the board and strategy venture capital and high technology abstract in the area of strategy formulation the part played by the board of directors in high technology firms operating with funds provided by venture capital organizations has not been investigated before this exploratory study although based on a limited sample looks at some of the fundamental issues and contrasts the involvement of the board in firms of this kind with very limited involvement of the board in small conventional firms and in large publicly held corporations the relative power of management and the board of directors is of great importance in contrast with the small conventional firm and the large corporation in both of which the chief executive officer is usually in firm control of the board and generally does not look to the board for active involvement in strategy formulation the high technology firms funded by venture capital organizations are characterized by a board of directors that has high power relative to management this power can be understood not only in terms of the power of the purse high concentration of the ownership in hands external to management but also in terms of the expertise of the venture capitalists and their access to important networks the business plan which is a key element in obtaining initial funding is in effect a statement of strategy that is carefully scrutinized by the venture capitalists some of whom will assume positions on the board of directors the board is similarly involved in the revisions of business plans in conjunction with later rounds of funding the study found that the board is typically small with outsiders rather than management in control further at least some of the outside members were found to have a high degree of expertise and a close working relationship with management board meetings are frequent and deal actively with key issues and with the review of how the strategy is working and what changes in strategy may be required reviews of the business plan when a new round of funding is required or when major new product or marketing decisions are needed are examples of likely occasions for involvement of the board in strategy revisions further research should center on identifying the conditions under which board involvement can play a constructive role in the strategy process of these high technology companies some pertinent variables are suggested the next step in research should be more structured and quantitative and should use a geographically dispersed sample but field interviews will be of continuing value as a complement for firms funded by venture capital organizations the board of directors is a significant interface between the venture capitalists and the internal management group the working relationship between inside and outside directors in this arena in strategy formulation and in other major business decisions is a matter of considerable practical importance

new venture teams assessment of learning assistance from venture capital firms abstract prior research examining whether venture capital firms vcs add value to the ventures in their portfolios by advising their new venture teams nvts has led to inconclusive results whereas most prior studies have assumed that nvts value vc assistance this study tests for the possibility that they differentially value two different types of vc assistance business management and operational we collected data by surveying 837 firms identified in the venture capital journal that had received financing from venture capital firms only firms that received first round financing were included in our analysis which reduced our sample size to 205 firms our central finding is that systematic differences exist among nvts in their evaluation of learning assistance from vcs even though vcs can chose their own level of involvement with an nvt successfully improving venture performance through nonfinancial assistance at least partially depends upon the extent to which the nvt values vc input our results indicate that nvts with more industry experience and longer team tenure in the current venture are negatively related to both business management advice and operational assistance offered by their vcs however when an nvt has previously worked together and when its primary experience is from another industry it tends to welcome business management advice from its vc one interpretation of this finding is that an advanced level of operational specialization already exists in such a team which reinforces established operating patterns changing established operating patterns could make it more costly to adopt vc input on operational issues however business management advice may be more welcome because the nvt is still learning how to compete in a new industry these findings add to the growing literature that suggests that vcs play a particularly important role in entrepreneurial ventures when they pursue the development of new technologies ehrlich et al 1994 sapienza 1992 however business management advice is not highly valued by nvts that pursue more technical innovations these findings in combination with those of sapienza and amason 1993 suggest that conflict in the vc nvt relationship may be the greatest when the parties attempt to resolve critical differences which ironically appear to be the ones where the nvt could derive the greatest benefit from listening to its vc finally current firm performance is not related to the nvt s evaluation of vc assistance although cross sectional measures of performance have obvious limitations particularly with new ventures these results indicate that the nvt evaluation of vc assistance is not driven by short term performance past research has shown that vcs vary widely in their preferred level of involvement with the managers of firms in their portfolio some vcs prefer a laissez faire approach whereas others think that they must be more involved if they are to ultimately receive high rewards the central finding from this study is that significant differences exist among nvts in their evaluation of business management and operational assistance for vcs that are more involved these findings suggest that the optimal level of involvement is also partially contingent upon the nvts openness to learning ignoring the contingent nature of the vc nvt relationship vcs could reduce their influence as a tool to improve firm performance and to ensure the ultimate survival of the venture

attitudes and behaviors of informal investors toward early stage investments technology based ventures and coinvestors abstract seed capital financing for new firms is important to the commercialization of business innovations yet few entrepreneurs have the personal resources necessary to finance very early stage ventures and they often find themselves relying on external sources of seed capital their personal financial capabilities can easily become exhausted and the venture capital industry represents only a partial source of needed capital for start up and infant firms in recent years researchers have discovered the individual of financial means who invests a portion of his assets in early stage risk ventures this individual is variously termed an informal investor or an angel following an initial study by seymour and wetzel in 1981 researchers have expanded the knowledge about the backgrounds investment interests and behavioral patterns of informal investors the fact that informal investors generally invest within 50 miles of their homes or offices makes their participation in the entrepreneurial process particularly important for local economies our understanding of the general role of informal investors in risk venture financing has been greatly enhanced by prior studies however additional work is needed to identify characteristics of persons committed to start up firms or to technology based ventures two especially important types of business activity in the regional competition for economic development fifty five informal investors participated in a mail questionnaire modeled after prior studies sponsored by the small business administration respondents differentiated themselves on a scale of very early stage start up versus later stage risk venture investments and on a scale of technology oriented versus nontechnology oriented investments informal investors in this sample also differed on the average number of coinvestors including institutions per investment implications arise from the study for individuals interested in regional economic development and for entrepreneurs seeking seed capital first persons more committed to start up investing are more likely to have been or to be currently entrepreneurs themselves also these individuals may not be the most visible community members in terms of past entrepreneurial success and acquired wealth in fact persons committed to start up investing tend to have a lower annual income and lower net worth than persons investing in later stage risk ventures individuals playing this important financing role are particularly hard to identify a valuable key to their identification may lie in the fact that they tend to have worked or currently work in ventures similar to those in which they invest individuals committed to investments in technology oriented risk ventures give very little information about their personal characteristics however they do indicate a considerable amount about their investment patterns these investors play a higher risk higher return investment game than do persons less committed to technology based firms technology oriented investors also report a number of actions that appear to help them manage the risks inherent in their investment behaviors contrary to conventional wisdom about informal investors in general technology oriented investors use friends as referral sources less frequently people more interested in technology based ventures in the future look more to business service professionals investment business brokers and accounting law persons as referral sources finally a person s pattern of coinvesting indicates that individual s orientation toward risk a greater number of individual coinvestors in a typical deal is associated with a willingness to invest further from home for example and with a lower return expectation also persons investing with a fewer number of different types of coinvestors individuals and institutions tend to have more personal entrepreneurial experience to invest more in very early stage ventures and to be more interested in financing inventors this study is relevant to community leaders and entrepreneurs in several ways first the project begins to ask pertinent research questions about types of informal investors who play particularly important roles in local economic development second a more differentiated view of the role of the informal investor is suggested because special characteristics of start up investors and technology based investors can be distinguished third some initial clues about identifying these key individuals emerge the study demonstrates a productive line of thinking for community leaders and entrepreneurs in the risk venture financing process

business ethics in china first i briefly review the emergence and development of business ethics following three stages 1978 1984 1984 1994 1994 to the present and driven by four factors the inheritance of chinese traditional ethics the influence of marxist philosophy and ethics the reflections on the economic reform and the influence of business ethics from abroad then from a practical and a theoretical perspective i discuss the main challenges for business ethics in china issues of the economic system of corporate ethics and of management after commenting on the role of business ethics for the social development in china i offer some reflections about what china can contribute to and learn from other peoples

allocation of attention within venture capital firms in this article we use a simple queuing network to model the process through which entrepreneurs receive venture capital funding our model focuses in particular on the allocation of venture capitalists attention between pre and post investment activities and on the degree of selectivity in deciding which ventures to fund based upon this model we develop expressions for the financial performance of the venture capital process both overall and also from the perspectives of the entrepreneurs investors managers and venture capitalists involved for these financial measures we derive the optimal allocation of attention between pre and post investment activities and the optimal proportion of venture proposals to accept further analysis shows how these different financial measures and optimal values respond to changes in the business climate more interestingly our analysis also shows where and to what extent the different parties could be expected to agree or disagree on how best to manage the process

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

a balanced concept of the firm and the measurement of its long term planning and performance this paper offers a new concept of the firm that aims at balancing the corporate economic social and environmental responsibilities and goes beyond the stakeholder approach it intends to provide a conceptual and operationalizable basis to fairly assess corporate conduct from both inside and outside the companies to a large extent these different responsibilities may overlap and reinforce each other however if they conflict they should be clearly evaluated for their own sake and in terms of wealth creation only then can a balanced approach be realized section 1 briefly discusses some general aspects of the relationship between concepts and measurement in section 2 a concept of the firm is developed that is based on the notion of responsibility and balances economic social and environmental responsibilities according to these concepts different ways of measuring corporate planning and performance are examined in section 3 followed up by a summary and conclusions

the living dead phenomenon in venture capital investments abstract living dead investments represent the middle ground of venture capital investing outcomes lying between winners that produce adequate multiples of return on investment and losers that result in loss of invested funds living dead investments are typically mid to later stage ventures that are economically self sustaining but that fail to achieve levels of sales growth or profitability necessary to produce attractive final rates of return or exit opportunities for their venture capital investors this article reports the results of a survey of 80 u s venture capital firms that investigated the living dead phenomenon and strategies used by venture capital investors to deal with living dead companies venture capital managers reported that living dead conditions were usually caused by deficiencies in investee management particularly in responding to market conditions as well as markets that were too small or two slow growing missed opportunities and unanticipated competition the timeframe of this phenomenon is typically after product development and initial sales have been achieved and during the rollout stage of pushing for rapid growth and market share the key characteristic of living dead companies in the eyes of their investors is their very poor prospects for producing a successful exit for their investors usually because of more limited growth than originally anticipated or inadequate profitability although the rate of return boundaries for living dead companies were wide ranging from a rate of return ror of 0 on the low side to 10 on the high side most were described by venture capital managers as economically self sustaining in the near term and a number of living dead companies had reached 5 m to 15 m in revenues thus the concept of a living dead investment is specific to the context of venture capital backed investing and represents primarily a failure of investor expectations as distinct from an economic failure of the venture overall the 80 venture capital firms projected that 20 6 of their investments would end up as living dead companies by the point of final distribution when living dead situations occur venture capital managers use a number of strategies to attempt to turnaround these companies or to achieve an exit the most often used strategy was to attempt to sell or merge the company but usually only after one or more preliminary steps to turnaround the company had been attempted first including replacing investee management repositioning the product and making revisions to the venture opportunity strategy firms that projected lower percentages of living dead investments at distribution as well as firms using high rate of return targets for their portfolios were slightly more likely to use active intervention strategies to turnaround or liquidate living dead investments than firms that expected higher percentages of living dead companies at distribution or firms that used lower rate of return targets overall venture capital managers were able to achieve a successful turnaround or exit in only 55 9 of living dead situations and these results were unrelated to the age of the venture capital firms their size or the relative availability of investor personnel for monitoring investees this result in conjunction with the high number of causal factors identified for living dead situations that involved adverse market factors suggests that successful or unsuccessful outcomes with living dead investments may be largely determined by the underlying causation of the living dead problems and whether or not these causal factors are controllable by the venture capital investors inadequate investee management and internal operational problems can potentially be remedied by venture capital investors whereas markets that are too small or too slow growing or severe industry oversupply conditions are largely outside of their control

the structure of the investment networks of venture capital firms abstract venture capital firms are linked together in a network by their joint investments in portfolio companies through connections in that network they exchange resources with one another the most important of those resources are the opportunity to invest in a portfolio company good investment prospects are always scarce the spreading of financial risk and the sharing of knowledge all venture capitalists operate in very uncertain environments none more so than the one confronting high innovative venture capitalists hivcs 1 that specialize in investing in high innovative technology companies the most uncertain of all their investments is a high technology start up with nothing more than a product in the head of the founder there is uncertainty about the talent of the entrepreneur the market need for the product the development of a saleable product the raising of second round financing for working capital and expansion the manufacturing of the product competitors responses and government policies such as capital gains tax and erisa rules to name some of the major components it is a formidable list indeed it is hard to name a segment of any other industry that bears more uncertainty than hivcs a venture capital firm copes with uncertainty by gathering information this research shows that the amount of coinvesting by a firm depends on the degree of uncertainty it faces the greater the uncertainty the greater the degree of coinvesting by examining how venture capital firms were connected by their joint investments it was found that the top 21 hivcs comprise a tightly coupled network and of that group none is more tightly bound than the nine hivcs located in california in contrast the group of top 21 firms that invest mainly in low innovative technology companies livcs is more loosely bound hivcs are more tightly bound together because they shoulder more uncertainty and therefore have a greater need to share information with one another the practical implications of this study are as follows venture capitalists it is vital to be well connected to other venture capital firms they are important sources of information and investment opportunities for hivcs the california group is central in the network so links to them are valuable communications in a tightly coupled system are swift so it is likely that information is disseminated very quickly among members of the group it probably facilitates the setting of a market rate for venture capital a disadvantage of a tightly bound system is that information flowing among the members has a redundancy and sameness about it so to ensure a supply of fresh information members should have as many links as possible to other organizations and individuals besides venture capitalists entrepreneurs when entrepreneurs submit a proposal for funding to venture capital firms they can assume that news will spread fast to other firms thus they should not use a bird shot approach rather they should select their targets with rifle precision the proposal should be submitted to a few firms that are known to specialize in the type of product or service that the entrepreneur is planning to make entrepreneurs should be concerned about more than the price of the deal when the top 61 firms invest in a portfolio company they bring information contacts and deep pockets to the companies in which they invest those factors are significant in nurturing a growing company policy makers the networks of hivcs and uvcs are quite different the hivcs cluster around oases of high technology entrepreneurship in the northeast and california whereas the livcs are more evenly spread throughout the u s a hivcs are located almost exclusively in the so called bi coastal regions of prosperity this study found cliques among the venture capital firms but it found no evidence that the top 61 firms exclude other venture capital firms from their coinvestments of first rounds of capital more research is needed before conclusions can be drawn about the power and influence of the top firms researchers in a recent article granovetter 1985 suggests that if we are to explain economic behavior we must understand the networks in which transactions are embedded this research shows that the networks formed by the syndicated coinvestments of venture capital firms may help us to explain their behavior a general model for coinvestment networks that is developed in this article is applicable to analysis of syndicated coinvestments not only of venture capital firms but of investors and lenders in general

the persistence of lenient market categories research across disciplines presumes that market categories will have strong boundaries categories without well defined boundaries typically are not useful and so are expected to fade away we suggest many contexts contain lenient market categories or less constraining market categories that persist and become important we argue that this fact can be explained by looking at market categories from the producer perspective lenient market categories have more flexibility and allow for a wider range of fit as a result we expect to see high rates of entry into lenient categories at the same time lenient market categories have drawbacks they do not clearly convey what an organization does and do not identify specific sets of potential consumers this means organizations are more likely to exit when entry rates are higher than exit rates lenient market categories will endure over time we also predict that organizations exiting lenient categories will enter other lenient categories further fueling the persistence of such categories finally this trend is exaggerated when influential external agents favor leniency we find support for these ideas in a longitudinal analysis of organizational entry into and exit from market categories in the software industry

variants of agency contracts in family financed ventures as a continuum of familial altruistic and market rationalities abstract funding is a critical dimension of new creation although instances of family involvement in new venture financing are common ironically their role has been largely ignored in much of the mainstream business and economics literature when family members invest in the ventures of other family members they must make many choices either explicitly or implicitly about organizational form and governance consequently the governance of these exchange relationships tends to be highly variable this paper explores the primary rationalities governing the exchange relationships in family investment decisions during the early stages of new venture creation it presents activities as variants of agency contracts occurring within a continuum of familial altruistic and business market rationalities existing venture capital theory is extended through the introduction of rationalities and more comprehensive models of decision making

on growth drivers of high tech start ups exploring the role of founders human capital and venture capital abstract in this paper we jointly analyze the effects of the human capital of founders and access to venture capital vc financing on the growth of 439 italian new technology based firms ntbfs we rely on econometric models that control for survivorship bias and the endogeneity of vc financing as to non vc backed firms the competence based argument that the capabilities of ntbfs coincide with founders skills is confirmed nonetheless once a ntbf obtains vc this coincidence vanishes pointing to the coach function performed by vc investors conversely the view that sees the scout function as the main task performed by vc investors is not supported

assessing the contribution to innovation of private equity investors a study on european buyouts abstract the paper provides an empirical analysis of the patenting activity of a sample of western european manufacturing firms undergoing a buyout between 1998 and 2004 a panel data design is used to test whether the characteristics of the deal and of private equity pe firms can affect acquired companies subsequent innovation effort as measured by the number of patents granted by the epo results support the view that the innovation activity of portfolio firms is affected by different types of investors pursuing different objectives and differing in their risk propensity expected returns and investment policies the characteristics of lead investors size stage specialization geographical location and of the deal amount invested presence of multiple investors are also investigated and are found to differently affect the post buyout innovation activity of sample firms

new technology based firms in europe market penetration public venture capital and timing of investment we investigate the effect of public puvc and private prvc venture capital funds on the sales growth of 6513 european new technology based firms ntbfs during the period from 1992 to 2009 our results show that puvc backed ntbfs underperform with respect to prvc backed ones and do not grow more than non venture capital backed companies the impact of puvc is still not statistically significant even though it is positive when puvc funds target young ntbfs the only notable exception suggesting a positive and statistically significant impact for puvcs is when puvc funds cofinance with prvc funds and both target young firms

determinants of required return in venture capital investments a five country study abstract using two complementary theoretical perspectives we develop hypotheses regarding the determinants of the return required by venture capitalists and test them on a sample of over 200 venture capital companies vccs located in five countries consistent with resource based theory we find that early stage specialists require a significantly higher return than other vccs when investing in later stage ventures consistent with financial theory we find that acquisition buyout specialists require a significantly lower return than other vccs when investing in expansion companies furthermore in comparison to specialists highly stage diversified vccs require a significantly higher return for early stage investments independent vccs require a higher rate of return than captive or public vccs in general higher required returns are associated with vccs who provide more intensity of involvement have shorter expected holding period of the investment and being located in the us or uk in comparison to those in france belgium and the netherlands

a study of the link between a corporation s financial performance and its commitment to ethics a number of studies have tested the relationship between a corporation s social and ethical performance and its financial performance in contrast this is the first study to demonstrate a link between overall financial performance and an emphasis on ethics as an aspect of corporate governance it identifies the 26 8 percent of the 500 largest u s public corporations that in their annual report to shareholders commit to ethical behavior toward their stakeholders or emphasize compliance with their code of conduct the financial performance of these corporations ranks higher than that of those who do not at a significance level of p 0 005 using the 1997 business week ranking which averages eight publicly reported measures of historical financial performance these findings should motivate more corporations to utilize the principles of social and ethical accounting auditing and reporting seaar

the informal venture capital market aspects of scale and market efficiency abstract risk capital is a resource essential to the formation and growth of entrepreneurial ventures in a society that is increasingly dependent upon innovation and entrepreneurship for its economic vitality the performance of the venture capital markets is a matter of fundamental concern to entrepreneurs venture investors and to public officials this article deals with the informal venture capital market the market in which entrepreneurs raise equity type financing from private investors business angels the informal venture capital market is virtually invisible and often misunderstood it is composed of a diverse and diffuse population of individuals of means many of whom have created their own successful ventures there are no directories of individual venture investors and no public records of their investment transactions consequently the informal venture capital market poses many unanswered questions the author discusses two aspects of the informal venture capital market questions of scale and market efficiency the discussion draws upon existing research to extract and synthesize data that provide a reasonable basis for inferences about scale and efficiency private venture investors tend to be self made individuals with substantial business and financial experience and with a net worth of 1 million or more the author estimates that the number of private venture investors in the united states is at least 250 000 of whom about 100 000 are active in any given year by providing seed capital for ventures that subsequently raise funds from professional venture investors or in the public equity markets and equity financing for privately held firms that are growing faster than internal cash flow can support private investors fill gaps in the institutional equity markets the author estimates that private investors manage a portfolio of venture investments aggregating in the neighborhood of 50 billion about twice the capital managed by professional venture investors by participating in smaller transactions private investors finance over five times as many entrepreneurs as professional venture investors 20 000 or more firms per year compared to two or three thousand the typical angel backed venture raises about 250 000 from three or more private investors despite the apparent scale of the informal venture capital market the author cites evidence that the market is relatively inefficient it is a market characterized by limited information about investors and investment opportunities furthermore many entrepreneurs and private investors are unfamiliar with the techniques of successful venture financing the author s scale and efficiency inferences coupled with evidence documenting gaps between private and social returns from innovation prompt questions about public as well as private initiatives to enhance the efficiency of the informal venture capital market the article concludes with a discussion of venture capital network inc vcn an experimental effort to enhance the efficiency of the informal venture capital market vcn s procedures and performance are described followed by a discussion of the lessons learned during the first two years of the experiment

financial intermediaries ownership structure and monitored finance evidence from japan this paper introduces new and unique data from 127 japanese private equity funds that enable a first ever direct comparison of individual owner manager structures versus financial intermediation structures in terms of the governance provided to investee companies through private equity funds the data indicate individual owner manager structures financial disintermediation give rise to much smaller portfolios of entrepreneurial firms and more advice to entrepreneurs across the scope of different financial intermediation structures including banks life insurance companies securities firms corporations and government bodies there are further differences in the provision of governance and value added advice provided to investees the data further indicate us affiliated funds in japan are more likely to have smaller portfolios and provide more advice to entrepreneurial companies possibly due to a greater skill set in providing advice to facilitate the development of small entrepreneurial firms

predictors of success in new technology based ventures abstract several recent studies have examined the causes of success and failure in new ventures from these a three level analysis has evolved which considers the management the venture s strategy and its competitive environment empirical testing is still at an early stage but results have generally supported the three level approach however the findings are not very strong this study considers only high potential technology based new ventures the companies on which venture capitalists concentrate it suggests that such firms face unusual time pressures and uncertainty and that their responses to these forces are major determinants of success or failure we propose 11 easily measured qualities describing management the firm s strategy and its environment which should influence how quickly the venture can act these should predict a new venture s performance the 11 attributes are tested on 36 new ventures representing essentially all of the startup investments of a major venture capital firm between 1974 and 1982 the data are taken from the firms original business plans performance is measured from the subsequent financial history using the compound rate of return to all shareholders founders employees and investors the ventures in this sample are primarily based on electronic or information technologies they are highly successful as a group with an average compound rate of return of 98 per year they are also very risky the standard deviation of returns is 171 per year and in 11 of 36 cases the shareholders lost on their investments results from a single sample must always be treated cautiously however several findings are strong enough to merit further study and to be incorporated as a part of a process for evaluating new ventures 1 1 a set of four measures representing all three areas explains 57 of the variance the four completeness of the founding team technical superiority of the product expected time for product development and buyer concentration all behave as expected the first two have a positive effect the latter two have an inverted u shaped relationship with an optimum development time of 12 months and an optimum number of customers of approximately 60 three other measures prior shared experience of the founders competitive conditions and projected market share show an influence when management strategy and environment are examined one area at a time 2 2 these relatively simple measures predict success well probably at least as well as any other study has done using more subtle measures 3 3 the measures used in this study though they have strong predictive power apparently did not influence the young capitalists otherwise the relationships should have been different when the return to venture capital investors was used in place of the total return in fact they were the same this suggests that the venture capital investors did not give sufficient weight to the qualities that we consider and could make better choices by giving greater attention to those measures 4 4 prospective entrepreneurs and investors should benefit from using our model aspart of their screening processes specifically they might calculate a predicted rate of return if it is low say below 30 per year they should examine the reason for the low score and consider whether circumstances exist which outweigh or invalidate that apparent weakness 5 5 an additive model seems realistic that is one can combine dissimilar qualities with appropriate weighting for relative importance to arrive at an overall figure of merit with strong predictive power the specific parameters imply that a company must have a complete management team and score well on two of the remaining three measures in order to be an attractive opportunity more generally the model allows a practitioner to make a rough assessment of the tradeoffs among management product and industry this is important because few if any new companies have all the qualities an investor may desire 6 6 although individual qualities of the founders are no doubt important this remains a difficult matter to demonstrate statistically 7 7 firms exist in an ever changing competitive environment to the extent that these findings are valid beyond this sample they may have been recognized and incorporated in more recent new ventures if so this may change the nature of competition and alter the key determinants of success or failure

expo power utility a flexible form for absolute and relative risk aversion a new utility function which i call expo power is proposed that exhibits decreasing constant or increasing absolute risk aversion and decreasing or increasing relative risk aversion depending on parameter values numerical analysis suggests that the expo power function performs well in incorporating these risk preference structures and that arbitrary risk preference specifications may lead to biased risk response estimates

specialization versus diversification as a venture capital investment strategy abstract much important work has informed us of rates of return earned by venture capitalists the importance of venture capitalists to the going public process and the criteria venture capitalists use to evaluate deals this paper seeks to add to the literature by testing hypotheses based upon both the finance and strategic management literature regarding certain venture capitalist investment practices venture capitalists seek to control or manage risk driscoll 1974 macmillan siegel and subbanarasimha 1985 financing structure and investment strategy provide several means for venture capitalists to do this tools available to the venture capitalist include portfolio diversification to spread risk across different industries firms or hot cold ipo markets to minimize unsystematic or investment specific risk information sharing networking and specialization can also be used to control unsystematic risk several hypotheses are developed from these conflicting perspectives data used to test the hypotheses are derived from responses to a survey of venture capitalists three hundred surveys were mailed to venture capitalists 98 or 32 7 returned usable responses portfolio diversification is a well known means to control risk exposure by reducing unsystematic or specific risks however bygrave 1987 1988 as well as financial intermediation theorists argues that maintaining a high degree of specialization is useful for controlling risk as well as for gaining access to networks information and deal flow from other venture investors the analyses of this paper build upon bygrave s work we construct more rigorous tests to resolve the conflict between the diversification and information sharing hypotheses our hypothesis tests were usually resolved in favor of the information sharing view for example venture capitalists in the sample that were heavily involved in seed round financing were diversified across fewer numbers of firms and industries further evidence in favor of information sharing is seen in investment patterns across different financing stages diversification would imply maintaining a portfolio of investments across the different investment stages the information sharing specialization view would argue that it is best to stay focused on a single stage or several connected stages the empirical evidence from the sample once again favors the specialization perspective this research provides information of use to venture capitalists as they seek information on how best to control risk to entrepreneurs as they learn of the factors venture capitalists consider in determining their investment strategy and to academicians as such studies provide insight to general industry practice and thus help to form the basis of classroom discussion and future research endeavors

institutional differences and the development of entrepreneurial ventures a comparison of the venture capital industries in latin america and asia this paper examines how differences in distinct institutional clusters of countries impact on the vital entrepreneurial activity of venture capital and how individuals organizations and their collective action in turn shape those institutions the focus on venture capital offers researchers the opportunity to view an industry that comes from a common root with strong and consistent traditions in which to examine how the differing institutional settings impact on behaviors in different markets and how the institutions themselves may change in these settings we also focus on emerging economies since such economies offer a natural laboratory to study the impact of institutional change specifically this paper employs an institutional theory perspective to examine venture capital in two regions of the world that form institutional clusters of countries latin america and asia it is found that the venture capital industry exhibits a strong consistency across many dimensions yet institutions in these two distinct settings result in significant differences in industry practice therefore this research is able to contribute to both empirical and theoretical understanding of emerging economies institutions in those environments and venture capital

averting risk in the face of large losses bernoulli vs tversky and kahneman abstract prospect theory asserts that people display risk attraction in high probability losses but our subjects tend to avoid fair risks for large 30 to 90 high probability 80 real losses vindicating bernoulli s view that risk aversion is the dominant attitude

prospect theory much ado about nothing prospect theory is a paradigm challenging the expected utility paradigm one of the fundamental components of prospect theory is the s shaped value function the value function is mainly justified by experimental investigation of the certainty equivalents of prospects confined either to the negative or to the positive domain but not of mixed prospects which characterize most actual investments we conduct an experimental study withmixed prospects using for the first time recently developed investment criteria called prospect stochastic dominance psd and markowitz stochastic dominance msd we reject the s shaped value function showing thatat least 62 76 of the subjects cannot be characterized by such preferences we find support for the markowitz utility function which is a reversed s shaped function exactly the opposite of the prospect theory value function it is possible that the previous results supporting the s shaped value function are distorted because the prospects had only positive or only negative outcomes presenting hypothetical situations which individuals do not usually face and which are certainly not common in financial markets

the shape of utility functions and organizational behavior based on measurements among 332 owner managers we investigate how theglobal shape of the utility function i e s shaped versus concave or convex over the total range of outcomes relates to choice behavior we find that the global shape of the utility function differs across decision makers about one third of the owner managers exhibit an s shaped utility function and that the global shape is linked to organizational behavior i e the production system employed a result that does not change when using different methods to identify the decision maker s global shape of the utility function the decision maker s risk attitude risk averse or risk seeking does not affect the choice of the production system whereas the degree of risk aversion based on thelocal shape of the utility function may be important in explaining owner managers trading behavior pennings and smidts 2000 more structural organizational behavior appears to be linked to theglobal shape of the utility function

an institutional view of china s venture capital industry explaining the differences between china and the west abstract institutional theory argues that institutions in general and culture in particular shape the actions of firms and individuals in a number of subtle but substantive ways the theory has been used to explain a number of significant and substantive managerial differences found in different parts of the world to date the examination of venture capital outside the us and europe however has been rather limited institutional theory also suggests that there would be differences in how venture capital may operate in other parts of the world such as asia where the culture is substantially different from the west based on interviews with 36 venture capitalists in 24 venture capital firms investing in china this exploratory research finds that china s institutional environment creates a number of significant differences from the west the article discusses the impact of these findings on future research on asian venture capital theory development and the activities of venture capital professionals in that region

choice under uncertainty evidence from ethiopia india and uganda we review experimental evidence collected from risky choice experiments using poor subjects in ethiopia india and uganda using these data we estimate that just over 50 of our sample behaves in accordance with expected utility theory and that the rest subjectively weight probability according to prospect theory our results show that inferences about risk aversion are robust to whichever model we adopt when we estimate each model separately however when we allow both models to explain portions of the data simultaneously we infer risk aversion for subjects behaving according to expected utility theory and risk seeking behaviour for subjects behaving according to prospect theory

some hypotheses about risk in venture capital investing abstract venture capital investing differs in important respects from investment decisions involving the securities of fortune 500 companies or decisions to purchase established companies which are generally made in accord with widely recognized financial models investing in new ventures involves a high level of uncertainty as well as a high risk of failure venture capital investing is characterized by high variability in the outcomes of new ventures and in the performance of venture capital portfolios venture capital investing decisions are complicated by a general lack of quantifiable financial and market data for early stage ventures and investment decisions remain hostage to unanticipated competitors market shifts and financial cycles some observers have suggested that venture capital investment decisions are primarily subjective assessments while the question of risk in venture capital investing has been addressed on an ad hoc basis in several empirical studies there has been little effort to develop a theoretical framework of risk perceptions and risk reduction strategies despite differences in investor experience investment preferences and tolerance for risk venture capital managers share many common perceptions of the risks involved in investing in new ventures and the distribution of those risks over the venture capital funded phase of development venture capital managers also utilize many common behaviors and strategies in adapting to these risks these perceptions and reactions to risk in investing and strategies for controlling risk can in theory be used to construct a behavioral framework that can predict how venture capital managers will behave in choosing between various investment opportunities in order to minimize risk and to maximize potential returns in an attempt to begin to identify various elements of such a behavioral framework of venture capital reactions to risk the authors have drawn upon psychological risk theory of decision making under uncertainty including classic expected utility theory later modifications to that theory by kahneman and tversky 1979 and coombs and huang s 1970 portfolio approach to risk that are applicable to venture capital investing these expected behaviors to risk have been used in conjunction with empirical studies of venture capital investment and portfolio outcomes distributions of investments within portfolios and venture capitalist perceptions of risk to propose nine hypotheses about how venture capital managers behave in making investment decisions these hypotheses include differences in variation and magnitude of returns for early stage versus later stage ventures explanations of how risk distributions change over the stagewise development of new ventures differences in the behavior of aggressive versus conservative investors in screening investment prospects and strategies utilizing a lower ideal level of risk to reduce the chances of achieving negative or sub normal final portfolio returns

on the positive role of financial intermediation in allocation of venture capital in a market with imperfect information this paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information we consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions about which the investors are imperfectly informed it is shown that when all investors have positive search costs the entrepreneurs are induced to offer the unacceptable inferior projects lemons only and the investors will not enter the venture capital market but put their funds in other low return investments an undesirable allocation of resources beginning with an initial undesirable situation the financial intermediaries may evolve as informed agents that induce a pareto preferred allocation leading the investors to a higher welfare state we focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive the distribution of returns on projects the fees charged by intermediaries and the fraction of institutional holdings are all endogenous in equilibrium it is shown that i there cannot be a competitive intermediation equilibrium with very high institutional holdings and ii in other cases multiple equilibra may exist but the one with the highest institutional holdings dominates the others in a pareto sense

does acquiring venture capital pay off for the funded firms a meta analysis on the relationship between venture capital investment and funded firm financial performance abstract researchers and practitioners frequently propose that venture capital vc is an important resource to increase the performance of funded firms especially in environments of uncertainty in this paper we scrutinize these theoretical propositions following an evidence based research approach we synthesize 76 empirical samples on 36 567 firms we find a small positive performance effect of vc investment on funded firm performance however the effect vanishes if researchers control for industry selection effects furthermore we find that the performance effect mainly relates to firm growth while profitability is unaffected we also uncover that performance effects are reduced when the funded firms are very young or very mature in addition studies focusing on ipo events which constitute the majority of studies determine a substantially smaller performance effect we discuss theoretical implications and offer suggestions for future research on vc

the impact of institutional sources of capital upon the minority oriented venture capital industry venture capital vc funds specializing in investing equity capital in minority owned businesses have grown rapidly over the past decade fueled by the willingness of major institutional investors to support this traditionally neglected niche we investigate impacts of public pension funds upon the minority vc sector these funds providing over half of all capital invested in minority vcs selectively invest seeking to fund only those vcs likely to generate high returns although they attempt to pick the winners our findings indicate that they have failed to do so the influence of public pension funds upon the minority vcs is nonetheless real skewing investing away from traditional practices and toward those of the venture capital mainstream in the process minority vcs funded by pension fund money invest in high tech fields more than other minority oriented vc funds do further they are less likely to fund minority owned small firms focusing increasingly upon firms owned by nonminority whites neither of these trends has resulted in increased returns rather diverting minority oriented vcs away from their traditional mission of investing in minority firms operating in a broad range of industries has resulted in lower returns over the years studied

venture capital investment in minority business this study analyzes the performance of mature investments made by venture capital vc funds that specialize in financing minority business enterprises we explore the hypothesis that vcs focusing on investing in minority businesses earn attractive returns because this market niche is underserved minority vc funds collectively earned yields on their realized investments that were estimated to be broadly equivalent to those of the mainstream vc industry however these yields vary greatly from fund to fund vc fund traits that predict high yields on individual investments are identified by estimating multivariate regressions explaining net investment returns copyright c 2008 the ohio state university

service for equity arrangements untangling motives and conflicts abstract many professional service organizations have adopted a little understood contractual form service for equity based on in depth case studies of 12 major professional service providers with a combined experience of 179 equity for service deals this paper documents 18 intended and unintended consequences emanating from and expanding beyond agency theory of adopting such a contractual form six propositions are developed which speculate how these consequences categorized under client development service operations financial management and organizational behaviour affect long run performance assuming these propositions cannot be rejected through empirical analysis the paper also provides managerial guidance for effective implementation of equity for service arrangements

reliance upon informants in the venture capital industry abstract can venture capital investors rely upon informants to be forthcoming with what they know or do they need to be concerned about self serving conduct these questions are investigated among two types of venture capital investors business angels and venture capital firms the results of the present study suggest that the more either type of investor is concerned with market or agency risk the less likely he or she will be to use informal network informants business associates and friends market risk is due to unforeseen competitive circumstances whereas agency risk results from the separate and possibly divergent interests of investors and their informants investors with a higher concern for risk consult formal network informants venture capital firm investors for information about market risk but concern with agency risk is not related to the frequency of use of venture capital firm sources agency risk deals with particular self interested individuals who are unlikely to be known to the formal informant network venture capital firm investors consult formal network sources more frequently than do business angels compared to business angels they enjoy a much more efficient flow of information from their informants as they gain more experience exchanging information venture capital firm investors increase their reliance upon formal network informants because informal network informants have less experience exchanging information it is possible that some informal sources could escape being detected if they decided to act in a devious self interested manner rather than relying upon informal informants several investors indicated in face to face interviews that they prefer to perform their own due diligence business angels seem to distinguish between two types of informants close associates with whom they have had extensive investment experience and mere acquaintances to whom they are only weakly tied by a referral from a close associate or someone else it is quite likely that business angels rely upon informants who are close associates however the informants in this study were predominantly acquaintances which may be fairly typical of most business angel informants because they were acquaintances and not close associates they were not utilized much as informants venture capital firm investors rely heavily upon associates at other venture capital firms for market information because they do not trust other informants to the same extent they may wish to de emphasize their reliance upon them similarly there are indications that business angels rely upon close associates to provide them with information about agency factors because angels do not trust others for this information and may in fact have limited access to other informants they may wish to focus their search for information on business associates this would enable them to avoid the expense of investigating the reliability of other informants this research should be helpful to entrepreneurs who are searching for new venture funding it suggests that certain types of informants may be more effective in championing the prospects of a deal to a venture capitalist an entrepreneur with a technical or market advantage ought to approach a venture capital firm because the informant network for venture capital firms is highly interconnected with other venture capital firms it is likely that presenting a request for funding to one of them will quickly result in the sharing of it among their informant associates if entrepreneurs possess a market advantage they ought to concentrate on obtaining funding from the first venture capital firm investor who reviews the deal entrepreneurs who can argue that they are trustworthy or competent even if they lack a technical or market advantage ought to present their deals to a business angel using a close business associate as an intermediary a mere acquaintance used as an intermediary would be much less effective although statistical testing indicated that such an approach would not generate significant success interviews with business angels suggested that using a close associate as an intermediary would improve an entrepreneur s prospects especially if the business angel were relatively unconcerned about a deal s risk moreover using an informant intermediary to contact a business angel would avoid the need to do an initial background check on the entrepreneur

integrating the ethical dimension into the analytical framework for the reform of state owned enterprises in china s socialist market economy a proposal the discussions about the reform of state owned enterprises are so far dominated by economic and legal considerations while the ethical dimension of this highly complex problem is being barely addressed explicitly much less developed systematically and integrated into a broader analytical framework for companies in china this paper is a proposal to introduce this kind of ethical considerations first the main features of the reform of state owned enterprises are briefly summarized and a number of critical issues are identified second the balanced concept of the firm is presented and compared with other approaches to corporate ethics in chiefly western literature discussions on corporate social responsibility the stakeholder approach and social contract theories finally the relevance of this balanced concept of the firm for the reform of state owned enterprises is briefly discussed

informal risk capital investors investment patterns on the east coast of the u s a abstract in this study we profile a group of informal investors their investment criteria and the nature of their referral network the study supports the findings of several earlier studies it indicates the existence of an extensive informal investment community on the east coast of the u s a which can provide substantial financial resources to startup and young firms a full 58 of the sample investments were in startups a huge proportion compared with formal venture capital sources the study further supports earlier findings that this group is difficult to locate for entrepreneurs and researchers alike this opaque market consists primarily of friends and business colleagues who individually provide modest sums of money 20 000 50 000 but are often able to use their network to assemble a group of investors who will sponsor the entire funding requirement 130 informal investors report that in three years they and their networks raised 38 million dollars to support 286 new venture proposals there are also encouraging indications that these angels are both enthusiastic and persistent many of them claim that they have achieved higher returns via angel activity than any other investment options that they have tried of the angels who did better with alternative investment options more than 80 are still prepared to make further investments even those who reported failed investments in the informal risk capital market remain supportive over 65 indicate a willingness to invest again the criteria by which the angels screen the proposals differ markedly from those of the venture capital community in particular the angels do not appear to be interested in a thorough business plan a sine qua non for venture capitalists unlike the capital firms angels are not interested in competitive insulation they do not limit their investments to industries that are appealing or with which they are familiar nor do they care very much about the degree to which the entrepreneur has identified competition however they are in close agreement with the venture capital community in their concern with the management ability of the venture team and a requirement that there be a clear demonstrated need for the product or service preferably in a market with large potential the study has shed some light on the structure of the referral networks of angels though we do not know from this study how the respondents themselves first heard of the ventures that were described in this survey we do know that their referral network is composed primarily of friends and business colleagues to whom they refer as much as 60 of the proposals that they receive and in which they themselves eventually invest thus they pass on serious opportunities to their network their referees are inclined to be very supportive in our sample almost 75 of them also invested in the venture the current strategy for informal investors is to approach mainly close contacts these are inclined to be supportive 85 also invested in the venture and to follow a trusting investment behavior pattern relying mainly on the recommendation of the angel this strategem ensures that the total capital requirements are met via the network however given the results of this study the angels might be well advised not to stop here they might also approach at least one professional only a small proportion of professionals were approached by our sample of angels less than 30 as the study shows professionals are more effective at selecting successful ventures thus a mixed strategy may be called for use mainly trusting referees to ensure full capitalization and a limited number of professional referees to screen the proposals this will help ensure that those proposals that do get supported by the more trusting members of the network have been competently screened thus increasing to the probability of venture success a discriminant analysis revealed some useful pointers in helping the informal investor select successful ventures first it is critical to select only ventures in which the entrepeneur can be relied on to evaluate the risks of the ventures and manage these risks well angels do not need entrepreneurs that will gamble with their money equally important is to avoid placing too much credence on highly articulate sales pitches by the venture team or too much reliance on ventures in which the main emphasis is on product and proprietary protection rather insist on being shown clear evidence that the product or service has channel and or market acceptance it is also important for angels to stick to investments where they know the industry well and to back venture teams with a solid reputation and a propensity to get involved in the details rather than gloss them over as in the case of studies of venture capital investments competitive insulation in the early stages of the venture is also important

on the potential for observational equivalence in experiments on risky choice when a power value function is assumed we demonstrate theoretically and illustrate the implications of assuming power utility when the true function is of the expo power form empirical results can appear to be consistent with cumulative prospect theory when they are in fact generated from a markowitz model