The relationship between governance structure and risk management approaches in Japanese venture capital firms

Abstract

This paper attempts to understand what drives Japanese venture capital (JVC) fund managers to select either active managerial monitoring or portfolio diversification to manage their firms' investment risks [J. Bus. Venturing 4 (1989) 231]. Unlike U.S. venture capitalists that use active managerial monitoring to gain private information in order to maximize returns [J. Finance 50 (1995) 301], JVCs have traditionally used portfolio diversification to attenuate investment risks [Hamada, Y., 2001. Nihon no Bencha Kyapitaru no Genkyo (Current State of Japanese Venture Capital), Nihon Bencha Gakkai VC Seminar, May 7]. We found that performance pay is positively related to active monitoring and that management ownership is positively related to active monitoring and negatively related to portfolio diversification. The managerial implication of our study is that venture capitalists should be as concerned about the structure of their incentive systems for their fund managers as they are for their investee-firm entrepreneurs. Agency theory says that contingent compensation is a self-governing mechanism for individual effort that is difficult to measure and verify. When properly applied, equity ownership and performance-based pay can have powerful influencing effects on the strategic choices of managers. D

Moving forward: Balancing the financial and emotional costs of business failure

“…In such a case personal collateral is equivalent to the entrepreneur investing their own equity in the business because they are placing their personal funds at risk (Thorne 1989), and also being exposed to personal losses if the business fails. Third, equity investors are highly influenced by the knowledge of the ownermanager and often turn to an entrepreneur's track record for information to make such determinations (MacMillan et al, 1985) as well as the entrepreneur's level of "personal" equity in the business (Prasad et al, 2000;Yoshikawa et al, 2004). The owner-manager's level of personal equity in the business is believed to signal the quality of the business to investors (especially if this personal equity represents a substantial portion of the owner-manager's personal wealth) (Prasad et al, 2000) and reassure investors that the owner-manager will exert maximal effort to achieve business success.…”

How experience and perceptions shape risky behaviour: Evidence from the venture capital industry

“…Prior research dealing with risk in the venture capital setting has focused separately on the determinants of risk in the investment portfolio and postinvestment procedures to manage this risk (Fiet, 1995a, b;Busenitz et al, 2004;Yoshikawa et al, 2004). The risks faced by venture capitalists can be divided into market and agency risks (Fiet, 1995a, b).…”

“…Prior research dealing with risk in the venture capital setting has separately focused on the antecedents of venture capitalists' risk-taking behaviour on the one hand and post-investment procedures to manage investment risk on the other hand (Fiet, 1995a, b;Busenitz et al, 2004;Yoshikawa et al, 2004). Therefore, interrelations between the antecedents of risk taking, investment decisions and risk reduction strategies still remain a largely unexplored territory.…”

Developing the selection and valuation capabilities through learning: The case of corporate venture capital

“…Indeed, by making the CVC investment in different stages, a CVC program may obtain the diversity of experience that can help it to formulate a complete picture of the portfolio company's life cycle, leading to better judgments on investment decisions. This may be one reason why some CVC programs have tended to diversify their portfolios by pooling funds or syndicating with independent VCs (e.g., Yoshikawa et al, 2004). In addition, diverse industry experience helps to generate nuanced inferences about technological trends and potential returns in different markets, particularly important when corporate investors attempt to explore new technology/business territories.…”