital companies in their ventures. Hence, we conducted a structured literature review which was the basis for developing five hypotheses concerning measures to decrease failure risk in venture capital-backed ventures. We tested these hypotheses with an empirical data set of 93 venture capital-backed ventures in Germany using original deal data from nine different venture capital funds using a structural equation model. We showed that the experience and the skills of the corresponding investment manager have a significant negative impact on the failure risk of a venture. Investment manager´s experience and skills were measured by the working and founding experience, the technology expertise and the network size. Hence, the results emphasize the importance of the selection of the investment manager for risk management in venture capital investments

Risk and return management of venture capital companies in the post-investment phase

Risk and return management is one of the core competencies of venture capital companies (VCCs) as they invest in young, innovative firms with a high return potential, but also high risk potential. Due to the liability of smallness, newness and financial constraints young, innovative firms are constantly under the threat of failure. In the scope of this dissertation are four related studies – three empirical studies and one literature review – analyzing the risk and return management of VCCs. In particular, risk assessment and risk management and value adding activities in the post investment phase were examined. In the first article, authors analyze which risks are relevant over the whole venture capital (VC) investment process and show how VCCs assess and documents risks in their deal documents. The second article studies risk management practices of VCCs. We show that the experience and the skills of the corresponding investment manager have a significantly negative impact on the failure risk of a venture. Article three analyzes value creation measures applied by VCCs. The results suggest that VCCs are highly engaged in supporting ventures in financial and human capital issues as well as in establishing strong governance mechanisms. The fourth article also deals with the foregone topic. This paper provides a literature analysis on value adding activity measures in VC investments, synthesizes the variables measuring the main levers of value adding and identifies directions for improvement in terms of data, variables and methods.:1. Introduction 2. The entire research project 3. Risk and return management of venture capital companies in the post-investment phase 3.1 Risk types and risk assessment in venture capital investments: A content analysis of investors´ original documents 3.2 Risk management in the venture capital industry: Managing risk in portfolio companies 3.3. Value adding activities of venture capital companies: A content analysis of investor´s original documents in Germany 3.4 Value adding activities in venture capital literature: A review on data, variables and methods 4. Further research in the venture capital fiel