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.     

How venture capital works

The popular mythology surrounding the U.S. venture-capital industry derives from a previous era. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk taking and for their hands-on operating experience. But today things are different, and separating the myths from the realities is crucial to understanding this important piece of the U.S. economy. Today's venture capitalists are more like conservative bankers than the risk takers of days past. They have carved out a specialized niche in the capital markets, filling a void that other institutions cannot serve. They are the linch-pins in an efficient system for meeting the needs of institutional investors looking for high returns, of entrepreneurs seeking funding, and of investment bankers looking for companies to sell. Venture capitalists must earn a consistently superior return on investments in inherently risky businesses. The myth is that they do so by investing in good ideas and good plans. In reality, they invest in good industries--that is, industries that are more competitively forgiving than the market as a whole. And they structure their deals in a way that minimizes their risk and maximizes their returns. Although many entrepreneurs expect venture capitalists to provide them with sage guidance as well as capital, that expectation is unrealistic. Given a typical portfolio of ten companies and a 2,000-hour work year, a venture capital partner spends on average less than two hours per week on any given company. In addition to analyzing the current venture-capital system, the author offers practical advice to entrepreneurs thinking about venture funding.     

Asset liquidity and venture capital investment

We examine the relationship between asset market liquidity and venture capital (VC) investment and find that it is inverted U-shaped. Asset liquidity and VC investment are positively related for low levels of asset liquidity but negatively related for higher levels of asset liquidity. We also document evidence that VC firms with more industry experience invest more in a liquid asset market than those without industry experience or with significant experience in other industries. Portfolio companies obtained their first investment in a liquid asset market are less likely to exit successfully; however, given a successful exit, they prefer to exit through mergers and acquisitions rather than going public.     

Government venture capital and cross-border investment

We use data on venture capital investments from 26 countries from 1998–2013. We investigate the following questions: Do domestic government sponsored venture capital funds augment or curtail domestic private venture capital funds from cross-border investment? Do government sponsored venture capital funds attract or repel foreign private venture capital investment? The results show that a preponderance of mixed-structured over pure-structured government venture capital investment has a crowding-in effect overall: it attracts domestic and international private venture capital to the domestic venture capital market while simultaneously increasing total private venture capital investment. In contrast, a preponderance of pure-government over mixed-government venture capital fund investment repels foreign private venture capital investment (has a crowding out effect). We find that both these effects are more pronounced for domestic rather than foreign private venture capital and that the attraction effect is stronger than the repulsion effect.     

风险投资的策略有哪些变化?

风险投资在2007年第二季度表现如何?清科集团总裁兼首席执行官倪正东有一个评价,他说:"在刚刚走过的2007年第二季度,中国创业投资活动激增,无论是投资基金的募集还是投资的额度都达到了振奋人心的新峰值,成为中国创业投资产业史上一个新的里程碑.     

做风险投资,IBM的理念

IBM这样描绘公司的风险投资战略:公司风险战略大多集中在金融投资领域,而IBM却采取了一种与众不同的互惠战略,即将关系置于直接投资之上的战略.目前,该战略正结出丰硕的成果:大的风险投资公司正逐渐了解IBM的愿景和战略并看到由其投资公司变为其组合公司从而创造利润的大好机遇;创业者们正获取IBM的技术技能、市场渠道,从而为其自身解决方案获得更高的信誉度和有效性.     

Strategic decertification in venture capital

An early-round investment delivers information about the quality of a project before more funds are needed. To obtain the best early-round financing offer, the entrepreneur should then approach a venture capitalist with highest screening ability. Going for the most accurate venture capitalist can however backfire in a follow-on round of financing. He could extract advantageous terms by threatening not to reinvest: the more accurate the incumbent, the more the signal sent by his non-participation to alternative financiers would be negative. Then, the most attractive early-round venture capitalist has only intermediate screening ability. The threat of strategic decertification enhances credit rationing.     

Human capital investment,new firm creation and venture capital

This paper studies the relation between firm investment in general human capital, new firm creation and financial development for new firm financing, such as the existence of a venture capital industry. On one hand, firm investment in general human capital leads employees to generate new innovative ideas for starting their own firm. Since employees need a venture capitalist to start their new firm, firm investment in general human capital encourages the creation of venture capitalists by increasing the need for their services, such as providing advice and monitoring. On the other hand, as new firm financing becomes available, firms’ willingness to invest in general human capital increases, and as a by-product, the creation of employee-founded and venture capital-backed new firms increases in the economy. Hence, our model provides a rational explanation for the emergence of new firms created by employees of established firms, which represents one of the most common type of new firms in many industries.     

Economic freedom and cross-border venture capital performance

We investigate the determinants of cross-border venture capital (VC) performance using a large sample of 10,205 cross-border VC investments by 1906 foreign VC firms (VCs) in 6535 domestic portfolio companies. We focus on the impact of a domestic country's economic freedom on the performance of both VC investments and portfolio companies using a probit model and the Cox hazard model. After controlling for other related factors of domestic countries, portfolio companies, VCs and the global VC market, as well as year and industry fixed effects, we find that a domestic country's economic freedom is crucial to cross-border VC performance. In particular, in a more economically free country, as measured by the raw values of, quartiles of or the ranking in the index of economic freedom (IEF), a foreign VC-backed portfolio company is more likely to pull off a successful exit through an IPO (initial public offering) or an M&A (merger and acquisition), and a foreign VC firm is likely to spend a shorter investment duration in the portfolio company. We also identify interesting evidence on the impact of many other level factors of domestic countries, portfolio companies, VCs and the global VC market on cross-border VC performance.     

Local bias in venture capital investments

This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of U.S. VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and specialization in technology industries increase VCs' local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.     

风险投资是什么?

风险投资是什么?一个本是很明确的问题,怎么就有了疑问. 前不久,本刊记者应邀参加了牛仔投资承办的2007首届武汉国际风险投资大会,两天议程走下来,忽然觉得风险投资是一个需要经常说起的话题,特别是在中小企业融资难的今天.     

Squaring venture capital valuations with reality

We develop a valuation model for venture capital–backed companies and apply it to 135 US unicorns, that is, private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post-money valuations average 48% above fair value, with 14 being more than 100% above. Reported valuations assume that all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as initial public offering (IPO) return guarantees (15%), vetoes over down-IPOs (24%), or seniority to all other investors (30%). Common shares lack all such protections and are 56% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.     

The reputation effect of venture capital

The main purpose of this paper to examine how the reputation effect of venture capital (VC) is associated with the initial return and ex-post performance of its invested IPO firms. In this paper, we use 267 Taiwanese IPO firms in 1994–2007 periods and find that VC-backed firms outperform non-VC-backed firms in terms of ex-post equity market-to-book ratio, ROA and R&D expenditure ratio. For those VC-backed IPOs, reputable VC-backed firms outperform mediocre VC-backed ones. Moreover, among the four proxies of VC reputation, the market share with respect to total IPO proceeds is most promising in explaining IPO firms’ ex-post performance. The overall result confirms the reputation effect associated with VC.     

Making sense of corporate venture capital

Large companies have long sensed the potential value of investing in external start-ups, but more often than not, they fail to get it right. Remember the dash to invest in new ventures in the late 1990s and the hasty retreat when the economy turned? This article presents a framework that will help a company decide whether it should invest in a particular start-up by first understanding what kind of benefit might be realized from the investment. The framework--illustrated with examples from Intel, Lucent, and others--explains why certain types of corporate VC investments proliferate only when financial returns are high, why other types persist in good times and in bad, and why still others make little sense in any phase of the business cycle. The framework describes four types of corporate VC investments, each defined by its primary goal--strategic and financial--and by the degree of operational linkage between the start-up and the investing company. Driving investments are characterized by a strong strategic rationale and tight operational links. Enabling investments are also made primarily for strategic reasons, but the operational links are loose. Emergent investments, which are characterized by tight operational links, have little current--but significant potential--strategic value. Passive investments, offering few potential strategic benefits and only loose operational links, are made primarily for financial reasons. Passive corporate VC investments dry up in a down economy, but enabling and driving investments usually have more staying power. That's because their potential returns are primarily strategic, not financial. In other words, they can foster business growth. Emergent investments may make sense even in a weak market because of their potential strategic value--that is, their ability to help companies identify and spark the growth of future businesses.     

Technology timing of IPOs and venture capital incubation

This paper investigates whether industry technological changes affect the timing of venture capital-backed IPOs. Venture capitalists (VCs) shorten incubation periods and take portfolio companies public when the industry exhibits high levels of technological change. This technology timing of IPOs reflects the VCs' efforts to raise future capital. In particular, during periods of greater technological change, VCs that conduct IPOs after shorter incubation periods obtain more subsequent funding. However, portfolio companies with shorter incubation periods earn fewer patents, are less likely to survive, and experience worse stock returns after their IPOs. These findings provide new insights into VCs' strategic exit decisions due to changes in the technological environment, as well as how their decisions affect the post-exit performance of their portfolio companies.     

Nonlinearity and smoothing in venture capital performance data

Performance indices for illiquid investments are known to suffer from returns smoothing, and the purpose of this paper is to investigate the presence and nature of such smoothing in the context of venture capital. We find that while the standard techniques may or may not indicate the presence of smoothing, significant evidence of smoothing exists when a nonlinear regime-dependent model is specified. Further, the model suggests the presence of regime-specific responsiveness of venture capital returns whereby different weights are placed on newly arrived information in different regimes.     

Start-up investment with scarce venture capital support

Venture capitalists, representing informed capital, screen, monitor and advise start-up entrepreneurs. The paper reports three new results on venture capital (VC) finance and the evolution of the VC industry. First, there is an optimal VC portfolio size with a trade-off between the number of companies and the value of managerial advice. Second, advice tends to be diluted when the industry expands and VC skills remain scarce in the short-run. The delayed entry of experienced VCs eventually restores the quality of advice and leads to more focused company portfolios. Third, as a welfare result, VCs tend to provide too little advisory effort and to invest in too few companies. Testable implications are also discussed.     

Entrepreneurial finance: Banks versus venture capital

We analyze how entrepreneurial firms choose between two funding institution: banks, which monitor less intensively and face liquidity demands from their own investors, and venture capitalists, who can monitor more intensively but face a higher cost of capital because of the liquidity constraints that they impose on their own investors. Because the firm's manager prefers continuing the firm over liquidating it and aggressive (risky) continuation strategies over conservative (safe) continuation strategies, the institution must monitor the firm and exercise some control over its decisions. Bank finance takes the form of debt, whereas venture capital finance often resembles convertible debt. Venture capital finance is optimal only when the aggressive continuation strategy is not too profitable, ex ante; the uncertainty associated with the risky continuation strategy (strategic uncertainty) is high; and the firm's cash flow distribution is highly risky and positively skewed, with low probability of success, low liquidation value, and high returns if successful. A decrease in venture capitalists’ cost of capital encourages firms to switch from safe strategies and bank finance to riskier strategies and venture capital finance, increasing the average risk of firms in the economy.     

风险投资的十个真相

优秀的VC并不是永远都不会错过好项目、不投资坏项目,也不可能做到,但是．即便是成功的VC都会看走眼、放过好项目。这只是关于风险投资真相之一,还是其他种种真相．对此,创业者要有所了解