What Every Biotech Entrepreneur Needs to Know about VC Due Diligence

2012 ◽  
Vol 18 (2) ◽  
Author(s):  
Stephen M Sammut
Keyword(s):  
Venture Capital ◽  
Business Plan ◽  
Case Law ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Due Diligence ◽  
Special Edition ◽  
Venture Capital Firm ◽  
Good Opportunity ◽  
Business Plans

Due diligence, as it applies to venture capital, is actually imprecise. Origins of the term are based in banking case law. Due diligence to the attorney is more of a precise concept. A better term is “homework.” Better indeed, because the burden of this homework weighs far more heavily on the entrepreneur than on the venture capitalist. The odds of getting funded by a venture capital firm are somewhere between 50: and 100: 1. In most instances, the funding goes to companies that already have some connection into the community of venture capital funds. Does this mean that all others need not apply? That is hardly the case. Good venture capitalists know a good opportunity when they see it, but sometimes it is not always obvious. Either the business plan is flawed in strategy, format or content, or the due diligence process reveals a team totally unprepared to fulfill their own vision. Elsewhere in this special edition of JCB is an article on the business plan and the pitch book. This article teaches, in a manner of speaking, how business plans get read and pitches gets heard.

scholarly journals Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

2018 ◽  
Vol 2018 ◽  
pp. 1-13 ◽  
Author(s):  
Jiajia Chang ◽  
Zhijun Hu
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Maximization Problem ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Constant Elasticity ◽  
Constant Elasticity Of Substitution ◽  
Effort Level ◽  
Fairness Concerns ◽  
Venture Enterprise

The development of new venture enterprise is the result of joint efforts of entrepreneurs and venture capitalists who collaborate based on complementary resources. In this paper, we analyze a venture capital incentive contracting model in which a venture capitalist interacts with an entrepreneur who is risk neutral and fairness concerned, offering him an equity contract. We solve the venture capitalist’s maximization problem in the presence of double-sided moral hazard. Our results show that fairness concerns change the structure of the optimal contract. More importantly, we show that the solution to the contract regarding the optimal share given to the entrepreneur is nonlinear and is a fixed point between 0 and 1. Further, we simulate the model under the assumption that venture project’s revenue is a Constant Elasticity of Substitution (CES) function and obtain the following results. (1) When the two efforts are complementary, the venture capitalist’s effort does not monotonically decrease in the share allocated to the entrepreneur, while the entrepreneur’s effort does not monotonically increase in his share. (2) Relative to the benchmark case where the entrepreneur is fairness neutral, the optimal equity share allocated to the fair-minded entrepreneur is larger than 1/2, and as the degree of efforts complementarity increases, the optimal equity share tends to 60%. In this scenario, for a given efforts substitution parameter, the fair-minded entrepreneur provides a higher effort level than the venture capitalist.

CRITERIA FOR A SUCCESSFUL BUSINESS PLAN: PREFERENCES OF DIFFERENT FINANCING INSTITUTIONS

1996 ◽  
Vol 04 (02) ◽  
pp. 183-208
Author(s):  
TAN BENG KIM ◽  
JOANNE TAY
Keyword(s):  
Venture Capital ◽  
Commercial Banks ◽  
Business Plan ◽  
Study Data ◽  
Conservative Approach ◽  
Business Plans ◽  
Venture Capital Firms ◽  
Successful Business ◽  
The Government

A well-developed, well-written business plan is essential for entrepreneurs approaching banks or investors for funds. However, many entrepreneurs frequently underestimate the importance of a good business plan in increasing their chances of securing finance. This study aims to provide a better understanding of the criteria that different financing institutions in Singapore look for when assessing business plans. Such information can guide entrepreneurs in preparing their business plans and targetting different financing institutions. Fourteen institutions representing venture capital firms, commercial banks, finance companies and the government participated in this study. Data were collected through questionnaires and interviews. The results indicate general emphases on organisation and management, characteristics of the entrepreneur, and background and purpose of the proposed business. There is some indication that the criteria most highly emphasised will vary, depending on the type of financing institution, and the geographical and industry specialisation of the particular institution. In general, the participating institutions adopted a conservative approach which combined judgement and intuition.

scholarly journals The study of venture capital finance and investment behaviour in small and medium-sized enterprises

2012 ◽  
Vol 15 (1) ◽  
pp. 94-111
Author(s):  
Patmond Mbhele
Keyword(s):  
Economic Growth ◽  
Factor Analysis ◽  
Venture Capital ◽  
Entrepreneurial Activity ◽  
Venture Capitalists ◽  
Control Mechanisms ◽  
Due Diligence ◽  
Formal Control ◽  
Market Opportunities ◽  
Investment Behaviour

Small and medium-sized enterprises (SMEs) are often credited with innovative entrepreneurial practices and conceiving new market opportunities. Government has reinforced these positive economic externalities through policy programmes and designated support structures. Venture capital organisations often galvanise innovative knowledge by entrenching and sustaining nascent businesses through value-creating funding behaviours. In this way, the venture capital industry financially supports entrepreneurial activity for economic growth and governs and nurtures the growth of the SMEs. These show that the venture capital industry embraces value-creating opportunities on the basis of rational partnerships with enterprises that have limited track records and less formal control mechanisms. The tentative factor analysis findings suggest an integrated framework for the venture capital industry from the significant intercorrelations among the variables. The most important focus of this article, however, is its attempt to examine the behavioural traits of SMEs and venture capitalists regarding systematic finance and investment for inclusivity and due diligence.  

Rufus Rivers and Career Choices in Private Equity and Venture Capital Finance

2017 ◽  
pp. 1-21
Author(s):  
Steven Rogers ◽  
Pat Vaccaro ◽  
Scott T. Whitaker
Keyword(s):  
New York ◽  
Venture Capital ◽  
Private Equity ◽  
Career Choices ◽  
The Other ◽  
Venture Capitalists ◽  
Venture Capital Firm ◽  
Executive Search ◽  
Venture Capital Firms

Rufus Rivers, managing director and co-head of mezzanine investing at The Carlyle Group, is reviewing two employment offers he recently received. One came from RLJ Equity Partners, a private equity firm headquartered in the metropolitan Washington, D.C., area. The other came via Glocap Search, a New York-based executive search firm specializing in placing top private equity executives in premier venture capital roles. The Glocap recruiter had told Rivers that he had been selected as the leading candidate for a position with an established Boston-area venture capital firm that had several exciting investment prospects. In the next few days, Rivers needs to consider his personal and professional interests and make a decision: Should he go to Washington, go to Boston, or stay put—and on what terms?Learn about the different kinds of opportunities available to venture capitalists; Assess whether becoming venture capitalists themselves is worthwhile; Learn how venture capital firms offer positions and the terms under which joining a venture capital firm might make sense for them in their careers.

scholarly journals The failure to obtain VC financing in the pre-start-up phase: Evidence from the Portuguese context

2012 ◽  
Vol 43 (4) ◽  
pp. 45-53 ◽  
Author(s):  
J. Bilau ◽  
E. Couto
Keyword(s):  
Venture Capital ◽  
Public Policies ◽  
Venture Capitalists ◽  
Nascent Entrepreneurs ◽  
Business Plans ◽  
Start Up ◽  
Innovative Firms ◽  
Venture Financing

In this paper, we contribute to the literature on access to venture capital during the pre-start-up phase of innovative firms by identifying the reasons for failing to obtaining formal VC according to nascent entrepreneurs. The main reasons cited for not obtaining venture financing were the small size of the VC market and limited public policies to support venture capital participation. The sub-sample of nascent entrepreneurs who based their financing proposals on more complete business plans included “lack of interest of the venture capitalists in pre start-up phase investments” as the number one reason.

scholarly journals Equity crowdfunding and financial literacy of individual investors in Japan

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Masatoshi Fujii ◽  
Chie Hosomi ◽  
Yoshiaki Nose
Keyword(s):  
Financial Literacy ◽  
Information Disclosure ◽  
Private Equity ◽  
Business Plan ◽  
Fiscal Year ◽  
Individual Investors ◽  
Venture Capitalists ◽  
Due Diligence ◽  
Content Type ◽  
Equity Crowdfunding

PurposeThis study aims to fill the gap in previous research that focuses on the superficial aspects of equity crowdfunding (ECF) campaigns and financial practices by examining financial literacy aspects, such as due diligence and valuation, in terms of factors that influence Japanese individual investors' investments in ECF.Design/methodology/approachThe status of information disclosure in ECF campaigns is checked. In addition, the feasibility of the initial due diligence and valuation using this information is verified. Specifically, the lack of financial literacy hypothesis is developed and (1) expected market capitalization in the final fiscal year of the business plan and (2) expected returns on investment (IRR: internal rate of return) are estimated.FindingsECF campaigns in Japan disclose information equivalent to that obtained by professional venture capitalists. Analysis of the disclosed business plan allows for initial due diligence and valuation. By contrast, due diligence reveals that some projects are unlikely to be listed even if their business plans are met, and others have low IRRs. In addition, a stock acquisition rights project, in which even professional investors are unable to calculate IRRs, is completed at the same rate as a common stock project; this suggests that individual investors lack financial literacy.Originality/valueAnalyzing ECF from financial literacy aspects, such as due diligence and valuation, is unique. Such aspects are essential for private equity investments but have not been addressed in previous studies.

scholarly journals Assets need audiences: How venture capitalists boost valuations by recruiting investors to asset circles

2021 ◽  
Vol 7 (1) ◽  
pp. 1-19
Author(s):  
Dave Elder-Vass
Keyword(s):  
Venture Capital ◽  
Venture Capitalists ◽  
Financial Assets ◽  
Venture Capital Firm ◽  
Private Companies ◽  
Venture Capital Firms

Narratives and conventions have received considerable attention in recent discussions of the valuation of financial assets. Narratives and conventions, however, can only be effective to the extent that they attract and persuade audiences, and this article makes the case for paying more attention to those audiences. In particular, the article argues that financial assets can only be established as assets if there is a group of potential investors that has been persuaded to accept them as such: to take them seriously as potential investments. The article coins the term asset circles to refer to such groups and supports the argument with a discussion of venture capital and its role in the production of unicorns: private companies with extraordinary valuations. Venture capital firms may be thought of as value entrepreneurs, and much of the venture capital process is oriented towards constructing both value narratives for the companies they invest in and asset circles prepared to accept those value narratives. Their aim in these processes is a profitable exit, in which the venture capital firm converts its investment back into cash at a considerable profit through either an acquisition or a flotation.

scholarly journals Abusive Supervision Detection as Part of Venture Capital Due Diligence of Management

2017 ◽  
Vol 16 (1) ◽  
Author(s):  
David Blum
Keyword(s):  
Health Care ◽  
Venture Capital ◽  
Health Care Costs ◽  
Research Question ◽  
Abusive Supervision ◽  
Management Team ◽  
Venture Capitalists ◽  
Due Diligence ◽  
Lost Productivity ◽  
Care Costs

Abusive supervision (AS) costs U.S. businesses billions of dollars per year in lost productivity, increased absenteeism, and health care costs. To reduce these costs and to enhance the probability of a successful exist, independent venture capitalists (IVCs) need to be aware of the issue of AS among the management team during the due-diligence process. This study addresses a gap in literature related to IVCs being able to detect AS during due-diligence process of the management team. The research question was this: What tools, processes, and methods can IVCs use to detect AS during the due-diligence process of the management team? Four tools, processes, and methods were presented to help reduce the frequency of employee abuse and associated costs.

Can Venture Capital Be a Curse?

2010 ◽  
Vol 10 (1) ◽  
Author(s):  
George Kanatas ◽  
Christodoulos Stefanadis
Keyword(s):  
Social Welfare ◽  
Venture Capital ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Ipo Underpricing ◽  
Capital Services

Abstract We show that partnering with venture capitalists may be a curse to entrepreneurs in that it reduces their profits in the commercialization phase. Agents rationally infer that a likely reason an entrepreneur who has received managerial assistance (from a venture capitalist) refrains from a lucrative IPO and instead opts for an acquisition may be the low quality of his technology (which is unfixable), rather than of his management (which may be fixable). This leads to lower acquisition prices and greater IPO underpricing. From a social welfare standpoint, venture capital services are under-utilized and technologies are under-commercialized.

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