Round Of Investment Research Articles

Is Venture Capital Really a Local Business? Evidence from U.S. Cross-Border Investment

A collection of specialized pre- and post-investment practices help venture capital firms mitigate the tremendous information and agency problems associated with investment in early-stage startups. However, existing research sheds little light on if, and how, these practices change when investing across borders or the implications for investment performance. This study empirically examines cross-border impact on investment practice and the role local syndicate partners play in that process using a sample of 140,000 rounds of venture capital investment over a 30-year period. Results show little change in U.S. venture capital firm practice when investing across borders, and the addition of a local partner in cross-border deals is negatively associated with investment performance.

Emerging VC Industry: Do Market Expectations Play the Most Important Role in Project Selection? Evidence on Russian Data

The venture capital becomes more and more advanced and effective source of the innovation project financing, connected with a high-risk level. In the developed countries, it plays a key role in transforming innovation projects into successful businesses and creating the prosperity of the modern economy. In Russia, there are many necessary preconditions for creation of the effective venture investment system: the network of the public institutes for innovation financing operates; there is a significant number of the small and medium-sized enterprises, capable to sell production with good market potential. However, the current system does not confirm the necessary level of efficiency in practice that can be substantially explained by the absence of the accurate plan of action to form the national venture model and by the lack of experience of successful venture deals with profitable exits in Russian economy. This paper studies the influence of various factors on the venture industry development by the example of the IT-sector in Russia. The choice of the sector is based on the fact, that this segment is the main driver of the venture capital market growth in Russia, and the necessary set of data exists. The size of investment of the second round is used as the dependent variable. To analyse the influence of the previous round, such determinant as the volume of the previous (first) round investments is used. There is also used a dummy variable in regression to examine that the participation of an investor with high reputation and experience in the previous round can influence the size of the next investment round. The regression analysis of short-term interrelations between studied variables reveals prevailing influence of the volume of the first round investments on the venture investments volume of the second round. The most important determinant of the value of the second-round investment is the value of first–round investment, so it means that the most competitive on the Russian market are the start-up teams that can attract more money on the start, and the target market growth is not the factor of crucial importance. This supports the point of view that VC in Russia is driven by endogenous factors and not by exogenous ones that are based on global market growth. Keywords—Venture industry, venture investment, determinants of the venture sector development, IT-sector.

Patent Strategies of Technology Startups: An Empirical Study

How does a patent strategy affect a tech startup company’s growth? This is a fundamental question for technology entrepreneurs, investors, lawyers and the innovation system as a whole. In this study, I shed light on this issue by conducting an empirical analysis of the patenting strategies of technology startups, examining the relationship between a company’s patent applications and different events over the company’s life: rounds of investment received, company acquisition and closure. I provide the first comprehensive cross-industry analysis of this question, by analyzing the patent portfolios of United States startups listed in CrunchBase, a crowd-sourced registry of tech companies used by the startup industry. By looking into these companies’ public patent applications from the United States Patent and Trademark Office (USPTO) database between 2008 and 2012, I examine the patenting patterns of startups as they progress through funding rounds.Through a quantitative analysis, I find that companies based in California tend to patent more than in other states, and that companies that are venture-backed patent more than those who are not. I also unveil that most start-ups that patent file their first application before even receiving any reported funding. Moreover, I find that there is a significant positive relationship between patent protection, and receiving investment and being acquired. I further find that the number of patents (and not merely the fact that a company has patents or not) contributes to higher total funding. I finally observe that patenting early is also associated to higher funding, and that early may be more important for start-ups than what some views in venture capital may predict. I also conclude that while more patents are associated with higher funding, patents account for a relevant but small portion of a company’s success.The study provides novel insights on startup patenting strategies. It lays empirical groundwork on key circumstances under which patents can contribute to a startup’s growth, to provide important guidance to the legal and entrepreneurial communities.

Does Ownership Affect the Impact of Taxes on Firm Behavior? Evidence from China

Does ownership affect the way firms react to corporate taxation? This paper exploits key features of recent corporate tax reforms in China to shed light on the differential impact of taxation on firms under different ownership regimes including private, collectively owned and state owned companies. Employing a difference-in-difference estimation approach, we find that the increase in the deductibility of wage costs in 2006 has led to a sizable increase of wages per worker in private firms and an even larger increase in collective-owned enterprises. In contrast, there is no significant wage response in state owned enterprises. The decrease in the statutory tax rate for domestic firms since 2008 has induced collectivley owned enterprises and private firms to reduce debt while there is no significant response SOEs. Our results also suggest that the 2008 reform has reduced tax induced investment round tripping through Hong Kong, Macao and Taiwan.

More than Money: Venture Capitalists on Boards

We explore what factors influence whether venture capitalists receive a board seat and whether they add value to portfolio companies in which they invest. In a comprehensive sample of US-based and non-US-based companies, we find that a prior relationship with the founder, lead investor status, size of a venture capital firm’s network of managers and outside board members, and geographic proximity are positively correlated with taking a board seat in an investment round. The enactment of Sarbanes-Oxley (SOX), which increased the demand for independent and sophisticated directors, increased the probability of a venture capitalist receiving a board seat for US-based companies. We also find that successful and well-connected venture capitalists recruit more managers and outside board members for portfolio companies on whose boards they serve than their less successful and less connected counterparts do. We control for potential endogeneity by using the enactment of SOX as an instrument, which exogenously increased the demand for sophisticated venture capital directors. This study provides evidence to support the notion that venture capital investors are active investors who take actions to enhance portfolio firm value.

Forming cognitions by investing in a form: Frequent Flyer Programs in US air travel post-deregulation (1981–1991)

This paper addresses the link between action and cognition in markets. Increasing reliance on markets to co-ordinate economic activity across diverse contexts underscores the need to better understand how such coordination is achieved and how it can be changed. Our starting point is sense-making in formal organizations and markets. We argue that, whereas focusing on intersubjective agreements supported by frequent communication provides useful insights on coordination in formal organizations, coordination in markets cannot rely on these mechanisms alone. We borrow Thévenot's (1984) notions of form and investments in form to show how cognition and action are interrelated, and coordination achieved, in market settings. A form is characterized by its capacity to generate temporal and spatial equivalencies, allowing us to move from the particular (e.g., one exchange episode) to the generic (e.g., recurrent exchanges with particular types of customers). The development of a form helps construct common contexts of action which become the basis for coordinated actions.Our empirical case describes how the introduction of Frequent Flyer Programs created a new market form following the US Airline Deregulation Act (1978). Under the previous regulatory regime, the US Civil Aeronautics Board controlled routes and prices and airlines were limited to competing on frequency and quality of service. We show how successive rounds of investments by a variety of market actors helped articulate and consolidate the new market form over a 10-year period. Whereas action preceded cognition in the early stages, the gradual consolidation of the new form provided opportunities for market participants to gain reflexive distance and conjure up further ways to engage with the form.

New Metrics for Corporate Governance: Shifting Strategies of 'Activist' Investors in an Aging IPO Market

This paper examines initial public offerings (IPOs) as funding rounds for high-tech companies and exit mechanisms for investors, as well as the stringent corporate governance requirements that apply to newly listed companies in the growth stages of their development. Current investment trends seem to indicate that the IPO market is aging: More and more high-tech companies decide to remain private longer. Moreover, public market investors, such as hedge funds and mutual funds, increasingly invest in non-listed high-tech companies, making “IPO-like” investment rounds at massive valuations a normal phenomenon in the private market. These developments have led to the belief that we are in the next tech bubble. Fortunately, however, a new establishment amongst investors is emerging. They realize that in order to prevent the bursting of the bubble, they must collaborate with management and actively contribute to a company’s medium-term and long-term performance.

Understanding New Resource Projects

The surge in new resource projects has been a prominent feature of the recent strong performance of the Australian economy, with mining and energy investment accounting for almost one‐half of all private investment. Although the current round of resource investment has now peaked, as swings in the resource sector tend to repeat themselves, there is an ongoing need to carefully understand the available information sources. We use a specially developed panel of matched projects from three widely followed, but under‐researched, sources to analyze cost inflation, the biases, the degree of independence, and timeliness of each source. This information is of use to policy makers who have to closely monitor these developments, analysts following the resources sector, and project proponents wanting to know something about the typical cost profile of a project.

Valuation of Angel‐Backed Companies: The Role of Investor Human Capital

This article examines how angel investors' human capital affects the valuation of their portfolio companies, based on the pre‐money valuation of 123 investment rounds in 58 elgian companies. We argue that angel investors with higher levels of human capital will perceive a higher value‐creating potential in entrepreneurial opportunities through their ability to see more value‐creating options, a higher value‐adding potential post‐investment, and an enhanced legitimacy provided to the venture. Economic theories suggest they appropriate these rents through lower valuations, whereas stewardship theory suggests they share value creation with entrepreneurs. Consistent with stewardship theory, we show angel investors negotiate higher valuations when they have higher levels of human capital, more specifically if they studied longer, have a business degree, more entrepreneurial experience, or previous professional law experience. As such, our results contrast with the behavior of venture capital investors who negotiate lower valuations when they have more experience.

Does Ownership Affect the Impact of Taxes on Firm Behavior? Evidence from China

Does ownership affect the way firms react to corporate taxation? This paper exploits key features of recent corporate tax reforms in China to shed light on the differential impact of taxation on firms under different ownership regimes including private, collectively owned and state owned companies. Employing a difference-in-difference estimation approach, we find that the increase in the deductibility of wage costs in 2006 has led to a sizable increase of wages per worker in private firms and an even larger increase in collective-owned enterprises. In contrast, there is no significant wage response in state owned enterprises. The decrease in the statutory tax rate for domestic firms since 2008 has induced collectively owned enterprises and private firms to reduce debt while there is no significant response SOEs. Our results also suggest that the 2008 reform has reduced tax induced investment round tripping through Hong Kong, Macao and Taiwan.

Place, Capital Flows and Property Regimes: The Elites’ Former Houses in Beijing’s South Luogu Lane

Place is seen as a process whereby social and cultural forms are reproduced. This process is closely linked to capital flows, which are, in turn, shaped by changing property regimes. However, relatively little attention has been paid to the relationship between property regimes, capital flows and place-making. The goal of this paper is to highlight the role of changing property regimes in the production of place. Our research area is South Luogu Lane (SLL) in Central Beijing. We take elites’ former houses in SLL as the main unit of analysis in this study. From studying this changing landscape, we draw four main conclusions. First, the location of SSL was critical in enabling it to emerge as a high-status residential community near the imperial city. Second, historical patterns of capital accumulation influenced subsequent rounds of private investment into particular areas of SLL. Third, as laws relating to the ownership of land and real estate changed fundamentally in the early 1950s and again in the 1980s, the target and intensity of capital flows into housing in SLL changed too. Fourth, these changes in capital flow are linked to ongoing changes in the place image of SLL.

Australia, China and the Asia-Pacific: The Regulation of Investment Flows into Australia

Australia now has FTAs with investment provisions with ASEAN, Japan and Korea – the China agreement is now in its 20th round of negotiations and investment is, according to reports, a major issue. Australia is both a major exporter to developing countries and a recipient of substantial amounts of investment from developed and developing countries, particularly from China. It is also the subject of an investor-State arbitration (through the Hong Kong BIT). The paper addresses trade and investment regulations involving China, Australia and the Asia-Pacific. Although Australia cannot be placed in the category of a Southern country, its middle-level economy, and its role as a recipient of capital investment, presents some rather different issues to the developing-developed country analysis.

The Relevance of Financial versus Non-Financial Information for the Valuation of Venture Capital-Backed Firms

This study examines the relevance of financial and non-financial information for the valuation of venture capital (VC) investments. Based on a hand-collected data set on venture-backed start-ups in Germany, we investigate the internal due diligence documents of over 200 investment rounds. We document that balance sheet and income statement items capture as much economic content as verifiable non-financial information (e.g. team experience or the number of patents) while controlling for several deal characteristics (e.g. industry, investment round, or yearly VC fund inflows). In addition, we show that valuations based on accounting and non-accounting information yield a level of valuation accuracy that is comparable to that of publicly traded firms. Further analyses show that the industry-specific total asset multiples outperform the popular revenue multiples but lead to significantly less accurate results than those obtained from the more comprehensive valuation models. Overall, our findings might inform researchers and standard-setters of the usefulness of accounting information for investment companies and provide additional evidence to gauge the overall valuation accuracy in VC settings.

Which venture capital selection criteria distinguish high-flyer investments?

This study is based on an analysis of 64 ventures that were funded by German Venture Capital (VC) firms in order to identify VC selection criteria that distinguish non-high-flyer exits from high-flyer exits (exits that returned more than five times the VC's first-round money invested). Based on highly sensitive data, which are the venture's first-round business plan and the VC's return rate of the particular venture at exit, three high-flyer predictors were identified: company, product and market related. Logistic regression and discrimination analysis revealed that ventures with the following characteristics have the best chance of generating a VC high-flyer exit: targeting the business-to-customers market, being location in a metropolitan cluster and close to the lead investor, raising VC financed prior to the proof of concept level and having strategic partners raising the first round of VC investment. Ventures that have spun out from corporate institutions perform below average in terms of VC exit performance.

Startup valuation by venture capitalists: an empirical study

How to value a new venture is critical in entrepreneurial financing. This article develops an integrated theoretical framework to examine whether venture capitalists' valuation of a new venture can be explained by factors identified in the strategy theories as important to firm performance. Empirical results from the analyses of 184 rounds of early-stage venture capital investments in 102 new ventures support the central proposition that venture capitalists do take into consideration those factors that are important to firm performance in their valuation of new ventures. More specifically, this article finds that attractiveness of the industry, the quality of the founder and top management team, as well as external relationships of a new venture significantly and positively affect its valuation by venture capitalists when it seeks venture capital financing in its early stages of development. These empirical findings help to establish an initial linkage between the well-developed theories in strategic management and under-researched venture capital valuation practice. It brings more theoretical rigor to the venture capital investment literature by introducing a systematic approach to identify and measure factors important to new venture valuation. It explores a possibility to develop a supplementary method to value an early-stage new venture when extant valuation methods fail to yield consistent results because these methods require accounting information that a new venture typically cannot provide.

International entrepreneurship, venture capital networks, and reinvestment decisions

Prior research has established that venture capitalists (VCs) may face significant obstacles in financing ventures from emerging or transition economies. Such hurdles are usually attributed to the weaknesses of host countries’ institutional systems, especially regulatory. These institutional pitfalls may thwart VCs’ ability to exit a portfolio company leading to lower returns than expected. Developing this approach, we argue that exit strategies may also be difficult to execute when VCs expand into advanced economies although for different reasons. Thus, we show that both necessity entrepreneurship prevalent in emerging economies and opportunity entrepreneurship prevalent in advanced economies are positively associated with the number of investment rounds received by portfolio companies. In contrast, we establish that VC firm capital and network density are negatively associated with the number of rounds provided to portfolio companies across distinct institutional environments. This suggests that VCs may improve their performance by choosing an appropriate strategy to navigate unfamiliar institutional environments to minimize their liability of foreignness. Finally, we find that the interaction of VC capital and network density is positively related to the number of VCs’ investment rounds. Apparently, resource-rich VC firms may not fully realize the informational benefits of their dense “knowledge networks” due to insufficient collaboration with partners. At the same time, such VCs may no longer enjoy access to free information flows from prospective allies. Hence, network density and superior resources combined may lead to a greater number of investment rounds.

Innovation in Health Care: Time for a Gut Check

O the past several decades, advances in science and technology have yielded great strides in our ability to reat major medical conditions such as heart disease and cancer. he genesis of many of these technologies has been innovative iopharmaceutical, medical device, and diagnostic start-up ompanies often formed by physicians and researchers within cademic medical institutions and hospitals. These start-up companies often have taken on venture captal funding to complete product development and clinical rials. As a reward for successful clinical trials, these companies ere historically able to raise additional capital through muliple investment rounds and sometimes through an initial pubic offering of their stock to public investors. Indeed, there are several very successful examples of new herapies that followed this playbook in the area of gastroenerology including treatments for morbid obesity, hepatic enephalopathy, hepatitis C, reflux disease, and Barrett’s esophaus, all developed by small companies that effectively developed nd launched these products with the backing of high-risk nvestment capital and in concert with thought-leading physiians and inventors. Over the past 30 years, this ecosystem of physician, acaemia, start-up, and venture capital fostered a very successful ilieu for the advancement of innovation in health care and as yielded many new drugs and devices in use today by phyicians. Indeed, it has been shown previously that contrary to opular belief, venture capital returns from health care start-up nvestments actually have exceeded the returns from informaion technology and Internet investments since 2000 by a very ide margin.1 Today, however, we are at serious risk of dismantling this medical innovation ecosystem. There are 3 major reasons for this looming crisis in financing innovation in health care.

The different roles played by venture capital and private equity investors on the investment activity of their portfolio firms

Venture capital (VC) and private equity (PE) investors play different roles in their portfolio companies. We argue that this will translate in a recognizable difference in the investment sensitivity to cash flows of portfolio companies and its evolution after the first investment round. We hypothesise that VC, thanks to its ability in overcoming asymmetries in information, will entail a reduction in the financial constraints which hampered the growth of investee firms. We predict, instead, a greater dependency of investments to cash flow for PE-backed companies, driven by the renewed interest for growth of their management combined with higher leverage. We find evidence confirming our hypotheses on a large panel of Spanish unlisted firms in low and medium technology sectors, where both VC and PE firms are active.

Differences in Venture Capital Financing of U.S., UK, German and French Information Technology Start-Ups - A Comparative Empirical Research of the Investment Process on the Venture Capital Firm Level

Independent Venture Capital (IVC) has been paramount in the emergence of the information technology industry in both the United States and Europe. There are relatively few large global information technology companies in Europe. A widening gap is observable in the success rate of IVC backed start-ups between the U.S. and Europe in the information technology industry. This difference could be attributable to the differences in the venture capital financing of start-ups in the U.S., UK, Germany and France. This book deals with Differences in Venture Capital Financing of U.S., UK, German and French Information Technology Start-ups. The comparative analysis is conducted on a microeconomic level (managerial venture capital research), i.e. on the venture capital firm level. The differences are analyzed for the whole venture capital investment cycle: contact phase, initial screening phase, due diligence phase, deal structuring and negotiation phase, management phase - value adding services, and exit phase. The research framework model examines the following differences in the venture capital investment cycle: average size of investment in the seed stage, average size of investment in the start-up stage, aver-age size of investment in the growth stage, percentage of start-ups in pre-revenue phase at time of investment, percentage of start-ups not managed by founders but experienced managers, percentage of investment in start-ups with me-too products, percentage of mar-ket analysis due diligence done informal, typical liquidation preference multiple, percent-age syndicated exits that are outperformers, number of tranches per investment round, number of board seats per partner and the cash multiple X that defines an outperformer. The empirical research work is based on an extensive scientific online questionnaire with VCs in the U.S., UK, Germany and France. Before the online questionnaire was drafted, a preliminary face-to-face expert interview was conducted with 24 VCs in Silicon Valley, London, Paris, Hamburg, Berlin and Munich. The primary data collected in the questionnaire served as basis for quantitative parametric and non-parametric statistical analysis. The book is bespokenly written for decision makers in the venture capital industry in the U.S, UK, Germany and France; all entrepreneurs and professionals who want to under-stand the economics and mechanics of venture capital term sheet clauses; venture capital industry professionals; venture capital associations; researchers and venture capital government policy wonks. The dissertation paper can be purchased as a printed book or e-Book online. The printed book can be purchased on your local Amazon bookstore or on Grin. The e-Book is available on Grin.

The Framework for the Introduction of Transnational Corporations’ Low-carbon Foreign Investment in Zhejiang Province in China

Abstract Low-carbon Foreign Investment has gradually become the hot issue of the new round of international investment, and it is significant that Zhejiang introduces transnational corporations’ Low-carbon Foreign Investment. This paper shows that the framework for it should include motivation, influencing factors, introduction models, weighing the pros and cons of promoting LFI, policy option, and low-carbon industrial cluster should be the focus issue among its.