Opportunity Cost of Capital for Venture Capital Investors and Entrepreneurs

2004 ◽  
Vol 39 (2) ◽  
pp. 385-405 ◽  
Author(s):  
Frank Kerins ◽  
Janet Kiholm Smith ◽  
Richard Smith
Keyword(s):  
Venture Capital ◽  
Risk Premium ◽  
Opportunity Cost ◽  
Cost Of Capital ◽  
Early Stage ◽  
High Tech ◽  
Holding Period ◽  
Management Fees ◽  
One Year ◽  
Risk Free Rate

AbstractWe use a database of recent high tech IPOs to estimate opportunity cost of capital for venture capital investors and entrepreneurs. Entrepreneurs face the risk-return tradeoff of the CAPM as the opportunity cost of holding a portfolio that necessarily is underdiversified. For early stage firms, we estimate the effects of underdiversification, industry, and financial maturity on opportunity cost. Assuming a one-year holding period, the entrepreneur's opportunity cost generally is two to four times as high as that of a well-diversified investor. With a 4.0% risk-free rate and 6.0% market risk premium, for the sample average, we estimate the cost of capital of a well-diversified investor to be 11.4%, which equates to 16.7% before the management fees and carried interest of a typical venture capital fund. For an entrepreneur with 25% of total wealth invested in the venture, our corresponding estimate of cost of capital is 40.0%.

scholarly journals Endowments, fiscal federalism and the cost of capital for states: evidence from Brazil, 1891–1930

2010 ◽  
Vol 17 (1) ◽  
pp. 13-50 ◽  
Author(s):  
André C. Martinez Fritscher ◽  
Aldo Musacchio
Keyword(s):  
Risk Premium ◽  
Fiscal Federalism ◽  
Cost Of Capital ◽  
State Level ◽  
Export Prices ◽  
Brazilian Government ◽  
Per Capita ◽  
The Difference ◽  
Risk Free Rate ◽  
The Impact

There is a large literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign's bonds and the risk free rate). In this article, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the capacity to pay. We use a newly created database with state-level fiscal and risk premium data (between 1891 and 1930) to show that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g. rubber and coffee) ended up having higher revenues per capita and lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments (i.e. the fact that states cannot produce any commodity they want) and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralisation that the Brazilian government adopted in the constitution of 1891, which gave states the sole right to tax exports. We also run instrumental variable estimates using indices of export prices for each state. These estimates confirm our findings that states with commodities that had higher price increases had lower risk premia.

scholarly journals How to Determine the Cost of Capital for a Commercial Forestry

2022 ◽  
Vol 72 (1) ◽  
pp. 21-28
Author(s):  
Karlo Beljan ◽  
Denis Dolinar ◽  
Donald Hodges
Keyword(s):  
Risk Premium ◽  
Cost Of Capital ◽  
Stock Exchange ◽  
For Profit ◽  
Average Return ◽  
Risk Characteristics ◽  
Us Government ◽  
The Difference ◽  
Risk Free Rate ◽  
The Cost

Abstract This paper focuses on designing a methodological workflow to fill a knowledge gap for determining the cost of capital for commercial forestry projects. Upon reviewing the literature, a method to determine the cost of capital for profit-oriented forestry seems to be lacking. Accordingly, we selected and analyzed 42 companies that do businesses worldwide, are present on the stock exchange, and possess or lease forest land. Based on their business activities (growing forest, sawmilling, final production, paper production), these companies are classified into four subgroups. An algorithm has been devised using the concept of risk diversification and the capital asset pricing model for three groups of investors and four forestry subgroups. In doing so, the real risk-free rate (0.43%) is set as the difference between an average return on 10-year US government bonds (2.59% nominal) and the 10-year average US inflation rate (2.16%). The measure of forestry systematic risk (beta coefficient) varies between 0.83 and 1.41, while the equity (stock exchange market) risk premium is set to 6%. Unsystematic risk is determined using a process of mapping which takes into account all risk elements marked as relevant for the forestry sector. This approach provides results that reveal the cost of capital varying between 5.41% and 16.55% based on the current level of an investor's portfolio diversification and the risk characteristics of the forestry subgroup. Finally, the forestry companies meeting the investor's expectations are noted as preferable investment opportunities.

Strategic alliances, venture capital, and exit decisions in early stage high-tech firms

2013 ◽  
Vol 107 (3) ◽  
pp. 655-670 ◽  
Author(s):  
Umit Ozmel ◽  
David T. Robinson ◽  
Toby E. Stuart
Keyword(s):  
Venture Capital ◽  
Strategic Alliances ◽  
Early Stage ◽  
High Tech ◽  
Exit Decisions

Regarding issues of the concept of venture investment of innovative activity

2021 ◽  
pp. 30-35
Author(s):  
Hanna Sitchenko
Keyword(s):  
Venture Capital ◽  
Early Stage ◽  
Civil Law ◽  
Innovation Activity ◽  
High Tech ◽  
Negative Consequences ◽  
Venture Investment ◽  
Current State ◽  
Law Regulation ◽  
Legal Entities

Problem setting. The current state of scientific researching the issue of venture investment of innovation activity suggests that the presence of mixing in research of diverse concepts in the field of venture investment innovation, reflection in regulations of the uncoordinated categorical definitions, leads to negative consequences in the form of legal uncertainty or even conflict, that significantly slows down the process of attracting investment. Therefore, the idea is that the building effective mechanisms of civil law regulation of venture investment of innovation activity of Ukraine in order to accelerate the commercialization of innovations as a major driving force of economy during the spread of COVID-19. Analysis of recent researches and publications. O. M. Vinnyk, S. O. Vikhrov, S. V. Hlibko, T. S. Hudima, Y. M. Zhornokuy, D. V. Zadykhaylo, O. YU. Kampi, O. P. Podtserkovnyy, V. V. Poyedynok, V. Y. Polatay, O. E. Simson have been researched the subject of innovation and investment activities. Theirs scientific minds formed the basis of this research, but the author has analyzed the current state of legislation in the given field and concluded that, in terms of civil law regulation of legal relations aimed at investing in innovation sphere, does not meet the global vector of development. To date, no systematic approach to building a holistic regulatory framework for the basic principles of formation and regulation of the venture capital market in Ukraine. So in the conditions of legislation of civil law the issues of venture investment of innovation activity in Ukraine remains open for new discussion, and the relevance of this study is obvious. Target of research is to analyze and identify the concept of venture investment of innovation activity, to determine its essence and characteristics in the civil law aspect. Article’s main body. Venture capital investment, as an element of the national innovation system, ensures the effective implementation of venture capital in the activities of private legal entities operating in the field of innovation, on a corporate or contractual basis. The high risks of such investment are due to the novelty of commercialized innovations and the early stage of bringing new high-tech products to market, created on their basis, and are reduced using of special legal forms and tools. Venture investment of innovation activity as a civil law category is a type of activity of venture investors to acquire shares (shares in the authorized capital) of legal entities of private law, carrying out innovative activities at an early stage of bringing their innovative product to market or (and) its scaling, aimed at obtaining a high level of profit from the subsequent sale of these shares (shares), characterized by high risks and long-term return on invested capital. Conclusions and prospects for the development. Analysis of the concept under this research allows us to conclude that venture investment of innovation activity is special value to the economy nowadays, demonstrating high growth potential during the spread of COVID-19. Therefore, its legal definition and legislative consolidation, taking into account the essence and characteristics, is a particularly urgent need for today's civil law regulation.

Sign in / Sign up

Export Citation Format

Share Document