Convertible securities and optimal exit decisions in venture capital finance

We study the interaction between exit decisions and contract design in venture capital finance. One of the main characteristics of venture capital funds is that they need to divest their holdings in the portfolio firms after a limited period of time. However, venture capitalists and entrepreneurs often have diverging interests with respect to different exit solutions (e.g., IPOs or trade sales). We show that with convertible securities, the ex-ante agreed optimal exit policy can be implemented. Thereby, we give an explanation for the widespread use of convertible securities in venture capital finance.     

Venture capital investment practices in Europe and the United States

This article focuses on the investment practices and contract behavior of venture capitalists in relation to their portfolio companies. Using a unique self-collected data set, we provide new evidence on the venture capital industry in Europe and the United States. Important differences are identified between the two, particularly with respect to the use of convertible securities, replacement of former management, stage financing, deal syndication, and duration of exit stage. The most striking difference involves the use of convertible securities, which are used far less often in Europe than in the United States. These differences suggest that European venture capitalists engage in less monitoring and thus adopt a more hands-off approach to their portfolio companies as compared to US venture capitalists.

资源稀缺、技术冲击与风险投资退出时机

本文从风险投资市场资源稀缺的特征出发,建立了一个风险投资退出时机选择模型,在此基础上,运用2004-2011年中国风险投资退出的季度数据考察了技术冲击和市场利率等因素变化对风险投资退出时机的影响。研究发现：（1）资源稀缺的程度与风险投资退出时机的选择有着非常紧密的联系;（2）市场利率的变化对风险投资的退出行为的影响具有不对称性：市场利率下降可能会导致风险投资加速退出质量较差的风险企业,同时却更长时间地持有质量较好的风险企业;（3）技术进步会增加风险企业的数量,提高风险投资市场上风险企业的平均质量,加速风险投资退出。     

‘Cleantech’ venture capital around the world

Cleantech venture capital investment differs from the typical venture capital investment in that it tends to be very capital intensive and faces greater technology risks associated with the functioning of the technology, scalability and exit requirements than the typical venture capital investment. Moreover, unlike the typical venture capital investment, the benefits arising from cleantech cannot be totally captured by the venture capitalist as many of its benefits accrue to society via reduced environmental degradation and better health and quality of life outcomes. The public goods literature posits that such externalities reduce investment in cleantech below the socially optimal level. We seek to determine whether there are countervailing factors which may incite greater cleantech investment. We argue that oil prices, increased stakeholder attention, as well as the impact of various formal and informal institutions are such factors. This paper provides a cross-country analysis of the determinants of cleantech venture capital investment with a unique worldwide dataset of 31 countries spanning 1996–2010. The data show consistent evidence of a pronounced role for oil prices in driving cleantech venture capital deals, which is more important than other economic, legal or institutional variables. Cleantech media coverage is likewise a statistically significant determinant of cleantech venture capital investment and as economically significant as other country level legal, governance, and cultural variables. Uncertainty avoidance has a negative impact on cleantech venture capital investment, as well as a moderating effect on other variables.     

欧洲创业投资发展及启示

本报告基于对欧洲创业投资业发展历程的考察,从创业环境、政府基金支持、税收优惠政策、退出机制、监管体制和行业协会作用等六个方面,全面总结了欧洲主要国家发展创业投资业的经验。结合中国国情,我国发展创业投资须从创业环境、政府基金支持、税收优惠等方面加以促进和完善。     

Exit Options in Corporate Finance: Liquidity versus Incentives

This paper provides a first study of the optimal design of active monitors'exit options in a problem involving a demand for liquidity and costly monitoring of the issuer. Optimal incentives to monitor the issuer may involve restricting the monitor's right to sell her claims on the firm's cash-flow early. But the monitor will then require a liquidity premium for holding such an illiquid claim. In general, therefore, there will be a trade off between incentives and liquidity. The paper highlights a fundamental complementarity between speculative monitoring in financial markets (which increases the informativeness of prices) and active monitoring inside the firm: in financial markets where price discovery is better and securities prices reflect the fundamentals of the issuer better, the incentive cost of greater liquidity may be smaller and active monitoring incentives may be preserved. The paper spells out the conditions under which more or less liquidity is warranted and applies the analysis to shed light on common exit provisions in venture capital financing.     

我国风险投资退出方式的选择

风险投资在现代经济中具有举足轻重的作用,选择合适的方式退出是风险投资成功的关键。本文结合目前我国风险资本的退出现状,分析中国风险投资退出的主要障碍在于相关法律法规不健全、中介服务不成熟、风险企业在国内主板上市难度大,指出了在我国目前的国情下,可供选择的风险投资退出方式有收购与兼并、买壳或借壳上市、境外二板上市或国内中小企业板上市、股份回购、通过区域性产权交易市场退出等。     

Short and long-term interactions between venture capital returns and the macroeconomy: evidence for the United States

The main purpose of this paper is to empirically model the influence of macroeconomic and financial variables on the performance of risk capital in the US. We start our investigation using a static long-run equilibrium model. In contrast to previous studies, we analyze the effect of several factors simultaneously within the framework of a vector error correction model (VECM). This allows us to study short- and long-term interactions to overcome the problem of endogeneity, and to discover causal mechanisms. The results show that the value of venture capital investments is positively related to industrial production, the exit channel Nasdaq, and the long-term interest rate. However, the value of venture capital investments is negatively related to the short-term interest rate. According to the short-term dynamics, VEC Granger causality confirms that only industrial production influences venture capital performance, while venture capital returns Granger causes Nasdaq performance.     

IPOs,trade sales and liquidations: Modelling venture capital exits using survival analysis

This paper examines the dynamics of exit options for US venture capital funds. Using a sample of more than 20,000 investment rounds, we analyze the time to ‘IPO’, ‘trade sale’ and ‘liquidation’ for 6000 VC-backed firms. We model these exit times using competing risks models, which allow for a joint analysis of exit type and exit timing. The hazard rate for IPOs are clearly non-monotonic with respect to time. As time flows, VC-backed firms first exhibit an increased likelihood of exiting to an IPO. However, after having reached a plateau, non-exited investments have fewer possibilities of IPO exits as time increases. This sharply contrasts with trade sale exits, where the hazard rate is less time-varying. We further provide evidence on the impact of economic factors such as syndicate size and composition, geographical location and VC value adding, on exit outcomes.     

The Determinants of Venture Capital in Europe — Evidence Across Countries

This article analyses the determinants of European venture capital activity. The main novelty of our work is in accounting for the idiosyncrasies of the European venture capital market. In particular, we investigate whether the size of the merger and acquisition market (M&A) is important in explaining venture capital. Moreover, our work is the first that analyses the impact of the degree of information asymmetry at the macro level, the direct impact of the level of entrepreneurial activity and the impact of the unemployment rate on venture capital activity. We use aggregate data from 23 European countries for the period 1998–2003 to estimate panel data models with fixed and random effects. Our results reveal that the size of the M&A market and the market-to-book ratio have a positive impact on venture capital activity whereas the unemployment rate influences the venture capital market negatively. These results highlight the importance of the exit environment and of the degree of asymmetric information for the venture capital market.     

Can herding improve investment decisions?

Existing models show that herding in decisions can cause significant information loss, inferior information aggregation, and impaired decision making. However, we show that in a multistage decision setting with endogenous information production, herding on the initial decision can actually result in superior aggregate information and improved decisions. This is because the possibility of herding by a follower incentivizes the leader to increase its ex ante information production to an extent that it can dominate the information loss from herding. Examples include decisions to enter new markets, fund R&D, and provide early‐stage venture capital.     

DOES VENTURE CAPITAL REQUIRE AN ACTIVE STOCK MARKET?

The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. The authors argue that this is no accident— that venture capital flourishes especially, and perhaps only , when venture capitalists can exit from successful portfolio companies through initial public offerings (IPOs), which in turn require an active stock market.
Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers, particularly (1) the importance of exit by venture capitalists and (2) the implicit contract over control between venture capitalists and entrepreneurs created by the possibility of exit through an IPO. This possibility gives entrepreneurs a valuable option that, in the event they are successful, allows them to reacquire control of their enterprises from venture capitalists.     

Venture capital financing in the eSports industry

We examine the drivers of venture capital financing raised by eSports companies, using the Crunchbase database containing information on private and public companies receiving any type of venture capital funding worldwide. We find that companies located in Asia-Pacific and Americas attract more funding than in Europe. Venture capital funds are more likely to fund late stage and older companies, than innovative early stage and younger firms. We also observe that the founders’ previous experience plays a significant role in explaining the level of funding. Companies with at least one founder with previous eSport, managerial or start-up experience are more likely to get more funding by venture capital funds. Our research provides new evidence on how venture capital funding is allocated between late stage and early stage firms as well as between older and younger companies in the eSport-industry and in different markets.     

Public economics gone wild: Lessons from venture capital

A recent article in the Journal of Public Economics has asserted, among other things, that government venture capital funds in Europe have crowded out private venture capital. I explain that the findings in that paper are based on empirical measures that are completely flawed. Moreover, I show with data spanning 13 countries and the years 1989–2011 that government venture capital funds in Europe have not crowded out private venture capital investment. Finally, I draw implications for studying venture capital and public policy for other countries such as India and China.     

Sustainable economic growth in the European Union: The role of ICT,venture capital,and innovation

Over the past 30 years, the economies in Europe have undergone major transformations that have been powered by diffusion of information and communication technology (ICT), intensification of innovation, and reforms in the financial sector to support innovative endeavors. The primary objective of this study was to examine the causal relationships among ICT diffusion, innovation diffusion, venture capital investment, and economic growth for 25 countries in Europe for the period from 1989 to 2016. Using a vector error‐correction model, the study examines the underlying short‐run and long‐run relationships for the above variables. The empirical analysis shows that in the long run, venture capital investment, ICT diffusion, and innovation diffusion have significant impacts on economic growth in Europe. However, in the short run, the direction of the causality varies depending on the specific measures of ICT diffusion and innovation diffusion that are utilized. Results from this study provide valuable insights into the types of policies that will contribute to sustainable economic growth in Europe.     

Biomarker of Quality? Venture‐backed Biotech IPOs and Insider Participation

Corporate financial managers of biotech firms need long‐term financing to reach key milestones, and that requires a long‐ term capital structure. They must balance a mix of investors with different objectives and different investment horizons that includes traditional venture capitalists and also hedge funds and mutual funds. This study helps practitioners understand the complex role of exit decisions, as venture capitalists seek better exit strategies and performance. IPOs are financing but not “exit” moves. In addition to certifying firm value, insider purchasing of shares in the IPO offering has two major consequences. First, venture capitalists reallocate large sums of capital from early‐stage to late‐stage deals that are expected to have lower risk (but also lower expected return) and shorter time to exit. Second, the speed at which VCs exit after the IPO depends on the firm ownership structure after the IPO and the stock liquidity. Going public with a significant participation by venture capitalists will probably increase the post‐IPO ownership and decrease the free float of the stock, implying a delay of the exit and the realization of the capital gains from the investments. Although this study has focused exclusively on the biotechnology industry, insider participation is not unique to it. Biotech's venture brethren in the software and technology industries also have insider participation in IPOs. During 2003–2015, approximately 41 venture‐backed firms outside of the biotechnology sector had insider participation.     

风险投资退出时机研究

信息不对称是风险投资运作过程中的重要特征,而退出环节的信息不对称的表现形式不仅与其它环节相似,而且还有其特殊性.不同类型的信息不对称从不同的角度影响风险投资的退出时机.风险投资家在退出过程中必须以企业当前的状态为基础,结合风险资金市场供求和已确定的退出方式,准确把握风险投资运作过程中各种信息不对称的状况,选择能最大化其退出收益的最优退出时机.     

风险投资退出机制研究:来自广东的经验

股权退出机制使得风险资本能够实现循环投资,也是风险投资中潜在或外在的有关公司控制权的激励合约的组成部分之一。本文以广东为例,说明了退出机制差异造成了我国内外资风险投资机构的经营差距,而退出机制差异主要体现为国内资本市场体系不完善,进而提出了建设多层次资本市场的相关对策选择。     

The role of accounting in high-technology investments

We present new qualitative empirical evidence from a series of interviews with representatives of venture capital support organisations, which discusses the role of accounting in high-technology investments. Our discussion is framed around three propositions on: whether or not the stewardship role of accounting still holds; the usefulness, or otherwise, of accounting information in the valuation of high-technology investments; and assessing the value of intangible assets in the investment decision. We find that accounting no longer plays such a strong stewardship role, certainly for the venture capital investor. Further, its role in enabling investors to make decisions on how, when and how much to invest is limited. We propose that standard setters take this on board in revising reporting requirements.     

风险投资对创业板IPO折价影响的实证研究

本文以截至2011年6月30日在我国创业板上市的236家公司作为研究对象,研究风险投资对创业板IPO折价的影响。研究发现：（1）有风险投资参与的企业IPO折价显著高于无风险投资参与的企业,支持声誉效应假说,即风险投资机构以IPO折价来提早退出投资项目,以此来建立自己的声誉,从而吸引更多的资金流入;（2）在对有风投参股的投资公司做进一步分析后发现一一随着风投参与度的增大,IPO调整折价率并未出现明显的提升,创业板企业IPO时风险投资机构的数量、风险投资机构持股比例与调整折价率关系不显著。