the economics of a blend mandate for biofuels a biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices depending on relative supply elasticities biofuel tax credits always reduce fuel prices tax credits result in lower fuel prices than under a mandate for the same level of biofuel production if tax credits are implemented alongside mandates then tax credits subsidize fuel consumption instead of biofuels this contradicts energy policy goals by increasing oil dependency co 2 emissions and traffic congestion while providing little benefit to either corn or ethanol producers these social costs will be substantial with tax credits costing taxpayers 28 7 billion annually by 2022 copyright 2008 oxford university press

a lack of insight do venture capitalists really understand their own decision process abstract what decision criteria do venture capitalists vcs use to make their investment decisions this question has received much attention within entrepreneurship literature i e wells 1974 poindexter 1976 tyebjee and bruno 1984 macmillan seigel and subba narasimha 1985 macmillan zeman and subba narasimha 1987 robinson 1987 timmons et al 1987 sandberg schweiger and hofer 1988 hall and hofer 1993 zacharakis and meyer 1995 for a number of reasons first vc backed ventures achieve a higher survival rate than non vc backed businesses kunkel and hofer 1990 sandberg 1986 timmons 1994 second a better understanding of the decision process may lead to even better survival rates finally entrepreneurs seeking venture funding benefit if they understand what factors are most important to the vc although past research has greatly contributed to our understanding of the decision it may be biased and somewhat misleading the majority of past studies rely on post hoc methodologies e g interviews and surveys to capture the decision process post hoc methods assume that vcs can accurately relate their own decision processes but studies from cognitive psychology suggest that people in particular experts are poor at introspecting introspection is subject to rationalization and post hoc recall biases using social judgment theory and the associated lens model as a framework the current study investigates how well vcs introspect about their own decision process and by extension whether the past research efforts are biased the current research uses policy capturing a real time method common in cognitive psychology to capture the vc s actual theories in use versus their espoused theories hitt and tyler 1991 policy capturing requires that vcs make a series of real time decisions based on various information factors regression analysis of each vcs decision captures how important each of the information factors is to her his actual decision process after the vcs make their decisions they provided a weighting of how they believe they used the information factors comparing the captured decision policies to stated decision policies provides a measure of vc insight the findings suggest that vcs are not good at introspecting about their own decision process even within the confines of a controlled experiment which greatly reduces the amount of information considered vcs lacked strong understanding of how they made decisions most decision makers would like to have all relevant information available for their decision however as more information becomes available insight diminishes finally this study finds that vcs are very consistent in their decision process even though they do not necessarily understand how they make their decisions vcs face a plethora of information when making an investment decision i e business plan outside consultants due diligence etc it may be difficult for vcs to truly understand their intuitive decision process because of all the noise caused by this information overload this lack of systematic understanding impedes learning vcs cannot make accurate adjustments to their evaluation process if they do not truly understand it therefore vcs may suffer from a systematic bias that impedes the performance of their investment portfolio the methodology used in this experiment can be modified and used as a training tool for active vcs in addition the consistent nature of vc decision making even if they do not have a strong understanding of that process is favorable to the development of decision aides decision aides can minimize the danger of salient information e g the lead entrepreneur is a winner clouding the vc s judgment past research also needs to be interpreted in a new light although vcs undoubtedly use some of the information cited in past studies the relative importance of that information needs to be reevaluated vcs may not for instance rely most on the background of the entrepreneurial team in addition it is likely that the past studies provide more information factors than vcs actually use people have a tendency to overstate the information they believe they relied upon and to use far less information typically three to seven factors to make a decision than they actually think they use the methodology used in this experiment has the potential to identify the more relevant information factors cited in previous work even though vcs are experts in the new venture funding realm their decision process has room for improvement almost 40 of all backed ventures fail to provide a return to the vc considering the billions invested each year a modest improvement in the failure rate can have a substantial impact on venture portfolio returns that improvement starts by better understanding the decision process this study is a step in that direction

patent pools as a solution to efficient licensing of complementary patents some experimental evidence production requiring licensing groups of complementary patents implements a coordination game among patent holders who can price patents by choosing among combinations of fixed and royalty fees summed across patents these fees become the total producer cost of the package of patents royalties because they function as excise taxes add to marginal costs resulting in higher prices and reduced quantities of the downstream product and lower payoffs to the patent holders using fixed fees eliminates this inefficiency but yields a more complex coordination game in which there are multiple equilibria which are very fragile in that small mistakes can lead the downstream firm to not license the technology resulting in inefficient outcomes we report on a laboratory market investigation of the efficiency effects of coordinated pricing of patents in a patent pool we find that pool like pricing agreements can yield fewer coordination failures in the pricing of complementary patents

trade offs in the investment decisons of european venture capitalists abstract previous studies of venture capital investment criteria which have tended to utilize traditional likert scaled survey methods have produced some general findings which indicate that the human factor is of utmost importance however virtually all of these studies have been undertaken with u s based venture capitalists in addition the studies have generally been exploratory and have assumed a single hierarchy of decision criteria in all cases and across all venture capitalists we do not accept that this is valid therefore our study tested this assumption by investigating the trade offs made by venture capitalists in europe thirty five investment criteria were identified from the literature and from experts in the field and a questionnaire was developed that required the venture capitalist to make 53 pairwise trade offs with multiple levels seventy three venture capitalists from across europe were interviewed and completed the questionnaire conjoint analysis was used to compute relative rankings and overall rankings were computed to provide some general insight into the overall importance of the various criteria after this cluster analysis was used to identify different decision groupings the trade offs were randomized in the questionnaire but for descriptive purposes fall into the following groupings financial product market strategic competitive fund management team management competence and deal all five management team criteria as opposed to management competence criteria were ranked among the first seven product market criteria appeared to be only moderately important and fund and deal criteria were at the bottom of the rankings overall we conclude that the venture capitalists interviewed would as a group prefer to select an opportunity that offers a good management team and reasonable financial and product market characteristics even if the opportunity does not meet the overall fund and deal requirements it appears quite logically that without the correct management team and a reasonable idea good financials are generally meaningless because they will never be achieved cluster analysis identified three groupings of venture capitalists those primarily concerned with investing nationally those who focus solely upon the deal and those mainstream investors who consistently and instinctively rank the five management team criteria at the top of their list however there was no evident country bias a conclusion that is sustained if the countries are grouped by physical proximity northern versus southern europe or by size of the local venture capital community a surrogate for experience moreover there was no relationship to the scale of the fund the typical round of financing or the apparent network the article concludes by outlining the implications of the study for venture capitalists entrepreneurs and the research community

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

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

an experimental analysis of dynamic incentives to share knowledge knowledge sharing arrangements are an important part of the innovation process as they help firms acquire technological capabilities shorten development time and spread risk and cost a question central to the study of knowledge sharing arrangements is the impact of competition on cooperation while cooperation has the benefit of avoiding duplication it may have an adverse effect on the competitive advantage of a leading firm hence firms face a difficult challenge during the innovation process while deciding which components of it if any to carry out in collaboration with other firms this paper reports the results of controlled laboratory experiments which identify how the decision to form research joint ventures changes with both relative progress during the r d process and the intensity of product market competition the design is based on a modified version of erkal and minehart optimal sharing strategies in dynamic games of research and development research paper 1038 university of melbourne department of economics 2008 the results indicate that if expected profits are such that the lagging firms always stay in the race cooperation unravels as firms move forward in the discovery process and as monopoly profits become more attractive these results are generally consistent with the theoretical predictions jel c91 l24 o30 d81

determinants of the incidence and scale of seed capital investments by venture capital firms employing both behavioral decision making and agency theories our study seeks to identify those factors that influence a venture capital vc firm s decision to undertake seed capital investments and subsequently the scale of such activity using data on the investments made by 2949 vc funds raised worldwide between 1962 and 2002 we find investor age timing of investment and fund location to be of importance in addition the size of the fund and the existing number of portfolio firms exert opposite influences on the level of seed capital activity of the vc firm these results suggest that seed activity is a valuable source of market intelligence for leading vc firms seeking proactively to identify and invest in novel technologies

the new institutional economics and the theory of the firm abstract concepts of importance in the literature of the new institutional economics such as transaction costs and bounded rationality have been used to extend the standard neoclassical model of the firm but the hybrid models created have failed to provide adequate explanations of enterprise behavior an alternative neoinstitutional model of the firm is developed in the paper that differs from the pure neoclassical model and hybrid models in respect to both the nature of the solution it yields and the process by which it reaches a solution the neoinstitutional firm cannot be expected to achieve either the hypothetical allocative efficiency promised by the frictionless neoclassical model or the relatively efficient constrained pareto optimal solutions predicted by the largely frictionless hybrid models the orthodox marginal rules of neoclassicism can only be used to solve lower level problems that appear within the firm

appropriability and market structure in a stochastic invention model this research examines in the laboratory a class of game theoretic equilibrium models of private research and development r d we formulate a stochastic model of r d investment whose predictions can be examined by using laboratory experiments the noncooperative nash equilibrium of our operational model yields testable predictions about the effects of appropriability and market structure on r d the experimental results support the hypothesis that the degree of appropriability is inversely related to r d spending the results strongly support the hypothesis that an increase in group size yields greater aggregate r d the noncooperative nash equilibrium is shown to be a good predictor of central tendencies in the experiments

multistage financing of technical start up companies in silicon valley abstract financing remains an issue that entrepreneurs face long after their initial financing has been obtained in technical companies that face changing customers competitors and technology the need to finance new products to replace earlier products can be of vital importance to growth and survival venture capital firms that invest in technical companies also recognize the need for subsequent financing to maintain growth and thus protect the initial investment this research explored both the venture capitalist s and the entrepreneur s viewpoints the principal questions asked in the research were 1 how are subsequent rounds of investment considered and made by venture capitalists and 2 what problems occur in the entrepreneur s search for subsequent funding a combination of in depth interviews and mailed questionnaires was used in the research to obtain responses from a sample of venture capitalists and entrepreneurs in silicon valley this approach produced observations on the venture capitalists methods of making risk return trade offs and on the reasons why entrepreneurs face problems in obtaining funding for second new products specifically it was found that venture capital firms reduce the risk associated with funding young companies by showing preferences for certain stages of financing or for funding single versus multiple round investments these preferences appear to be idiosyncratic and entrepreneurs must be careful to deal with venture capitalists whose tendencies are consistent with the entrepreneurs goals it was also found that a major problem faced by entrepreneurs seeking funding for second products is the effort required for the search this effort takes away from their ability to perform day to day management activities at a crucial time in the growth of the firm implications are drawn for improving the effectiveness of entrepreneurs and venture capitalists efforts as well as for future research

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

cooperative and noncooperative r d in experimental duopoly markets abstract we analyze the relation between technological spillovers and r d cooperation in a duopoly experiment based on the well known model of d aspremont and jacquemin for scenarios without and with full spillovers two noncooperative treatments are run one without and one with non binding communication possibilities and one cooperative treatment with binding contract possibilities we find that without technological spillovers binding r d contracts are needed for r d decisions to deviate from the subgame perfect nash r d level towards the cooperative level with full spillovers the possibility of non binding cheap talk may suffice to move closer to r d cooperation

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

no news is bad news sensegiving activities media attention and venture capital funding of new technology organizations a significant body of research has examined how new organizations gain legitimacy and how gaining it affects their subsequent access to resources less attention has been given to the problem of how new organizations attract collective attention although related to legitimation the problem of attracting attention is distinct as attention and evaluation are distinct cognitive processes in this study we examine the allocation of collective attention to new organizations in a system of relationships within which new organizations seek to attract attention through their sensegiving activities the information properties of their sensegiving activities affect the level of attention they receive from different types of media and media attention in turn increases their perceived value potential in the eyes of venture capital investors vcs we examine these relationships in a sample of 398 information technology start ups that have obtained different levels of venture capital funding our results show that new organizations that engage in more intense and diverse sensegiving activities attract higher levels of industry media attention and that these effects are enhanced by the human capital of their founders and leaders diverse sensegiving activities are also associated with higher levels of attention from the general media but only the attention of specialized industry media is positively associated with the level of vc funding obtained these findings extend current research on information intermediation and institutional legitimation by demonstrating that media attention early in the life of new organizations affects how they are valued by a well informed expert audience such as vcs they also contribute to entrepreneurship research on the effects of new organizations strategies on their ability to secure resources and to research on vc funding decisions

assessing venture capital investments with noncompensatory behavioral decision models abstract this article examines the prospect of a decision support system for the assessment of venture capital investments it approaches the task of developing decision models from the perspective of the venture capitalist thus venture capitalists have played an active role in defining the predictor variables and in providing data on their own investments venture capitalists and recent research underscore the importance of the entrepreneur in new ventures and the predictor variables selected reflect this bias the literature is now replete with studies demonstrating the superiority of multiattribute actuarial models over human judgment for diverse decision environments ranging from medical science to finance this class of behavioral decision models consists of the simultaneous consideration of several attributes relevant to a decision actuarial models of this kind can be applied to attribute and decision data based on the decision maker s judgments i e expected outcomes before the events transpire termed judgment based models they can also be applied to data on past events or actual outcomes where known termed environment based models again it needs to be emphasized that actuarial models whether based on the decision maker s judgments or on the environment usually outperform the decision maker these general principles are applied here among actuarial models a particular subclass of models is called noncompensatory in these models a low value for one attribute cannot be compensated by a high value for another attribute as an example in selecting a place kicker in football athletic skills other than kicking ability are irrelevant in this study two types of noncompensatory actuarial models conjunctive and disjunctive are used to model both venture capitalists judgments and the environment interviews with venture capitalists reveal that some place strong emphasis on one or two attributes in judging a potential investment this type of decision making behavior indicates a disjunctive decision process at the same time there can be a tendency to ensure that a prospective investment is satisfactory at a minimum the entrepreneur s tenacity courage is a redundant variable that is sublimated in desire for success and enthusiasm capacity for work

business performance and angels presence a fresh look from france 2008 2011 business angels enjoy a strong reputation for being more efficient than other investors among policy makers practitioners and scholars however due to the limited availability of specific financial data previous research has barely assessed the impact of angels on companies performance this paper seeks to bridge this gap by providing evidence from a unique dataset made up of 432 angel backed french companies which are compared to two control groups one randomly selected and another one consisting of similar enterprises this double comparison process enables us to purge our analysis of structural effect and to demonstrate the importance of the methodology in generating the sample indeed the results we obtain significantly differ depending on the control group our results show that the positive influence of angels depends on the condition of the comparison the set of ba backed companies is more likely to exhibit superior performance when it is compared to a random sample whereas the companies performance is either identical or worse when it is compared to a sample composed of k nearest neighbors in addition using a quantile regression technique makes it possible to differentiate the effect of business angels based on the distribution of the value of the growth rate

does britain or the united states have the right gasoline tax this paper develops an analytical framework to assess the second best optimal level of gasoline taxation taking into account unpriced pollution congestion and accident externalities as well as interactions with the broader fiscal system we provide calculations of the optimal taxes for the us and the uk under a variety of parameter scenarios under our central parameter values the second best optimal gasoline tax is 1 01 gal for the us and 1 34 gal for the uk current tax rates are much lower than this in the us and higher in the uk the calculations are moderately sensitive to alternative parameter assumptions the congestion externality is the largest component in both nations revenue raising needs also play a significant role as do accident externalities and local air pollution potential welfare gains from reducing the current uk tax rate are estimated at nearly one fourth the production cost of all gasoline used in the uk even larger gains could be achieved by switching to a tax on vehicle miles with equal revenue yield for the us the welfare gains from optimizing the gasoline tax are smaller but those from switching to an optimal tax on vehicle miles are very large

who is afraid of pirates an experiment on the deterrence of innovation by imitation abstract in the policy debate intellectual property is often justified by what seems to be a straightforward argument if innovators are not protected against others appropriating their ideas incentives for innovation are suboptimally low now in most industries and for most potential users appropriating a foreign innovation is itself an investment decision fraught with cost and risk nonetheless standard theory predicts too little innovation arguably the problem is exacerbated by the sensitivity of innovators to fairness imitators do get a free lunch after all we model the situation as a game and test it in the lab we find more appropriation but also more innovation than predicted by standard theory in the lab the prospect of giving imitators a free lunch does not have a chilling effect on innovation this even holds if innovation automatically spills over to an outsider and if successful imitation reduces the innovator s profit beliefs and the analysis of experiences in the repeated game demonstrate that participants are sensitive to the fairness problem but this concern is not strong enough to outweigh the robust propensity to invest even more in innovation than predicted by standard theory the data suggest that this behavior results from the intention not to be outperformed by one s peers

constellations of firms and new ventures abstract firm growth is typically described as from the inside out an integrated process of resource capture supplementing the traditional view of growth from within this article focuses on how small firms come into being and grow resorting to cooperative relationships with external organizations through such a process new firms come into being without notable direct investments and grow without significant employment increases the emerging organizational design stresses the importance of constellations constellational structures suggest that organizations do not survive as isolated and self sufficient entities rather they are strongly tied to supportive quasi infrastructural collectives firms grow through various and changing interorganizational relationships we suggest that a growth path of firm disintegration is positively associated with flexibility cost reductions and more favorable competitive position that the success of this path in different industries and countries makes a venturing without investing process more than a small is beautiful fad we find regularities in growth patterns at the beginning an unplanned constellation of firms each geared to solving short term contingent problems planned interfirm linkages and partnerships geared to greater effectiveness arise in more advanced stages in this manner the competitive position of the constellation is improved this article suggests underlying conditions facilitating the growth of organizations that use synergies and the constellations resources effectively

comparing the information acquisition strategies of venture capital and commercial lenders a computer based experiment abstract owners and financial planners in new ventures prefer using internal sources of capital as much as possible because they are uncertain about how to obtain external financing and how the involvement of others will impact their ventures because undercapitalization and financial problems are at the center of nearly all business failures it would appear useful for owners and financial planners to reduce the uncertainty surrounding external financing obtaining information about one source of this uncertainty a lack of understanding of the decision processes followed by venture capitalists is the focus of research in this paper and a growing body of literature to further this line of study we investigate the differences in decision behavior of venture capitalists using bankers as a benchmark for comparison in cases in which debt and debt related financing are sought to the extent that venture capitalists have unique decision processes owners and financial planners might improve their ability to obtain financing through knowledge of the unique features of venture capitalists decision processes in addition venture capitalists might improve their decision effectiveness if made aware of systemic biases in their decision procedures using a computer software package to trace information acquisition processes we found that venture capitalists acquired less information and followed a pattern of acquisition that was deeper within categories of information than bankers in addition venture capitalists showed a stronger preference for strategic data and less interest in historical financial data both groups minimized the use of financial forecasts and followed decision processes persistently across different types of companies start up and well established the implications of this study for practice are two fold first if the owners or financial planners of a new or relatively new venture are seeking financing from external sources they should package the business plan and request in a manner that is consistent with the source of financing for example requests from venture capitalists should highlight strategic information such as descriptions of the product or process patentability prospects product market and management team less emphasis should be placed on financial information particularly financial projections in contrast requests for financing by banks should highlight historical financial information such differences between venture and bank financing may lead individuals who are seeking financing to conclude that because historical financial information is of primary importance to bankers bank financing should be sought after the business has developed a positive financial history and trend this would confirm intuition and research findings that venture financing is the primary source of external financing in the early stages of a new venture second bankers and venture capitalists like all decision makers who have developed a degree of expertise in a particular specialty should attempt to gain some insight into their decision processes the goal of obtaining this information would be to provide feedback on processes such as information acquisition which tend to become automatic over time with this knowledge bankers and venture capitalists could examine any biases in their behavior with the ultimate goal of improving performance this paper also has important implications for researchers in particular we have demonstrated that computer based approaches for studying decision behavior offer promise for interesting explorations into important issues such as how venture capitalists make decisions the computer minimizes researcher intrusion in the decision task and permits the collection of process data from samples large enough to permit statistical analyses in addition the subjects determine the length of the task and the direction of the search much as they would in practice which increases the external validity of the research method

experimenting with contests for experimentation we report an experimental test of alternative rules in innovation contests when success may not be feasible and contestants may learn from each other following halac kartik and liu in press the contest designer can vary the prize allocation rule from winner take all wta in which the first successful innovator receives the entire prize to shared in which all successful innovators during the contest duration share in the prize the designer can also vary the information disclosure policy from public in which at each period all information about contestants past successes and failures is publicly available to private in which contestants only know their own histories in our setting the optimal contest design in terms of maximizing the probability that at least one innovator is successful depends on the probability of successful innovation given that innovation is feasible under some parameters the designer will prefer a wta public contest while under others he will prefer shared private our experiments provide evidence that private disclosure contests behaviorally dominate public disclosure regardless of the prize allocation rule and moreover that shared private contests dominate wta private contests

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

deal structuring in philanthropic venture capital investments financing instrument valuation and covenants philanthropic venture capital phvc is a financing option available for social enterprises that like traditional venture capital provides capital and value added services to portfolio organizations differently from venture capital phvc has an ethical dimension as it aims at maximizing the social return on the investment this article examines the deal structuring phase of phvc investments in terms of instrument used from equity to grant valuation and covenants included in the contractual agreement by content analyzing a set of semi structured interviews and thereafter surveying the entire population of phvc funds that are active in europe and in the united states findings indicate that the non distribution constraint holding for non profit social enterprises is an effective tool to align the interests of both investor and investee this makes the investor behaving as a steward rather than as a principal conversely while backing non profit social ventures philanthropic venture capitalists structure their deal similarly as traditional venture capital as the absence of the non distribution constraint makes such investments subject to moral hazard risk both in terms of perks and stealing and social impact focus

best of three contest experiments strategic versus psychological momentum abstract we conduct an experimental analysis of a best of three tullock contest intermediate prizes lead to higher efforts while increasing the role of luck as opposed to effort leads to lower efforts both intermediate prizes and luck reduce the probability of the contest ending in two rounds the patterns of players efforts and the probability that a contest ends in two rounds are consistent with strategic momentum i e a momentum generated due to strategic incentives inherent in the contest we do not find evidence for psychological momentum i e a momentum which emerges when winning affects players confidence similar to the previous studies of contests we find significantly higher efforts than predicted and strong heterogeneity in effort between the subjects

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

entrepreneur passion and preparedness in business plan presentations a persuasion analysis of venture capitalists funding decisions we investigated the extent to which venture capitalists vcs perceptions of entrepreneurial passion influence the vcs investment decisions we defined entrepreneurial passion as an entreprene

round robin tournaments with a dominant player we analyze the subgame perfect equilibrium of the round robin tournament with one strong dominant and two weak players and we compare this tournament and the one stage contest with respect to the players expected payoffs expected total effort and their probabilities of winning we find that if the contest designer s goal is to maximize the players expected total effort then if the asymmetry between the players is relatively low the one stage contest should be used however if the asymmetry is relatively high then the round robin tournament should be used

a dynamic game of r and d patent protection and competitive behavior a theory of dynamic optimal resource allocation to r and d in an n firm industry is developed using differential games this technique represents a synthesis of the analytic methods previously applied to the problem static game theory and optimal control the use of particular functional forms allows the computation and detailed discussion of the nash equilibrium in investment rules this paper addresses the problem of resource allocation to research and development among the important issues that a firm engaging in r and d must evaluate are uncertainty regarding the feasibility and profitability of a particular innovation the possibility of a protracted development period the possibility that a rival firm may innovate first capturing either a patent or a significant share of the new market the possibility that a rival firm may imitate the innovation and appropriate some of the profits in the new market in what follows we will develop a theory of optimal resource allocation to research and development which incorporates the aspects of r and d enumerated above we will use a dynamic game theoretic analysis determining the nash equilibrium strategies for n identical firms the availability of perfect patent protection is shown to accelerate development of the innovation and the effect of increasing rivalry is addressed the impact of increasing rivalry on nash equilibrium investment in r and d depends upon the degree of appropriability of rewards if patent protection is perfect then increasing the number of nash rivals results in increased r and d effort however when imitation is rewarded the opposite may be true finally some notions of competitive and perfectly competitive equilibrium are examined in the context of the model developed below

why do venture capital firms exist theory and canadian evidence executive summary this paper investigates the role of venture capitalists we view their raison d etre as their ability to reduce the cost of informational asymmetries our theoretical framework focuses on two major forms of asymmetric informa tion hidden information leading to adverse selection and hidden ac tion leading to moral hazard our theoretical analysis suggests four em pirical predictions 1 venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors this suggests strong industry effects in venture capital investments venture capitalists should be prominent in industries where infor mational concerns are important such as biotechnology computer software etc rather than in rou tine start ups such as restaurants retail outlets etc the latter are risky in that returns show high variance but they are relatively easy to monitor by conventional financial intermediaries 2 within the class of projects where venture capitalists have an advantage they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe thus within a given industry where venture capitalists would be expected to focus we would also expect venture capitalists to favor firms with some track records over pure start ups

private equity investment decisions in family firms the role of human resources and agency costs abstract this study examines decision making criteria that are employed by private equity pe investors selecting family firms hypotheses test the likelihood of investment based on family firm characteristics findings show that pe professionals take into account family specific criteria including human resources and opportunities to reduce agency costs furthermore pe professionals prefer family firms that are already professionalized this research contributes to the family firm literature on both a theoretical and a methodological level exploring nonfamily succession routes and employing techniques conjoint analysis for data collection and multilevel models for data analysis that have seldom been used in this context

multi battle contests an experimental study this study examines behavior of subjects in simultaneous and sequential multi battle contests in simultaneous contests subjects make positive bids in each battle 80 of the time and bids fall within the predicted boundaries however 35 of the time subjects make positive bids in only two instead of all three battles and they significantly overuse moderately high bids in sequential contests theory predicts sizable bids in the first battle and no bids in the subsequent battles contrary to this prediction subjects significantly underbid in the first battle and overbid in subsequent battles consequently instead of always ending in the second battle contest proceeds to the third battle 38 of the time finally in both simultaneous and sequential settings subjects make higher aggregate bids than predicted resulting in negative expected payoffs

turning water into wine exploring the role of dynamic capabilities in early stage capitalization processes technology based ventures face considerable challenges when attempting to raise early stage capital during the early stages of development to create an operational business they need access to financial capital but external investors prefer to see an operational business before investing capital this study extends arguments grounded in dynamic managerial capabilities theory to examine the extent to which various trade offs among the quality of a venture s management team radicalness of the firm s technological resources and demand uncertainty in focal markets impact the ability of ventures to resolve these capitalization challenges we find that higher levels of demand uncertainty and more radical innovations do not appear to enhance the impact of strong management teams on the raising of early stage capital however lower levels of uncertainty do appear to strengthen the effects of strong management teams implications of these findings for dynamic capabilities theory and early stage capitalization processes are discussed

hybrid conjoint analysis an estimation probe in new venture decisions abstract how venture capitalists select start ups for financing has been an interesting topic for many researchers and practitioners the underlying assumption is that people who make money investing in new businesses by assessing the proposals should be experienced enough to distinguish losers from winners our research study tested three models self explicated conjoint and a hybrid comprising the two previous ones conjoint in order to find out 1 if these models could be applied to venture capital decision making and if so 2 to demonstrate the potential of conjoint analysis as a practical research method 3 to test whether or not the characteristics of the entrepreneur the product and the market replicate the venture capital decision this research study confirms what normative literature on decision making emphasizes that in the first stage of an evaluation screening venture capitalists focus on a small subset of criteria in a non compensatory process i e an unacceptable value on one criterion cannot be offset by a high value of another one the important criteria in this phase appear to be the entrepreneur s experience and the existence of a prototype for some decision makers or unique features of the product for others the screening step is more judgemental than analytic in a second stage the evaluation phase however venture capitalists end a detailed examination due diligence process by choosing the most preferred ventures through processes approximating compensatory rules that is a low but acceptable value on one criterion can be compensated by a high value on another the most important criteria identified by the research in this second stage are criteria found in the previous stage product gross profit margin and patent our research demonstrates agreement among venture capitalists in terms of one criterion to evaluate research proposals managerial experience as to the rest of the attributes tested there was variation in the weights assigned to them the findings of this pilot study also confirm the applicability of conjoint analysis as a research method in venture capital decision the approach helps shed light on the decision rules applied and permits the testing of previously researched criteria for predictive validity the method has the advantage of retaining individual preferences and clustering them around venture capitalists demographic and psychographic backgrounds i e years of experience type of education life style and the like or other types of information such as venture fund policies size of the investment type of industry etc the major implication of the study for entrepreneurs is the importance of previous experience in the industry where they expect to develop their ventures and a deep knowledge of the product advantages over competition technical production and cost feasibility they are to produce and market these are the factors that have the greatest influence on venture capitalists evaluation of such projects

dynamic behavior and player types in majoritarian multi battle contests abstract in a dynamic contest where it is costly to compete a player who is behind must decide whether to surrender or keep fighting in the face of bleak odds we experimentally examine the game theoretic prediction of last stand behavior in a multi battle contest with a winning prize and losing penalty as well as the contrasting prediction of surrendering in the corresponding contest with no penalty we find varied evidence in support of these hypotheses in the aggregate data but more conclusive evidence when scrutinizing individual player behavior players realized strategies tend to conform to one of several types we develop a taxonomy to classify player types and study how types interact and how their incidence varies across treatments although last stand and surrendering behaviors arise at rates responsive to the importance of losing penalties the most prominent behavior is escalation

a model of venture capitalist investment activity the paper describes the activities of venture capitalists as an orderly process involving five sequential steps these are 1 deal origination the processes by which deals enter into consideration as investment prospects 2 deal screening a delineation of key policy variables which delimit investment prospects to a manageable few for in depth evaluation 3 deal evaluation the assessment of perceived risk and expected return on the basis of a weighting of several characteristics of the prospective venture and the decision whether or not to invest as determined by the relative levels of perceived risk and expected return 4 deal structuring the negotiation of the price of the deal namely the equity relinquished to the investor and the covenants which limit the risk of the investor 5 post investment activities the assistance to the venture in the areas of recruiting key executives strategic planning locating expansion financing and orchestrating a merger acquisition or public offering 41 venture capitalists provided data on a total of 90 deals which had received serious consideration in their firms the questionnaire measured the mechanism of initial contact between venture capitalist and entrepreneur the venture s industry the stage of financing and product development ratings of the venture on 23 characteristics an assessment of the potential return and perceived risk and the decision vis i vis whether to invest the modal venture represented in the database was a start up in the electronics industry with a production capability in place and seeking 1 million median in outside financing there is a high degree of cross referrals between venture capitalists particularly for the purposes of locating co investors factor analysis reduced the 23 characteristics of the deal to five underlying dimensions namely 1 market attractiveness size growth and access to customers 2 product differentiation uniqueness patents technical edge profit margin 3 managerial capabilities skills in marketing management finance and the references of the entrepreneur 4 environmental threat resistance technology life cycle barriers to competitive entry insensitivity to business cycles and down side risk protection 5 cash out potential future opportunities to realize capital gains by merger acquisition or public offering the results of regression analyses showed expected return to be determined by market attractiveness and product differentiation r2 0 22 perceived risk is determined by managerial capabilities and environmental threat resistance r2 0 33 finally a discriminant analysis correctly predicted in 89 4 of the cases whether or not a venture capitalist was willing to commit funds to the deal on the basis of the expected return and perceived risk the reactions of seven venture capitalists who reviewed the model s specification were used to test its validity

emerging strategies in the venture capital industry abstract this article reports a study of the future direction of the venture capital industry by examining the basic strategies and strategic assumptions of a broad sample of venture capital firms there are three main sets of results first the once homogeneous venture capital industry is rapidly dividing into several different strategic groups members of these groups are increasingly distinguishing themselves from other groups on four basic dimensions followed by member firms 1 financial resources equity capital comes from a greater variety of sources five major sources resulting in fundamentally different demands on the mission of the receiving venture capital firm 2 staff resources the way venture capital firms use staff resources particularly regarding investee management assistance is becoming increasingly varied across different groups some firms provide fewer than 2 days per year while others provide up to 450 man days per year per client 3 venture stages while the overall industry retains a primary interest in stage 1 2 and 3 investment specific firms vary considerably in the distribution of investment emphasis across these three stages 4 use of financial resources firms in the industry are becoming increasingly differentiated in the size of minimum investments they make 100 m to 1000 m and in their role as a direct investor versus a broker for institutional funds practicing venture capitalists should make use of this first set of findings in two ways first they may find it useful to compare their firm s orientation along these four strategic dimensions with those of the firm s that comprised this study second they may seek to use these four strategic dimensions as a basis on which they might examine clarify and or redefine the marketing strategy pursued by their firm a second set of results identified three goals and priorities of venture capital firms that have neither changed over time nor across increasingly different strategic groups annualized after tax return on investments of between 25 and 40 remain the most common objective across all firms a 5 to 6 year investment time horizon and a major emphasis on the quality of the management team in evaluating new deals were universal priorities across diverse venture capital firms a third finding in this study was that venture capital firms profess greater certainty about the future direction of the venture capital industry than the direction of their firm the most notable example of this is a strong sense that industry wide rates of return are headed downward yet few senior partners expect their firm to experience this decline practicing venture capitalists may be interested to peruse these results to see what trends are predicted within the venture capital industry by this subsample of that industry second they should consider the finding that industry wide rates of return are headed downward in light of the first two sets of findings to develop their own opinion about the future performance of different strategic groups within the industry it is important to note that the sample of venture capital firms on which this study was based did not include most of the larger older funds some of these funds would be characterized as industry leaders pace setters and innovators the sample provides a solid representation of the broad middle of the venture capital industry and newer entrants into the industry while larger older funds are under represented their impact on future trends and strategies in the industry is captured to some extent in the set of questions about future direction of the venture capital industry finally the emerging strategic groups in the venture capital industry that were identified by this study may be useful information for investors as well as users of venture capital for investors the opportunity to participate in venture capital activity should become more clearly understood and varied basically this study should help investors differentiate the strategic posture of different venture capital firms and funds on four factors rather than simply industry geographic considerations for users of venture capital the results of this study suggest a possibility for multiple options that are both more accessible and more catered to specific needs users of venture capital should find a clearer basis on which to differentiate venture capital firms in terms of venture stage priorities staff utilization orientations sources and uses of financial resources this should make for more informed shopping among different venture capital sources and provide a basis on which to shop for the most compatible firm

new venture strategy and profitability a venture capitalist s assessment abstract this study uses theoretically justified criteria from the industrial organization io strategy literature and applies it to a new domain namely venture capitalists decision making specifically the study investigates the types of information venture capitalists utilize when evaluating new ventures and how venture capitalists use this information to assess likely new venture profitability in the interest of advancing our understanding of the decision making policies of venture capitalists this study addresses many of the limitations of previous research a review of io research suggests important relationships between a number of strategy variables and new venture profitability some of the relationships proposed by io strategy research are contingent in nature the strategy variables and their relationships with profitability are investigated in the domain of venture capitalists decision making individual and aggregate decision making analyses identified those strategy variables criteria venture capitalists utilize in assessing likely new venture profitability namely timing key success factor stability lead time competitive rivalry educational capability industry related competence timing key success factor stability interaction timing lead time interaction and timing educational capability interaction on average the most important criterion for venture capitalists in their assessment of profitability is industry related competence the second tier of importance is competitive rivalry timing and educational capability the third tier of importance is lead time key success factor stability and timing lead time interaction other interactions are less important therefore while venture capitalists use contingent decision policies main effects dominate if venture capitalists use a reported 8 to 12 minutes on average to evaluate a business plan sandberg 1986 then this study s findings may help the inexperienced venture capitalist allocate time towards assessing those attributes of primary importance although more complex relationships exist between the attributes the inexperienced venture capitalist can take comfort from this study s findings that main effects dominant amongst senior venture capitalists senior venture capitalists may take less comfort from their importance placed on main effects in light of research from io which suggests the importance of contingent relationships the results may also have practical application towards training how should venture capital firms train their new employees should venture capital firms rely solely on experienced venture capitalists lecturing the inexperienced on the criteria they use in assessing a new venture proposal like most decision makers venture capitalists have limited insight into their assessments and venture capital firms need to be aware of the gap between espoused policies and policies in use the information being taught needs to be supplemented with venture capitalists decision making research that investigates decision policies in use such as this study venture capitalist training could also involve experiential learning in conjunction with cognitive feedback about the decision policies used to accelerate the learning process experiential learning using cognitive feedback maximizes industry related learning while minimizing the cost of inexperienced decisions for the entrepreneur seeking capital this increased understanding of venture capitalists decision making may help them better target their business plans and presentations at those criteria venture capitalists find most critical to the profitability of a new venture

racing with uncertainty a patent race experiment this paper presents an experimental test of the multi stage patent race model of harris and vickers rev econ stud 54 1987 1 tied competitors invested more when nearer the end of the race but this may have followed from a more general and unexplained pattern of a positive correlation between investment and progress in the race the relationship between investment and gap between competitors was mostly not as predicted also leaders did not invest more than not heavily lagging followers and the race did not approach monopoly as the gap between competitors widened overall the evidence brings only limited support to the theory

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

war and conflict in economics theories applications and recent trends we review the main economic models of war and conflict these models vary in details but their implications are qualitatively consistent highlighting key commonalities across a variety of conflict settings recent empirical literature employing both laboratory and field data in many cases confirms the basic implications of conflict theory however this literature also presents important challenges to the way economists traditionally model conflict we finish our review by suggesting ways to address these challenges

the potential of actuarial decision models abstract venture capitalists vcs are considered experts in identifying high potential new ventures gazelles vc backed ventures survive at a much higher rate than those ventures backed by other sources kunkel and hofer 1991 sandberg 1986 timmons 1994 thus the vc decision process has received tremendous attention within the entrepreneurship literature nonetheless vc backed firms still fail at a surprisingly high rate 20 moreover another 20 of the vc s portfolio fails to provide any return to the vc therefore there is room for improvement in the vc investment process the three staged investment process often begins with venture screening first vcs screen the hundreds of proposals they receive to assess which deserve further consideration those ventures that survive the initial stage are then subjected to extensive due diligence finally the vc and entrepreneur negotiate terms of the investment considering the amount of time that due diligence and negotiation of terms may take it is imperative that vcs minimize their efforts during screening so that only those ventures with the most potential proceed to the next stage yet at the same time the screening process should also be careful not to eliminate gazelles prematurely vcs are in a quandary how can they efficiently screen venture proposals without unduly rejecting high potential investments the answer may be to use actuarial decision aides to assist in the screening process actuarial decision aides are models that decompose a decision into component parts or cues and recombine those cues to predict the potential outcome for example an actuarial model about the vc decision might decompose a venture proposal into decisions about the entrepreneurial team the product the market etc the sub component decisions are than recombined to reach an overall assessment of the venture s potential such models have been developed in a number of decision domains e g bank lending psychological evaluations etc and been found to be very robust specifically these models often outperform the very experts that they are meant to mimic the current study had 53 practicing vcs participate in a policy capturing experiment the participants examined 50 ventures and judged each venture s success potential would the venture ultimately succeed or fail likewise identical information about each venture was input into two different types of actuarial models one actuarial model a bootstrap model used information factors that vcs had identified as being most important to making a good investment decision the second actuarial model was derived by roure and keeley 1990 the roure and keeley model best distinguished between success and failure in a study of 36 high technology ventures the bootstrap model outperformed all but one participating vc he achieved the same accuracy rate as the bootstrap model the roure and keely model although less successful than the bootstrap model outperformed over half of the participating vcs the implications of this study are that properly developed actuarial models may be successful screening decision aides the success of the actuarial models may be attributed to their consistency across different proposals and time the models always weight the information cues the same vcs as are all human decision makers may often be biased by differing salient information cues that cause them to misinterpret or ignore other important cues for example a vc may overlook product weaknesses if s he is familiar with the entrepreneur putting forth a particular proposal although the current study developed a generalized actuarial model each vc firm could create screening models that fit it s particular decision criteria the models could then be used by junior associates or lower level employees to perform an initial screen of received venture proposals thereby freeing senior associates time

corporate venture capitalists autonomy obstacles and performance abstract this report presents the results of a formal study of the corporate venture capital community in the united states and is based upon responses to a questionnaire completed by 52 corporate venture capitalists cvcs the central question addressed in this study involves which approach to corporate venture capital is most likely to produce successful results this question was addressed via cluster analysis which segregated the cvc community into two broad classes pilots which are marked by substantial organizational independence and copilots which are highly dependent on corporate management with respect to venture funding and decision authority pilots achieve equal or higher levels of performance and are plagued by far fewer obstacles than their highly dependent counterparts the results suggest the following 1 the corporate venture fund should be established as an independent entity and should have access to a committed separate pool of funds this will enable cvcs to respond aggressively to and manage investment opportunities with minimal corporate interference such an independent entity will defuse justifiable concerns on the part of entrepreneurs related to such interference 2 the fund should be managed by skilled venture professionals who may be drawn from the independent venture community or the small but growing pool of experienced cvcs corporate executives may comprise a part of the management team 3 if the corporate venture fund hopes to attract top quality managers it must be prepared to offer compensation and authority commensurate with their skill level in short corporate venture capitalists should be treated like independent venture capitalists by organizing the fund as an independent entity the political problem associated with establishing compensation levels above those of the corporation can be minimized 4 all cvcs should establish a primary focus on the realization of financial objectives i e return on investment strategic benefit objectives are not necessarily ill advised so long as they do not interfere with sound financial decision making when they do the corporate venture capital process is likely to become less effective for instance a corporate venture fund should only confine itself to investing in a few industries if there are sufficient high grade investment opportunities within those industries to ensure adequate deal flow the venture fund should not be pressured investments that appear exciting from a corporate perspective for technological or marketing reasons but are not financially attractive may well drain resources rather than produce opportunities 5 venture proposals failing on financial criteria might be referred to other parts of the corporation with the purpose of exploring an alternate relationship e g a development contract or joint venture if this is appealing to the corporation a mechanism such as a corporate liaison or reporting system might be established to facilitate the flow of information 6 a corporation should be willing to make a complete commitment of talent and capital if it establishes its own corporate venture fund the corporation should then be willing to accept a limited role if the corporation is unable to accept a limited role with respect to its own fund it may be best for it to participate as an investor in a traditional fund where such limitations will be enforced however this latter approach may significantly dilute or eliminate potential for strategic benefits

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

validation of the venture evaluation model in korea abstract this article examines the validity of the venture evaluation model in korea by directly comparing the relative importance of evaluation criteria on the funding decision with the relative importance of factors influencing venture s empirical performance specifically we first identify the relative importance of evaluation criteria based on whether a deal is accepted or rejected current evaluation model next we derive the relative importance of those criteria revealed in the empirical performance based on the success failure of ventures that overlap with the deals originally used as accepted cases performance based model finally to better understand the differences between the two models we measure the general perceptions of venture capitalists on the importance of those criteria without regard to specific deals normative model to identify potentially important criteria we reviewed the existing related studies on evaluation criteria and we interviewed 10 venture capitalists as a result we selected 31 evaluation items the questionnaire consists of two parts and deals with the following four cases in part a 1 1 case 1 general perceptions concerning the 31 criteria in part b 2 2 case 2 one of the most successful ventures 3 3 case 3 one of the least successful ventures 4 4 case 4 one of the rejected ventures using a five point scale we asked the respondents to rate the 31 criteria based on their general perceptions without referring deals case 1 and on the specific deals they had handled cases 2 3 and 4 to prevent any firm or respondent from affecting the results more than it ought to we distributed the questionnaire to each firm in proportion to the investment amounts we also asked the respondents to fill out only one questionnaire including four cases seventy four venture capitalists including 10 interviewed responded to this questionnaire they have worked as investment directors or managers in the top rated 20 venture capital companies selected according to investment amounts on the basis of the ratings of 31 criteria for the previous four cases we developed three investment models first the current evaluation model reveals which criteria are more important in deciding whether or not to fund the model measures the relative importance of evaluation factors in discriminating between the accept case 2 and case 3 and the reject case 4 decision second the performance based model consists of the relative weights of evaluation factors influencing the two performance categories success case 2 and failure case 3 this model shows the relative importance of evaluation criteria that are reflected in the venture s empirical performance finally we identify the normative model revealing the venture capitalists general perceptions concerning the importance of individual criteria in light of their past field experiences case 1 by comparing the three models we find that the importance of these criteria revealed from venture capitalists perceptions and empirical performances is fairly similar but not sufficiently reflected in the actual deal evaluation in particular the entrepreneur related characteristics are not considered the most important in evaluating venture proposals according to the current evaluation model but they do turn out to be the most important factors in evaluating empirical performance this is in strong contrast to the findings of some existing studies which contend that the entrepreneurrelated criteria ultimately determine the funding decision instead the result confirms the previous assertion that the evaluation of managerial capability is the most challenging task in the venture selection process in the current evaluation model financing ability is considered more important than either superiority of product and technology or production capability contrary to venture capitalists perceptions and empirical performance results therefore it seems necessary to raise the level of specialization of venture capital firms through the acquisition of managerial skills from developed countries and by enhancing the technical background of individual venture capitalists

singapore venture capitalists vcs investment evaluation criteria a reexamination the venture capital vc industry in singapore is of recent origin however funds under management in singapore have grown from s 45 million in 1983 to s 7 86 billion in 1996 these developments together with the recent announcement of government s vision of singapore becoming a hub for venture capital in the region provide an opportunity for an examination of the venture capital industry in singapore the vc industry originated in the western hemisphere in response to the need for risk capital for high technology industries in the light of the differences in investment opportunities around singapore and the nature of industrial developments in south east asia in general the authors anticipated that the investment criteria employed by venture capital firms vcs in singapore would differ the results however reveal that criteria adopted by singapore vcs are not very different from those adopted by vcs in other countries including u s the results also confirm that the entrepreneur s characteristics or the top management s capabilities are seen as being primary indicators of the venture s potential further examination of vcs investment process revealed that the investment criteria adopted by successful vcs were no different from those adopted by less successful vcs this confirms that investment selection is a multi stage process wherein venture assessment is only one of the steps in this process before vcs evaluate a venture they screen investment proposals based on their investment preferences or investment strategies vcs in our sample had definite ideas about where to invest and in what types of firms how do vcs select appropriate investment strategies however has not been adequately dealt in the literature and is a fitting subject for further studies

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

have uk venture capitalists a bias against investment in new technology based firms abstract this paper addresses the important question for innovation policy of whether or not uk venture capital firms show a bias against investing in technology based new and young enterprises the evidence from uk and us industry statistics indicates that pro rate american venture capital invest nearly three times as much finance into technology based start up and early stage investments as their uk counterparts when later stage mbo lbo investments are removed from the data us venture capital firms are also more likely to invest at the earlier stages of investment while the uk industry has increasingly come to be dominated by management buy outs buy ins and other later stage refinancing activities in 1991 a postal survey was conducted of 40 investing firms from a population of 75 uk venture capitalists which currently invest or are prepared to consider investing in technology based companies the sample was segregated into generalist funds and technology specialists depending on the percentage greater or less than 50 of technology based investee companies within the venture capitalists current portfolios the results confirmed that technology projects had to meet more rigorous selection criteria than non technology projects in undertaking technology based project evaluations investors imposed higher investment return hurdle rates at each stage of investment other than seed capital technology based projects were also more frequently required to address minimum markets greater than the uk alone when compared to other investment categories no material bias was found between the actions of generalist and specialist funds towards technology based projects the ratio of technology based projects offered to technology based projects accepted was similar for both groups

venture capital and high technology entrepreneurship abstract venture capital clearly plays an important role in high technology entrepreneurship the purpose of this article is to explain the differences among various venture capital complexes focusing on where venture capital is important to innovation and entrepreneurship and conversely where it is not we do so through an empirical and historical examination of the seven most important venture capital complexes california san francisco silicon valley massachusetts boston new york illinois chicago texas connecticut and minnesota minneapolis we establish a three part tripartite typology for explaining the differences between these venture capital complexes 1 technology oriented complexes are located close to concentrations of high technology intensive businesses invest most of their funds locally and are net attractors of capital 2 finance oriented complexes are located around financial institutions and export their capital and 3 hybrid complexes mix characteristics of both technology and finance oriented venturing our findings have a series of important practical implications although venture capital is not absolutely necessary to facilitate high technology entepreneurship well developed venture capital networks provide tremendous incentives for entrepreneurship by lowering the difficulties of entering an industry venture capitalists use both their experience and their contacts to reduce many of the information and opportunity costs associated with new business formation the importance of contact networks and information to both deal flow and investment monitoring goes a low way toward explaining why venture capitalists cluster tightly together the availability of venture capital also attracts entrepreneurs and high quality personnel to a region creating a virtuous circle of new enterprise formation innovation and economic development private nonprofit and subsidized public efforts aimed at providing venture capital and stimulating high technology entrepreneurship must confront the fact that venture capital alone will not magically generate entrepreneurship and economic development it is important that such efforts recognize the nonfinancial side of venture investing and attract experienced personnel who can tap into established entrepreneurial networks and secure coinvestors more significantly establishing public venture funding in an area lacking the requisite entrepreneurial climate or technology infrastructure may create a catch 22 situation where locally oriented funds invest in bad deals or where venture capital is simply exported to established high technology regions

practical implications of game theoretic models of r and d the purpose of this paper is to survey recent game theoretic models of research and development and to ask whether they yield practical implications or testable hypotheses the papers i will be discussing have been written or published within the past five years they have a good deal in common relying upon similar assumptions and building upon each other because of this the literature surveyed here may seem narrow and some relevant work has probably been inadvertently omitted i apologize for these omissions for want of space i will not discuss the normative conclusions of this literature

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

entrepreneurial ability venture investments and risk sharing a number of issues that relate to the desirability and implications of new venture financing are examined within a principal agent framework that captures the essence of the relationship between entrepreneurs and venture capitalists the model suggests 1 as long as the skill levels of entrepreneurs are common knowledge all will choose to involve venture capital investors since the risk sharing provided by outside participation dominates the agency relationship that is created 2 the less able entrepreneurs will choose to involve venture capitalists whereas the more profitable ventures will be developed without external participation because of the adverse selection problem associated with asymmetric information 3 if a costly signal is available that conveys the entrepreneur s ability some entrepreneurs will invest in such a signal and then sell to investors these entrepreneurs however need not be the more able ones the implications for new venture financing of these and other findings are discussed and illustrated by example

dynamic r d competition the authors study a simple two stage stochastic patent race involving two firms they examine the behavior of the participants as they gain the lead or fall behind in the race the authors find that the leader engages in rd 2 a policy of issuing patents for intermediate research results and 3 the effects of research joint ventures whereby the firms coordinate their initial research efforts and share their results copyright 1987 by royal economic society

incremental impact of venture capital financing this paper investigates the differences in the return generating process of venture capital vc backed firms and their peers that operate without vc financing using a unique hand picked database of 990 vc backed belgian firms and a complete population of belgian small and medium sized enterprises smes we focus on the extent to which the presence of a vc investor affects the sensitivity of a firm s returns to the changes in the capital structure in the operating cycle and in the industry dynamics the differences may stem from the self selection of better companies into vc portfolios from the venture capitalists vcs value adding activities and or from both we examine these factors in the context of a complex simulation procedure which allows separating selection from value adding when traditional approaches are difficult to implement our results indicate that vc backed firms are able to extract more rent from the changing industry conditions and from the optimizations in their capital structure the presence of vcs in the firm s equity seems to have only a marginal effect on the operating cycle efficiency overall the results are suggestive of the value adding being the main driver of the vc backed firm s performance

publicly traded venture capital funds implications for institutional fund of funds investors abstract institutional investors supply the bulk of the funds which are used by venture capital investment firms in financing emerging growth companies these investors typically place their funds in a number of venture capital firms thus achieving diversification across a range of investment philosophy geography management industry investment life cycle stage and type of security essentially each institutional investor manages a fund of funds attempting through the principles of portfolio theory to reduce the risk of participating in the venture capital business while retaining the up side potential which was the original source of attraction to the business because most venture capital investment firms are privately held limited partnerships it is very difficult to measure risk adjusted rates of return on these funds on a continuous basis in this paper we use the set of twelve publicly traded venture capital firms as a proxy to develop insight regarding the risk reduction effect of investment in a portfolio of venture capital funds i e a fund of funds measurements of weekly total returns for the shares of these funds are compared with similar returns on a set of comparably sized maximum capital gain mutual funds and the daily return of the s p 500 index a comparison of returns on an individual fund basis as well as a correlation of daily returns of these individual funds were made in order to adjust for any systematic bias resulting from the thin market characteristic of the securities of the firms being observed the scholes williams beta estimation technique was used to reduce the effects of nonsynchronous trading the results indicate that superior returns are realized on such portfolios when compared with portfolios of growth oriented mutual funds and with the s p 500 index this is the case whether the portfolios are equally weighted i e naive or constructed to be mean variant efficient ex ante according to the capital asset pricing model when compared individually more of the venture funds dominated the s p market index than did the mutual funds and by much larger margins when combined in portfolios the venture capital funds demonstrated very low beta coefficients and very low covariance of returns among portfolio components when compared with portfolios of mutual funds to aid in interpreting these results we analyzed the discounts and premia from net asset value on the funds involved and compared them to thompson s findings regarding the contribution of such differences to abnormal returns we found that observed excess returns greatly exceed the level which would be explained by these differences the implications of these results for the practitioner are significant they essentially tell us that while investment in individual venture capital deals is considered to have high risk relative to potential return combinations of deals i e venture capital portfolios were shown to produce superior risk adjusted returns in the market place further these results show that further combining these portfolios into larger portfolios i e funds of funds provides even greater excess returns over the market index thus plausibly explaining the fund of funds approach to venture capital investment taken by many institutional investors while the funds studied are relatively small and are either small business investment companies or business development companies they serve as a useful proxy for the organized venture capital industry despite the fact that the bulk of the funds in the industry are institutionally funded private closely held limited partnerships which do not trade continuously in an open market these results demonstrate to investors the magnitude of the differences in risk adjusted total return between publicly traded venture capital funds and growth oriented mutual funds on an individual fund basis they also demonstrate to investors the power of the fund of funds approach to institutional involvement in the venture capital business because such an approach produces better risk adjusted investment results for the institutional investor it seems to justify a greater flow of capital into the business from more risk averse institutional investment sources this may mean greater access to institutional funds for those seeking to form new venture capital funds for entrepreneurs seeking venture capital funds for their young companies it may also mean a lower potential cost of capital for the financing of business venturing from the viewpoint of public policy makers interested in facilitating the funding of business venturing it may provide insight regarding regulatory issues surrounding taxation and the barriers and incentives which affect venture capital investment

venture capitalists decision policies across three countries an institutional theory perspective this paper examines the influence of economic institutions upon venture capitalists vcs decision policies we conducted policy capturing experiments on 119 vcs across three countries representing distinct economic institutions us mature market economy south korea emerging economy and china transitional economy results show that vcs in rules based market economies us rely upon market information to a greater extent than vcs in emerging economies korea and chinese vcs transitional economy weight human capital factors more heavily than either us or korean vcs findings suggest that although professional institutions may dictate which information is included in vc decision policies the extent to which that information is emphasized is determined partly by the economic institution in which the decision maker operates journal of international business studies 2007 38 691 708 doi 10 1057 palgrave jibs 8400291

schumpeterian competition in experimental markets abstract we report on a series of laboratory experiments that capture key elements of research and development r d rivalry the experimental environment has a small number of sellers who compete in terms of pricing and production decisions and in terms of cost reducing r d rewards for innovation depend on the profitability of product market competition the experiments capture a kind of dynamic schumpeterian competition there is a sharp contrast in experimental results between monopolies and four seller competitive markets aggregate r d is higher under competition than under monopoly and prices follow marginal cost reductions much more quickly under competition than under monopoly the paper examines market performance in the experiments and the sources of market performance problems

environmental policies and risk finance in the green sector cross country evidence abstract this paper provides a detailed description of venture capital investment in the green sector across 29 countries over the period 2005 2010 and identifies the role that policies might play in explaining observed cross country differences the analysis is based on a deal level database of businesses seeking financing combined with indicators of renewable policies and government r d expenditures the econometric analysis relates the number of deals and their volumes in a country to deployment and supply policies using count data and limited dependent variable tobit models the results suggest that both supply side policies and environmental deployment policies designed with a long term perspective of creating a market for environmental technologies are associated with higher levels of venture capital relative to more short term fiscal policies when focusing on policies related to renewable energy generation the results confirm the positive association of generous feed in tariffs fits with venture capital investment however in the solar sector excessively generous fits tend to discourage investment perhaps reflecting a lack of credibility over the longer term thus both sets of results point to long term policy stability sustainability and credibility as important policy features to ensure venture capital backing of innovative and risky ventures in a country s green sector

an analysis of compensation in the u s venture capital partnership abstract venture capital limited partnerships are an attractive arena to study cross sectional and time series variations in compensation schemes we empirically examine 419 partnerships the compensation of new and smaller funds displays considerably less sensitivity to performance and less variation than that of other funds the fixed base component of compensation is higher for younger and smaller firms we observe no relation between incentive compensation and performance our evidence is consistent with a learning model in which the pay of new venture capitalists is less sensitive to performance because reputational concerns induce them to work hard

the evaluation criteria of the venture capital investment activity an interactive assessment abstract in this paper the modelling of venture capital decision making is being attempted using a multicriteria decision support system the minora system based on the interactive use of the uta ordinal regression model first a review of the literature on the evaluation criteria for venture capital investment is outlined and the general methodology of financing firms is presented then a real world application of the minora system is developed this has been done in a french venture capital firm and concerned the assessment of an analytical evaluation model of firms