The consequences of conflict between the venture capitalist and the entrepreneurial team in the United Kingdom from the perspective of the venture capitalist

This research investigates the factors associated with the nature of conflict in the post-investment relationship between the venture capitalist (VC) and the entrepreneurial team (EP) in a venture that was funded by the venture capital firm, and as perceived by the VC. The study hypothesises a relationship between this perceived conflict and the post-investment performance of the investee firm. It examines both cognitive and affective conflict in two strategic areas — organisational goals and policy decisions — and relates them to the performance. The data was collected by a survey of VCs in the UK and a 60% effective response rate was achieved. The results show that conflict as disagreement can be beneficial for the venture performance, although at the same time, conflict as personal friction is negatively associated with performance. These impacts are in general stronger in the conflict related to organisational goals than to policy decisions.     

Revisiting the risk-taking effect of executive stock options on firm performance

While the relation between equity-based compensation and firm performance has been widely discussed, the findings on how executive stock options (ESOs) affect firm value are still inconclusive. This research examines the risk-taking effect of ESOs on firm performance by taking into consideration managers' personal risk aversion. A three-stage-least-squares approach is adopted to examine a simultaneous system of equations describing option compensation, risk-taking, and firm performance. Evidence confirms that ESOs increase managerial risk-taking, but such risk-taking is constrained by managers' personal risk aversion. In addition, evidence indicates that managerial risk-taking induced by ESOs would increase both long-term and near-term stock returns. The negative impact on near-term and the positive impact on long-term returns on investment imply that it takes time for accounting performance to reflect the risk-taking effect of ESOs. These results further indicate that managers focus their concerns more on stock risk and return rather than near-term accounting results.     

Limited attention and the role of the venture capitalist

This research analyzes the venture capitalist's incentives to maximize the profits of the entrepreneurs of ventures and the limited partners of a venture fund. Venture capital is a professionally managed pool of capital invested in equity-linked private ventures. Entrepreneurs turn to venture capitalists for financing because high-technology startup firms have low or negative cash flows, which prevent them from borrowing or issuing equity. In addition, venture capitalists are actively involved in management of the venture to assure its success. This solves the problem of startup firms that do not have the cash flows to hire management consultants.Venture capital contracts have three main characteristics: (1) staging the commitment of capital and preserving the option to abandon, (2) using compensation systems directly linked to value creation, and (3) preserving ways to force management to distribute investment proceeds. These characteristics address three fundamental problems: (1) sorting the venture capital among the entrepreneurial ventures, (2) providing incentives to motivate venture capitalists to maximize the value of the funded ventures, and (3) providing incentives to motivate entrepreneurs to maximize the value of the ventures. Venture capitalists fund only about a dozen projects a year out of a thousand evaluated. Each project may receive several rounds of financing. Payoffs to VCs can be very high or be a complete loss.The typical venture capital (VC) firm is organized as a limited partnership, with the venture capitalists serving as general partners and the investors as limited partners. General partner VCs act as agents for the limited partners in investing their funds. VCs invest their human capital by placing their reputation on the line. The goal is to begin to convert the investment into cash or marketable securities, which are distributed to the partners. VC management companies receive a management fee equal to a percentage (usually 2.5%) of the capital of each fund. They also receive a percentage (15–30%) of the profits of each fund, called carried interest. Periodic reports are made by the VC firm to the limited partners. Usually these are only costs of managing the fund, and so revenues are negative. Most contracts specify the percentage of time that the VC will devote to managing the fund.The analysis of this research deals with the incentives of the VC who has limited attention to be allocated between improving current ventures and evaluating new ventures for possible funding. The analysis shows that the VC, as agent for both the entrepreneur and the general partners, does not have the incentives required to maximize their profits. The VC allocates attention among ventures and venture funds less frequently than required to maximize the entrepreneurs' and limited partners' profits. However, the VC does maximize the total profits of all ventures. Because the VC considers the opportunity cost of attention, the VC's allocation of attention is efficient. The implication of this result is that, although the entrepreneurs and limited partners could be made better off with a different allocation of the VC's time, this would be an inefficient use of the VC's time.     

The moderating effect of environmental dynamism on the relationship between entrepreneur leadership behavior and new venture performance

This article outlines a model of when, why, and how the influence of entrepreneur leadership behavior on new venture performance is likely to be moderated by the level of environmental dynamism. The model is tested using a sample of 66 new ventures. The results indicate that environmental dynamism has a significant positive moderating effect on the relationship between transformational leadership and new venture performance, and a significant negative moderating effect on the relationship between transactional leadership and new venture performance. Implications for theory and practice are discussed.     

深刻认识当代资本主义新变化坚定社会主义道路

通过正确认识和研究当代资本主义的新变化及发展趋势,我们会发现,当代资本主义的"欣欣向荣",正从另一方面证明了这样一个真理:资本主义必然灭亡,社会主义才是人类社会发展的方向和终极目标.     

An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach

We develop a game-theoretic model that analyzes the effects of economic and behavioral characteristics on an entrepreneur's choice of financier (venture capitalist or angel). After the entrepreneur has chosen his financier, the dyad faces double-sided moral hazard problems in the form of ex ante effort-shirking, and ex post project-expropriation. In making his choice of financier, the entrepreneur trades-off the following factors. The venture capitalist has higher value-creating abilities than the angel. However, the entrepreneur anticipates a closer, more empathetic and trusting relationship with the angel. Entrepreneur/angel empathy and trust mitigates the double-sided shirking and expropriation threats. Our model contributes to two strands of venture capitalist research; the entrepreneur's choice of financier in the face of double-sided moral hazard problems, and the effect of behavioral factors, such as empathy and trust, on the creation of ‘relational rents’.     

Qualifications and turnover of managers and venture capital-financed firm performance: An empirical study of german venture capital-investments

This study investigates relationships between experience and education aspects of manager qualifications and performance measures in a sample of 103 Portfolio Companies (PC) of German Venture Capital Firms (VCF). In addition, we consider whether lower PC performance induces higher PC manager turnover and if VCF actively influences such PC manager turnover. Bivariate and multivariate analyses confirmed that PC manager qualifications correlate significantly with PC performance. Specifically, characteristics of PC manager experience in marketing/sales, planning/strategy functional areas, as well as in terms of industry experience, were identified as critical success factors.Our findings have substantial implications for VCF management practice: Although deficits in PC manager qualifications were addressed previously both in English and the German language academic literature, to date management practices did not recognize the relevance of such qualifications for investment success and the need to influence PC manager qualifications systematically through tailored selection and development procedures for PC managers. Had the need to compensate for gaps in PC manager qualifications been given adequate priority, our sample would neither contain a high variance for qualification variables nor significant correlations between multiple aspects of PC manager qualifications and success. Therefore, our findings suggest that (German) VCF should in due diligence put more emphasis on (1) PC managers' business functional experience and, unless the PC is active in an entirely new market, (2) a high proportion of managers with experience in the relevant industry. Beyond due diligence, VCF may have to actively realign or replace top managers of PCs in cases where success is substantially below expectations. It is highly likely that there is room for further improvement in this area, in particular in constructing incentives against “living dead” cases, where PCs develop substantially below expectations, but do not fail completely.     

The contrasting interaction effects of improvisational behavior with entrepreneurial self-efficacy on new venture performance and entrepreneur work satisfaction

Although improvisation is often considered to be an elemental component of entrepreneurship, little work has been done to evaluate factors that influence the relationship of entrepreneur improvisational behavior with important outcome variables. In an attempt to partly fill this gap, the current study examines the moderating effect of entrepreneurial self-efficacy on the relationship of founders' improvisational behavior with both the performance of their startups and their individual level of work satisfaction using a national (United States) random sample of 159 entrepreneurs. In alignment with our predictions, improvisational behavior was found to have a positive relationship with new venture performance (i.e., sales growth) when exhibited by founders who were high in entrepreneurial self-efficacy, whereas improvisational behavior was found to have a negative relationship with new venture performance when exhibited by founders who were low in entrepreneurial self-efficacy. Contrary to our expectations, entrepreneurial self-efficacy was found to have a negative moderating effect on the relationship between entrepreneur improvisational behavior and work satisfaction.     

Leverage and growth: Effect of stock options

Previous literature documents a negative relationship between leverage and firm growth. This paper finds that once the incentives provided by stock options are accounted for, leverage does not affect firm growth. The paper also finds that the sensitivity of CEOs’ wealth to stock price (i.e. option delta) instead of leverage has a negative relationship with growth. These findings suggest that incentive contracts that tie managers’ wealth to firm value prevent managers from overinvesting. Thus in presence of options the role of debt as a disciplining mechanism has become less important.     

Mixed ownership and firm performance: Evidence from the Chinese venture capital industry

We examine the impact of mixed ownership on the performance of venture capital (VC) firms in China. We use successful/unsuccessful exits from VC-financed entrepreneurial companies and number of patent applications by VC-financed companies as proxies for VC firms' performance. Consistent with existing research on the inferior performance of SOEs relative to non-SOEs, we find that on average government-controlled VC firms (GVCs) underperform domestic private investors-controlled VC firms (PVCs). More importantly, we find that introducing minority private investors (i.e., mixed ownership) helps improve the performance of GVCs. However, we find no evidence that introducing minority government investors (i.e., mixed ownership) helps improve the performance of PVCs. Our results provide relevant information to the ongoing debate on the role of the government investors and private investors in developing the VC industry in emerging markets.     

Index options open interest and stock market returns

This study finds that the growth of index options open interest has a significant relation with future stock market returns. We propose a theoretical model that considers hedgers and informed traders in the options market and suggests that hedgers fully utilize options according to their expectations of future stock returns. The empirical results show that the growth of out-of-the-money call options open interest is significantly related with future stock market returns. These findings provide supporting evidence for our theoretical model.     

Staging of venture capital investment: a real options analysis

This paper uses contingent claims analysis to investigate the staging decision of venture capitalist (VC) in a principal-agent framework. Venture capital investment opportunities are modeled as real options with multiple volatilities, and the entrepreneur’s incentive is assumed to maximize the probability of getting funded in the next financing round. Two celebrated formulae in the option pricing literature are generalized to evaluate these real options. We find that staging not only gives the VC a waiting option but also mitigates the agency problem of the entrepreneur undertaking too conservative activities. Moreover, we find that the VC tends to stage her investment when the expected growth rate of the venture’s market value is lower. However, the risk-free interest rate is not an important factor in the staging decision. Our model also provides a good explanation for existing empirical evidence on the staging of venture capital investment.     

An expanded model for the valuation of employee stock options

The unique characteristics of employee stock options make straightforward applications of traditional option pricing models questionable. This study extends the standard pricing model to account for the dilution effect, the employees' exercise pattern, and the state‐dependent employee forfeiture rate. It also performs comparative analysis of popular existing models and the proposed models. Finally, the impacts of the above‐mentioned factors on the fair value of employee stock options are investigated. The results support the claim that our models reflect the reality better than existing models. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:713–735, 2009     

Is venture capital worth it? Effects on firm performance and founder returns

This paper extends research on venture capital (VC) finance by studying its effects on a venture's performance and on its founders' returns beyond an initial public offering (IPO). A “founder performance” construct, defined as a founder's financial and nonfinancial returns, is proposed and used to measure and compare returns to founders with returns to investors and firm performance. In general, venture characteristics pre-IPO and venture performance post-IPO were not significantly different when comparing ventures with and without VC backing. Only when VC backing is very high, do pre-IPO resources and funding improve significantly. However, higher levels of resource endowments did not seem to affect post-IPO performance for the venture or its investors. On the other hand, founders resorting to VC funding before taking their company public generated significantly less wealth for themselves and were less likely to remain as CEOs of their ventures after the IPO. Results suggest that founders motivated primarily by wealth creation and those motivated by remaining in control of their ventures should, in both instances, minimize VC backing when taking their ventures public. The finding that founder performance differs from venture and investor performance calls for future research to explore potential conflicts of interest that may arise from the double role of founders as principals and agents.     

Duration analysis of venture capital staging: A real options perspective

This study takes a real options perspective towards venture capital staging and views the staging decision as a choice between holding the current option to invest and investing now to obtain the option to invest subsequently. It proposes that this staging decision depends on the factors that influence the value of these two options, such as competition and various sources of uncertainty. The empirical results suggest that market uncertainty encourages venture capital firms to delay investing at each round of financing, whereas competition, project-specific uncertainty and agency concerns prompt venture capital firms to invest sooner. This study has useful implications for theory and practice.     

Replacing executive stock options with share units: A Canadian study

Are share units a better compensation tool than stock options? This paper studies the impact of a transition within the compensation structures of CEOs of companies listed on the TSX Composite Index. Specifically, we ask whether replacing options with units-based compensation reduces the volatility of these companies' stock prices while promoting better returns. Our findings show that a shift to share units reduces large-cap Canadian companies' total risk through its idiosyncratic component. This transition is also accompanied by an increase in their risk-adjusted accounting and market performance. This suggests that share units are better for compensation contracts.     

The influence of firm and executive characteristics on performance-vested stock option grants

Motivated by the considerable changes over the last two decades in the form and composition of executive remuneration schemes and the increasing use of performance-vested stock options (PVSOs), this study examines the determinants of PVSO grants. Using data on 4193 executive-year observations of 1373 executive directors in 243 FTSE 350 non-financial companies from 1999 to 2004, I examine the factors that influence PVSO grants at both the firm and the executive level. While controlling for unobservable industry, firm, and executive level fixed effects, the evidence shows that the PVSO grants awarded to individual executives are associated with observable features of corporate governance and indicators of managerial power. More specifically, the results support the following statements: (1) good corporate governance structures facilitate the use of PVSO plans; (2) the proportion of PVSO grants in the total compensation package is smaller for top mangers with more controlling power; (3) PVSO plans are less frequently used to compensate managers who are approaching their retirement and/or have a large equity stake in the firm; (4) relative to non-CEO executives, CEOs are more likely to be rewarded with PVSOs.