Finance - Bottazzi Lecture 9

“Optimal Investment, Monitoring, and the Staging of Venture Capital” : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION “Optimal Investment, Monitoring, and the Staging of Venture Capital” Gompers (Journal of Finance, 1995)

Agency Theory and Venture Capital : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Agency Theory and Venture Capital This study derives basic implications from agency theory on the structure of venture financing, and tests them with a sample of 794 venture-backed companies. Derivation of hypotheses: Which firms require close monitoring? More uncertain prospects: early stage Higher agency costs What is the cost of monitoring? Monetary and opportunity costs … This implies staged financing What are agency costs? Private benefits Inefficient continuation …. these imply that firms with more intangible assets and more R&D intensive will attract more monitoring and more staging.

Paper preview : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Paper preview Data: - random sample of 794 U.S. venture-backed firms over 1961 to 199 mix of company-level data and industry-level COMPUSTAT information on sector averages Descriptive statistics: -VC-backed companies are R&D intensive - distribution of exits - distribution of stages Regression analysis: - duration analysis of round staging - determinants of round size - determinants of round numbers

Results : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Results

Results : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Results

“Financial Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts”Kaplan and Strömberg (Review of Economic Studies, 2003) : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION “Financial Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts”Kaplan and Strömberg (Review of Economic Studies, 2003) This study examines actual data from investment memoranda on 119 start-ups from 14 US VCs. Data focus on the contracting dimension and are used to test predictions of financial contracting theory. The data strenght: non-survey data weakness: small sample, potential biases Descriptive results: separation of cash-flow and other rights

Use of securities: prevalence of convertibles : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Use of securities: prevalence of convertibles

Cash flow rights: often are state-contingent : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Cash flow rights: often are state-contingent

Voting rights: often are state-contingent : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Voting rights: often are state-contingent

Board rights: often are state-contingent : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Board rights: often are state-contingent

Liquidation rights: strong : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Liquidation rights: strong

Use of contingencies : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Use of contingencies

Determinants of voting controls : 

8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Determinants of voting controls