Coordination Frictions in Venture Capital Syndicates

2019 ◽  
pp. 351-371
Author(s):  
Ramana Nanda ◽  
Matthew Rhodes-Kropf
Keyword(s):  
Asymmetric Information ◽  
Venture Capital ◽  
Cash Flow ◽  
Agency Problems ◽  
Future Research ◽  
Extensive Literature ◽  
Start Up ◽  
Venture Capital Firms ◽  
Cash Flow Rights

An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a start-up typically does not have just one investor, but several venture capital investors that come together in a syndicate to finance a venture. This chapter therefore argues for an expansion of the standard perspective to also include frictions within venture capital syndicates. Put differently, what are the frictions that arise from the fact that there is not just one investor for each venture, but several investors with different incentives, objectives, and cash flow rights who nevertheless need to collaborate to help make the venture a success? The chapter outlines the ways in which these coordination frictions manifest themselves, describes the underlying drivers, and documents several contractual solutions used by venture capital firms to mitigate their effects. The chapter’s broader perspective provides several promising avenues for future research.

scholarly journals Private equity and venture capital in South Africa: A comparison of project financing decisions

2013 ◽  
Vol 16 (3) ◽  
pp. 258-278 ◽  
Author(s):  
David Portmann ◽  
Chipo Mlambo
Keyword(s):  
South Africa ◽  
Venture Capital ◽  
Private Equity ◽  
Venture Capitalists ◽  
Project Financing ◽  
Financing Decisions ◽  
Start Up ◽  
Risk Appetite ◽  
Investment Opportunities ◽  
Venture Capital Firms

This paper investigates the manner in which private equity and venture capital firms in South Africa assess investment opportunities. The analysis was facilitated using a survey containing both Likert-scale and open-ended questions. The key findings show that both private equity and venture capital firms rate the entrepreneur or management team higher than any other criterion or consideration. Private equity firms, however, emphasise financial criteria more than venture capitalists do. There is also an observable shift in the investment activities away from start-up funding, towards later-stage deals. Risk appetite has also declined post the financial crisis.

When Do Venture Capital Firms Learn from Their Portfolio Companies?

2005 ◽  
Vol 29 (4) ◽  
pp. 517-535 ◽  
Author(s):  
Dirk De Clercq ◽  
Harry J. Sapienza
Keyword(s):  
Venture Capital ◽  
Prior Experience ◽  
Secondary Data ◽  
Interview Data ◽  
Future Research ◽  
Curvilinear Relationship ◽  
Negatively Associated ◽  
Linear Fashion ◽  
Behavioral Theories ◽  
Venture Capital Firms

In this study, we examine when venture capital firms (VCFs) learn from their portfolio companies (PFCs). Relying primarily on learning and behavioral theories, we develop hypotheses regarding the effects of prior experience, knowledge overlap, trust, and PFC performance on learning by VCFs. We use a combination of primary and secondary data from 298 U.S.–based VCFs to test the hypotheses. Interview data are used to illuminate the results and to guide our discussion of implications.  Many of our results were surprising. For example, we found that the VCF's overall experience is negatively related to VCF learning, and we found that trust in VCF–PFC dyads is also negatively associated with VCF learning. Whereas we expected to observe a curvilinear relationship between knowledge overlap and learning, we found that lower levels of knowledge overlap were associated with greater learning in a linear fashion. Finally, we found that VCFs perceive greater learning to occur in higher–performing PFCs. We discuss the limitations and implications of our findings and also suggest avenues for future research.

Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts

2015 ◽  
Vol 50 (3) ◽  
pp. 349-375 ◽  
Author(s):  
Ola Bengtsson ◽  
Berk A. Sensoy
Keyword(s):  
Venture Capital ◽  
Cash Flow ◽  
Poor Performance ◽  
Venture Capitalists ◽  
Company Performance ◽  
Financing Frictions ◽  
Cash Flow Rights

AbstractWe study the evolution and renegotiation of the cash-flow rights that venture capitalists (VCs) obtain in their portfolio companies. When company performance between financing rounds is poor, subsequent contracts contain stronger VC cash-flow rights, and existing VCs tend to either give new VCs senior claims or forfeit their existing rights altogether. These results are consistent with the importance of financing problems between different VCs and with theory predicting that financing frictions worsen with poor performance. A consequence is that VC cash-flow rights are frequently significantly diluted before exit, implying that VC investments are riskier than previously estimated.

Venture Capital as an Alternative Means to Allocate Capital: An Agency-Theoretic View

1996 ◽  
Vol 20 (2) ◽  
pp. 19-29 ◽  
Author(s):  
Edgar Norton
Keyword(s):  
Venture Capital ◽  
Agency Problems ◽  
Agency Cost ◽  
Capital Allocation ◽  
Future Research ◽  
Capital Investments ◽  
Allocation Process ◽  
Alternative Means ◽  
Venture Capital Investments

The venture capital process is one of many methods of capital allocation. In a capital allocation process, investors acquire funds; potential investments are Identified and reviewed; Investment terms are negotiated; the investment must be monitored and ultimately harvested. The capital allocation process is full of potential agency problems. The venture capital process In particular provides a rich setting for the analysis of agency cost issues. This paper reviews the capital allocation process that occurs in venture capital investments. Suggestions are made for future research to study the role that agency cost issues play In the venture capital process.

scholarly journals The effects of corporate governance on capital structure in Taiwanese corporations after controlling for the heterogeneity of industries and firm size

2008 ◽  
Vol 6 (Special Issue 1) ◽  
pp. 35-47
Author(s):  
Lie-Huey Wang ◽  
Hsien-Chang Kuo
Keyword(s):  
Corporate Governance ◽  
Capital Structure ◽  
Board Of Directors ◽  
Cash Flow ◽  
Agency Problems ◽  
Voting Rights ◽  
Debt Financing ◽  
The Board Of Directors ◽  
Seat Control ◽  
Cash Flow Rights

Since the MM theory, scholars have discussed capital structure issues from the perspectives of agency problems in corporate governance. Corporate governance has been seen as the means to reducing the agency costs produced by aligning the interests of management and shareholders, and the incentive for the management to engage in opportunistic behavior has been influenced by the firm’s ownership and board of director structures. Previous studies, however, focus on traditional financial factors and neglect the debt and equity agency problems triggered by corporate governance and their possible influences on capital structure decisions. The sample used in this study consists of 317 firms listed on the Taiwan Stock Exchange from 1998 to 2007. By controlling for the heterogeneity of industries and firm size, our models incorporate the cash flow rights-voting rights-seat control divergence, the ownership structure, and the structure of the board of directors to examine the effects of corporate governance on the firm’s capital structure. The results show that, when the divergence between cash flow rights and seat control is lower or when the divergence between voting rights and seat control is higher, the controlling shareholders can either control the board of directors to better monitor the firm or exhibit a preference for debt financing based on entrenchment motives. Further analysis indicates that blockholders prefer lower debt financing and do not expropriate minority shareholders. Financial institutional shareholders function through their provision of monitoring and the certification of debt for technological firms and can decrease the firms’ debts. The management in the technological industry firms prefers debt financing in order to obtain agency-related benefits. While directors in traditional industries or large firms might use personal or firm debt to tunnel the firm’s assets, the function of independent directors in technological firms or large firms of lowering debts in order to reduce the firm’s bankruptcy risks is more evident.

Outreach Networks: First Venture Round

2017 ◽  
pp. 1-7
Author(s):  
Susan Chaplinsky
Keyword(s):  
Venture Capital ◽  
Cash Flow ◽  
Private Equity ◽  
Early Stage ◽  
Venture Capitalist ◽  
Entrepreneurial Finance ◽  
Discounted Cash Flow ◽  
Start Up ◽  
Excel File

OutReach Networks is taught in Darden's Entrepreneurial Finance and Private Equity elective. A teaching note for this case is available for instructors as well as an Excel file for student analysis. This introductory case explores the venture capital (VC) and discounted cash flow (DCF) methods of valuing early-stage companies. OutReach Networks is an unusual start-up company in that it was profitable early in its development and did not have to seek VC funding to support its growth. The company has grown quickly and may soon be a candidate for an IPO. In November 2011, an experienced venture capitalist approaches the founder with an offer to invest $30 million in exchange for 30% of the company. While the founder sees some benefit from the VC's experience in preparing the firm for an IPO and the funding enabling it to scale more quickly, he cannot understand how the VC has arrived at this offer. The founder believes the funding should be worth no more than 15% of his firm. Potential reasons for the disagreement over the valuation are (1) differences in the founder's and investor's view of the company's risk, (2) disagreement over the appropriate set of comparable companies, and (3) differences in the methods used to calculate the percentage equity stake. The case is appropriate for use in courses covering entrepreneurial finance or venture capital.

scholarly journals Venture Capital Best Practice Strategies To Reduce Economic Uncertainty In Biofuel Investing

2014 ◽  
Vol 3 (1) ◽  
pp. 25-30
Author(s):  
David A. Blum
Keyword(s):  
Venture Capital ◽  
Best Practice ◽  
Net Present Value ◽  
Primary Source ◽  
The United States ◽  
Internal Rate Of Return ◽  
Economic Uncertainty ◽  
Renewable Fuel ◽  
Start Up ◽  
Venture Capital Firms

Independent venture capital firms require actionable economic best practice strategies to reduce uncertainty when investing in biofuel firms. Biofuels derived from plant oils are a primary source of renewable fuel energy replacing petrol diesel. Investing in biofuels is fraught with high capital start-up costs and inaccurate portfolio firm valuation models lessening venture capital personnel ability to achieve higher levels of successful biofuel firm exits. The gap in literature addressed in this paper is venture capital best practice strategies to reduce economic uncertainty in biofuel firms investing are an unexplored phenomenon. Reducing and prospering from the effects economic uncertainty requires venture capital firms to implement best practice strategies. This paper provides venture capital firms with best practice strategies to reduce economic uncertainty when in investing in biofuel firms. Utilizing multiples, net present value, internal rate of return, and venture capital model for establishing a valuation price for portfolio firms are actionable economic best practice strategies addressed in this paper. The best practice strategies presented in this paper might reduce economic uncertainty, increase the number of successful exists, and encourage increased funding of biofuel energy firms, contributing to cleaner and healthier communities throughout the United States.

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