Venture Capital Contracting and the Valuation of High-technology Firms

by McCahery, Joseph A.; Renneboog, Luc

• ISBN13: 9780199270132
• ISBN10: 0199270139
• Format: Hardcover
• Copyright: 2004-03-25
• Publisher: Oxford University Press

Summary

Venture capitalists are specialized intermediaries that channel capital to firms and professional services to companies that might otherwise be excluded from the corporate debt market and other sources of private finance. Venture capital financing is used to invest mainly in small and mediumsize firms with good growth and exit potential. Typically, venture capital firms concentrate in industries with a great deal of uncertainty, where the information gaps among entrepreneurs and venture capitalist are commonplace. Venture capital firms are active in sectors with a high informationalopacity and agency costs. These ventures are identified as financially constrained. Start-up firms rely on venture capital as one of their main sources of funding. Recent empirical research has found that the effect of venture capital on the success of these ventures is considerable. The value ofventure capital investment is borne out by the figures which show that venture capital backed-firms grow on average twice as fast as those not backed by venture capital firms.The debate on the development of an efficient venture capital market has forced us to consider which financial instruments, legal rules, labour laws, contracts, and other institutional structures are necessary to create a venture capital market. The contributions to this book have offered insightson the structure of venture capital fund financial contracts, the screening, monitoring and staging of potential investments, the importance of partnership and other legal business forms for investors and start-up firms, the funding of innovation, the valuation of investments, and the exit routesfor venture capitalists. The essays in this volume, which draw upon international evidence and ideas from financial economics and law, contribute to further research on the relationship between venture capitalists and entrepreneurs.This collection analyses the main legal and contracting structures in the venture capital cycle. Exploring the differences between the US and European venture capital markets, it focuses on diverse organizational and contractual techniques, such as staged finance, convertible securities, boardfunctions and other forms of control, and the role of exit. Theoretical chapters examine the valuation of entrepreneurial firms and the liquidiation preference in convertible securities. Finally, the book assesses the importance of the IPO market for entrepreneurs, investors and venture capitalistsalike.

Author Biography

Joseph McCahery is Professor of International Business Law at the Department of Private Law of Tilburg University, and research fellow at the Center for Company Law (Tilburg), Tilburg Center for Law and Economics and the European Corporate Governance Institute (Brussels). He holds a visiting appointment at Leiden University Faculty of Law. He graduated from the University of Michigan (B.A. Hons), City University of New York Law School (J.D.), and from Warwick University with a PhD in law. His research interests are banking, corporate law, corporate finance, securities regulation, and tax. Luc Renneboog is Associate Professor at the Department of Finance of Tilburg University, and research fellow at the CentER for Economic Research (Tilburg) and the European Corporate Governance Institute (Brussels). He held appointments at the Catholic University of Leuven (Belgium) and Oxford University, and visiting appointments at London Business School, European University Institute (Florence), Venice University and CUNEF (Madrid). He graduated from the University of Leuven with degrees in management engineering (MSc) and in philosophy (BA), from the University of Chicago with an MBA, and from the London Business School with a PhD in financial economics. His research interests are corporate finance, corporate governance, dividend policy, insider trading, financial distress, law and economics and the economics of art.

Table of Contents

List of Figures	ix
List of Tables	xi
List of Abbreviations	xv
List of Contributors	xvii
Venture Capital Financing of Innovative Firms: An Introduction	1	(28)
Joseph A. McCahery
Luc Renneboog
Part I. Venture Capital Financing
Venture Capital and the Structure of Capital Markets: Banks versus Stock Markets	29	(31)
Bernard S. Black
Ronald J. Gilson
Going Public and the Option Value of Convertible Securities in Venture Capital	60	(13)
Thomas Hellmann
Evidence on the Venture Capitalist Investment Process: Contracting, Screening, and Monitoring	73	(10)
Steven N. Kaplan
Per Stromberg
The Value of Benchmarking	83	(25)
Dirk Bergemann
Ulrich Hege
Venture Capital on the Downside: Preferred Stock and Corporate Control	108	(25)
William W. Bratton
Part II. Innovation, Law, and Finance
Law, Innovation, and Finance	133	(29)
John Armour
Business Organization Law and Venture Capital	162	(26)
Joseph A. McCahery
Erik P. M. Vermeulen
Venture Capital and Innovation: Clues to a Puzzle	188	(39)
Samuel Kortum
Josh Lerner
Part III. Valuation of High-tech Firms
Real Options: Principles of Valuation and Strategy	227	(24)
Han T. J. Smit
Lenos Trigeorgis
The Market Valuation of Biotechnology Firms and Biotechnology R&D	251	(30)
John R. M. Hand
Internet Portals as Portfolios of Entry Options	281	(16)
Enrico Perotti
Silvia Rossetto
The Dotcom Premium: Rational Valuation or Irrational Exuberance?	297	(21)
Michael Cooper
P. Raghavendra Rau
The Liquidation Preference in Venture Capital Investment Contracts: A Real Option Approach	318	(21)
Didier Cossin
Benoit Leleux
Entela Saliasi
Part IV. Venture Capital Exits and IPOs
The Extent of Venture Capital Exits: Evidence from Canada and the USA	339	(32)
Douglas J. Cumming
Jeffrey G. MacIntosh
Greenhorns, Yankees, and Cosmopolitans: Venture Capital, IPOs, Foreign Firms, and US Markets	371	(25)
Edward B. Rock
Lock-in Agreements in Venture Capital-backed UK IPOs	396	(41)
Susanne Espenlaub
Marc Goergen
Arif Khurshed
Luc Renneboog
The Effect of Market Conditions on Initial Public Offerings	437	(27)
Raghuram Rajan
Henri Servaes
The Rise and Fall of the European New Markets: On the Short-and Long-run Performance of High-tech Initial Public Offerings	464	(29)
Marc Goergen
ArifKhurshed
Joseph A. McCahery
Luc Renneboog
Author Index	493	(6)
Subject Index	499