Why do venture capital firms exist? theory and canadian evidence

Amit, Raphael; Brander, James A.; Zott, Christoph

doi:10.1016/s0883-9026(97)00061-x

Cited by 576 publications

(361 citation statements)

References 24 publications

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“…The entrepreneur inhibits the role of a contracting agent and owns human capital, such as specific skills or knowledge, essential to realize the venture project (Hart & Moore, 1994). Furthermore, venture project's are characterized through a high fraction of intangible assets and growth opportunities giving great discretion to the action of the entrepreneur (Amit et al, 1998;Bergemann & Hege, 1998;Cornelli & Yosha, 2003;Burchardt et al, 2014;Gompers, 1995;Neher, 1999).…”

Section: Related Literaturementioning

confidence: 99%

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Moral Hazard in VC Finance: More Expensive than You Thought

2016

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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.

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Section: Related Literaturementioning

confidence: 99%

“…Since agency conflicts are the main reason for the existence of a VC industry (Amit et al, 1998), it is reasonable that they have a considerable impact on the realized returns. Cochrane (2005) shows that return patterns of VC portfolios characterize through a high alpha and a high market beta.…”

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confidence: 99%

Moral Hazard in VC Finance: More Expensive than You Thought

2016

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“…In consequence, the stock market has been largely used as a substitute for the VC market. As Cumming (2006, p.221) notes, "the comparatively lower quality of Canada's VC market As Amit et al (1998) posits, information asymmetries are the key to understanding the VC industry. To circumvent these asymmetries, VCs have developed particular tools and methods, which are briefly presented in Table 2 along with the equivalent (if any) in the public VC market.…”

Section: Description and Conceptual Analysis Of The Situationmentioning

confidence: 99%

The Canadian Public Venture Capital Market

Carpentier

Suret

2010

Venture Capital

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“…VCC seems to be best suited to deal with information asymmetries that typically exist for high-tech projects. Risk-pooling, risk-diversification and specialization are the most popular arguments to derive advantages of VCC over single investors (Chan 1983;Amit et al 1998). VCC syndicate a lot of investments to overcome the limitations in fund raising, to achieve sufficient diversification and to increase the quality of screening procedure (e.g.…”

Section: Conceptual Frameworkmentioning

confidence: 99%

“…Venture capital seems to be best instrument suited to reduce the funding gap of young high-tech firms (Amit et al 1998;Carpenter, Petersen 2002). Access to equity partners may have considerable economic benefits, measured by the number of new patent applications and firm performance (e.g.…”

Section: Introductionmentioning

confidence: 99%

The Birth of German Biotechnology Industry: Did Venture Capital Run the Show?

2004

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe answer the questions, how many firms acting in the modern German biotechnology industry are funded by venture capital companies (VCC) as well as equity funded by corporate investors. The theory suggests a high relevance of VCC as venturing partner of high-tech projects. In addition we argue that corporate investors are a venturing partner of firms with high-risk projects to a lower extent. Incumbents, however, are confronted with some opportunities in the low-risk area of the biotechnology industry to secure an optimal supply for the current product pipeline. Our empirical results emphasize a crucial importance of venture capital as financial resource for high-risk projects: whereas 42 percent of all healthcare developer in the early stage are venture-backed firms, only a small share of low-risk projects received venture capital. The results for corporate investors are reversible. Fewer high-tech projects and more low-risk projects compared to VCC are equity financed by corporate investors. The econometric analysis suggests that the observed pattern is mainly driven by the level of project risk and hence, supports all our hypotheses. JEL-Classification: G32, L21, C25Keywords: Biotechnology, Start-ups, Venture Capital, Discrete Choice Executive SummaryThe literature emphasizes the crucial importance of venture capital to reduce the funding gap of young high-tech firms carrying out a lot of R&D activities. In analogy, the development process of a new high-tech industry, i.e. the modern biotechnology industry, depends on the sufficient access to this financial resource. Our paper answers the question, how many firms of the German biotechnology industry are equity funded by venture capital companies (VCC) as well as how many firms have been successfully acquired corporate investors as venturing partners. Biotechnology offers an example of a recent booming high-technology industry, in which Germany gradually caught up with the leading countries in Europe.Beside the expected high relevance of VCC, theoretical arguments suggest that corporate investors avoid to be a venturing partner of firms with high-risk projects. Reasons for that are the higher risk-adversity of corporate investors, the higher attractiveness of alternative strategies such as collaborations, and the preferences of the biotechnology firms for VCC. On the contrary, incumbents are confronted with some opportunities in the low-risk area of the ...

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Why do venture capital firms exist? theory and canadian evidence

Cited by 576 publications

References 24 publications

Moral Hazard in VC Finance: More Expensive than You Thought

Moral Hazard in VC Finance: More Expensive than You Thought

The Canadian Public Venture Capital Market

The Birth of German Biotechnology Industry: Did Venture Capital Run the Show?

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