Browsing by Subject "Venture capital"

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Empirical essays on agency problems in venture capital
(2023) Koenig, Lukas; Burghof, Hans-Peter
In the first essay, we explore the potential agency conflict between limited partners and general partners in venture capital firms due to changes in investment style. Investment style refers to the characteristics of a venture capital funds portfolio, such as the portfolio companies stage of development, location, and industry. While investment style can significantly impact the risk and return profile of a fund, it is usually not explicitly agreed upon by limited and general partners. We argue that changes in investment style, known as style drifts, can reveal information about the risk-taking behavior of venture capitalists and present empirical evidence in support of this claim. To determine whether style drifts constitute an agency conflict, we consider two sets of hypotheses. The first set posits that style drifts are intentional decisions to take on more risk, potentially driven by incentives related to compensation or employment. The second set suggests that style drifts may occur because of competitive pressure and may not necessarily be indicative of an intent to increase risk. Our findings suggest that style drifts are likely to create an agency conflict, as the evidence supports the hypothesis that well-performing venture capitalists increase investment risk to benefit from higher compensation potential via carried interest when they feel confident, they will be able to raise a follow-on fund securing their base income via management fees. Additionally, we examine the impact of style drifts on individual investments and fund performance and find that overall, style drifts hurt a funds exit rate, indicating the potential for increased risk. In the second essay, we examine the relationship between venture capitalists and entrepreneurs, specifically focusing on the role of information asymmetry in the funding process. Using text classification and text mining techniques we analyze the content and level of detail in capital allocation plans provided by entrepreneurs to investors, which serve as a proxy for private informational updates that are typically not widely available. Our analysis shows that investors do consider the content and specificity of these updates when making valuation decisions and that both positive information signals and more detailed information are related to higher valuations. We also investigate the effect of the relative level of information asymmetry between venture capitalists and entrepreneurs on the value of these updates, finding that they are more impactful in situations where there is a higher level of information asymmetry. The results of our study have practical implications for entrepreneurs, as we find that the negative impact of negative information signals can be offset by providing highly specific information and that the value of an informational update is influenced by the existing level of information asymmetry. In the third essay, I explore the impact of university affiliations on the initial matching process between venture capitalists and founders, the involvement of the investor during the funding relationship, and the eventual startup performance and investment exit success. University affiliations can influence the funding relationship through two channels: first, attending a top university may serve as a signal of founder quality to venture capitalists, helping them to avoid adverse selection; second, shared alumni networks may establish trust and reduce information asymmetry between otherwise unknown individuals. Using a dataset of 42,101 investments involving 38,452 unique venture capitalists and founders, I find that educational ties between venture capitalists and founders have a positive effect on the funding relationship, including the initial matching, the level of involvement of the investor during the funding relationship, and the eventual startup performance and investment exit success. The effect of sharing an educational background between a venture capitalist and a founder is about five times larger than the effect of a founder attending a top university. Further, the results also show that educational ties are more valuable the more exclusive they are, and that redundant ties between the founding team and the investors have diminishing value for the investment decision.
Moral hazard in VC finance : more expensive than you thought
(2017) Tennert, Julius; Lambert, Marie; Burghof, Hans-Peter
Venture projects are fraught with exogenous market risk and endogenous agency risk. We apply a real options perspective to analyze the investment decision of the venture capitalist (VC) in this set-up. The solutions presented are conflictive: the VC reduces his exposure to exogenous risk by delaying investments to wait for informational updates (delay option), but he mitigates endogenous risk by advancing investments to discover entrepreneur’s effort. So far, papers focus on the optimal timing of investments considering independence of exogenous and endogenous risk. We show that interdependence of exogenous risk and endogenous risk exists. We find that endogenous risk prompts the VC to accelerate the discovery process when exogenous risk is high, and to abandon the delay option when it is most valuable.
Strategic alliances, venture capital, and their roles before IPOs and M&As
(2020) Brinster, Leonhard; Tykvová, Tereza
The research objects of this dissertation are strategic alliances, venture capital (VC), and their roles before initial public offerings (IPOs) and mergers and acquisitions (M&As) of biotechnology and pharmaceutical companies. Chapter 1 begins this dissertation with a general introduction and the motivation behind the research questions. Young and small businesses face several risks and difficulties, such as lack of access to finance. Highly innovative companies, therefore, often rely on VC finance. Firms offering VC provide not only financial capital, monitoring, and coaching, but also other useful resources and might encourage their portfolio companies to join strategic alliances. Such alliances can be beneficial for the portfolio companies because they provide new knowledge, access to scarce resources, or other synergies. In addition, engagement in one or many strategic alliances can have a positive signaling effect on outsiders, and thus, increase the probabilities of a successful exit (IPO or M&A). In Chapter 2, I analyze the role of connected VC firms in strategic alliances. This chapter is co-authored with Tereza Tykvová. A reviewed version of this chapter is published in the Journal of Corporate Finance. We study a new channel through which portfolio companies benefit from ties among venture capitalists. By tracing individual VC firms’ investment and syndication histories, we show that VC firms’ ties improve companies’ access to strategic alliance partners. While existing studies demonstrate that alliances are more frequent among companies sharing the same VC firm, we provide evidence that alliances are also more prevalent among companies indirectly connected through VC syndication networks. In addition, our results suggest that VC firms’ ties mitigate asymmetric information problems that arise when alliances are formed. Finally, we demonstrate that this type of alliance is associated with higher IPO probabilities. We also provide alternative explanations of alliance formation and address related endogeneity concerns. The research objective of the third chapter is to determine the role of strategic alliances in VC exits. This chapter is co-authored with Christian Hopp and Tereza Tykvova. A reviewed version of this chapter is published in Venture Capital. Chapter 3 contributes to a better understanding of the relationship between strategic alliances and VC exits. The recent empirical literature concludes that alliances improve the probability of successful exits for venture-backed companies. When we control for observed and unobserved heterogeneity in a cohort sample of companies, self-selection into alliance activity, and censoring, we find the effect to be smaller than evidenced in prior studies. Moreover, we confirm the positive effect of alliances only for IPOs and not M&As. These findings are consistent with the view that strategic alliances help companies certify their quality for potential buyers. Chapter 4 investigates the role of strategic alliances before M&As in more detail. This chapter is a single-authored manuscript by Leonhard Brinster. Based on a large sample of M&A deals, I estimate the role of different types of ties between companies. I distinguish related alliances into direct and indirect alliances. Related alliances provide access to more information and can reduce transaction costs by reducing the time from announcement to completion of the M&A deal. The reduction of such costs can lead to a more successful target selection and increase the transaction process efficiency of the M&A deal. This effect can be explained by trust-building, better access to private information, and certification through related alliances. The empirical results show a positive relationship between related alliances and the likelihood of an M&A. However, in contrast to other studies, I do not find statistically significant evidence that supports the hypothesis that alliances increase the post-M&A performance and that alliances are associated with higher announcement returns. Finally, Chapter 5 concludes the dissertation with a short summary of the main findings and an outlook for future research.
The phenomenon of corporate venture capital from an entrepreneurial finance perspective
(2018) Röhm, Patrick; Kuckertz, Andreas
The dissertation sheds light on several aspects of the corporate venture capital (CVC) phenomenon, and thereby contributes to the ongoing development of the research field as such. In addition to a structural literature review (Chapter 2), two studies (Chapter 3 and Chapter 4) with a special focus on the motivational drivers within the CVC dyad and two further studies (Chapter 5 and Chapter 6) were conducted. First, the investment motivation is observed at the CVC level—investigating how CVC units interpret their mission as delegated by the corporate mother. And thereby going beyond the well-established “either-or approach” of previously-published articles by focusing on the continuum between the financial and strategic investment motivation of CVC units (Chapter 3). Second, the study presented in Chapter 4 applies the framework of exploration and exploitation to scrutinize the interplay of corporate venture capital investments and subsequent startup acquisitions. The final two articles then address the application of new approaches in the context of CVC research. On the one hand in stimulating the use of isomorphic tendencies in the CVC context, and on the other hand in developing a data-cleaning procedure to enable future scholars to achieve academic rigor by identifying CVC units among the data records of information providers.
Where entrepreneurship and finance meet : startup valuation and acquisition in the venture capital and corporate context
(2018) Köhn, Andreas; Kuckertz, Andreas
The purpose of this dissertation is to examine the underlying determinants of startup valuation and startup acquisition in the venture capital (VC) context, with particular focus on the role of corporate venture capital (CVC). The first study—Chapter 2—titled “The determinants of startup valuation in the venture capital context: A systematic review and avenues for future research” is a systematic review of the literature on empirically examined determinants of startup valuations in the VC context. It compiles and organizes the determinants examined in 58 selected papers in an integrative framework. This framework shows that startup valuations in the VC context are shaped by factors related to three levels, namely startup, venture capitalists, and the external environment. Moreover, the review process makes it possible for the study to highlight academic voids and to outline promising paths for future research. In the second study—Chapter 3—“Exploring the differences in early-stage startup valuation across countries: An institutional perspective”, fuzzy-set qualitative comparative analysis (fsQCA) across a sample of 13 countries is applied to explore the driving factors of the institutional setting in combination with a country’s innovativeness determining high and low early-stage startup valuations across countries. Overall, the study identifies five configurations; two configurations explain the outcome of high early-stage startup valuations, and three configurations explain the outcome of low early-stage startup valuations across countries. By applying fsQCA, the study also highlights the benefits of a configurational approach to exploring the institutional determinants in combination with a country’s innovativeness underlying early-stage startup valuations in the VC context. The third study—Chapter 4—titled “A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation” combines explorative research (computer-aided text analysis and cluster analysis) and theory-testing (hierarchical linear modeling) methods to disentangle the different types of the motivation underpinning corporate venture capitalists’ (CVCs) investments, and their impact on startup valuations. In its explorative part, the study identifies four types of CVCs’ investment motivation: financial, strategic, unfocused, and analytic. In its theory-testing part, the results show that CVCs with a strategic investment motivation assign significantly lower startup valuations, while CVCs with an unfocused investment motivation assign significantly higher valuations than their peers having an analytic motivation. Hence, the study’s findings stress the heterogeneity of CVCs, thereby moving beyond the dominant black and white approach of the current academic discourse that labels CVCs as either strategic or financial. The fourth study—Chapter 5—titled “From investment to acquisition: The impact of exploration and exploitation on CVC acquisition” forms a bridge to the previous study by investigating the interplay of CVC investments and startup acquisitions drawing on the framework of exploration and exploitation. The study exploits a unique and diligently constructed dataset to shed light on the phenomenon of CVC acquisitions (i.e., a corporate mother acquiring a startup funded through its CVC unit) using computer-aided text analysis and logistic regression. The findings show that corporate mothers with a greater degree of explorative (exploitative) orientation are more (less) likely to engage in a CVC acquisition; and that this effect is negatively (positively) moderated by the extent of product market relatedness between startup and the potential acquirer. Taken as a whole, this dissertation is interested in the hitherto empirically studied determinants influencing startup valuations in the VC context; how the institutional setting affects early-stage startup valuations; the differing investment motivations of CVCs and their impact on the startup valuations assigned; and the underlying drivers of CVC acquisitions. To address these aspects, the dissertation draws on multiple streams of academic literature and various analytical methods. In doing so, this dissertation provides new and important insights that enhance the understanding of the entrepreneurial process by painting a more complete picture of the factors affecting the valuation and acquisition of startups in the VC context. Notwithstanding the dissertation’s contributions, it also discusses its limitations in outlining promising paths for future research. In sum, this dissertation can clearly serve as a door opener for future research seeking to further illuminate these under-researched, but crucial events in the entrepreneurial process.