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Abstract:
We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC) financed companies. We describe the financial performance, line of business, point(s) of differentiation, non-human capital assets, growth strategy, top management, and ownership structure. The most striking finding is that firm business lines or ideas remain remarkably stable from business plan through public company. Within those business lines, non-human capital aspects of the businesses are more stable than human capital aspects. In the cross-section, firms with more alienable assets experience more managerial turnover suggesting that specific people becomes less critical as firms establish non-human assets. We obtain qualitatively similar results to those in our primary sample for all non-financial start-up IPOs in 2004 - both VC- and non-VC backed. This suggests that our main results are not specific to the presence of a VC or to the time period. We discuss how our results relate to theories of the firm and to VC investment decisions.

Entrepreneurship, Venture Capital, Theory of the firm

Abstract:
We study how firm characteristics evolve from early business plan to IPO to public company for 50 venture capital (VC) financed companies. We find that firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to the formation of alienable assets. We obtain similar results from an out-of-sample analysis of all 2004 IPOs indicating that our main results are not specific to VC-backed firms or to the time period. The results suggest that, at the margin, investors in start-ups should place more weight on investing in a strong business ("the horse") than on a strong management team ("the jockey"). We also discuss how our results inform theories of the firm.

Entrepreneurship, Venture Capital, Theory of the firm

Abstract:
We study the effect of the financial crisis that began in August 2007 on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. We find that corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address concerns about the endogeneity of firms’ finances to changes in investment opportunities, we measure these financial positions as much as four years prior to the crisis and confirm that we do not find similar results following placebo crises in the summers of 2003-2006. We also do not find similar results following the negative demand shock caused by the events of September 11. These effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent, suggesting that supply constraints may no longer have been binding. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that has not been emphasized in the literature.

Abstract:
We analyze the pricing and characteristics of club deal leveraged buyouts (LBOs) - those in which two or more private equity partnerships jointly conduct an LBO. We find that target shareholders receive approximately 10% less in club deals than in sole-sponsor LBOs. These results are robust to numerous controls for target and deal characteristics, including size, Q, and measures of risk, as well as time and industry fixed effects. The results are stronger before 2006, when club deals began to receive heightened media and government scrutiny. High institutional ownership in the target firm mitigates the club deal effect, suggesting that sophisticated institutional investors are able to bargain effectively with clubs. We find little to no support for benign motivations for club deals based on capital constraints, diversification motives, or the ability of clubs to obtain favorable debt amounts or prices. Overall, our findings are consistent with the view that club deals are detrimental to passive, dispersed shareholders of publicly-traded corporations, especially before 2006.

Abstract:
Almost one-third of actively managed, diversified U.S. equity mutual funds specify a size and value/growth benchmark index in the fund prospectus that does not match the fund's actual style. Nevertheless, these "mismatched" benchmarks matter to fund investors. Performance relative to the specified benchmark is a significant determinant of a fund's subsequent cash inflows, even controlling for performance measures that better capture the fund's style. These incremental flows appear unlikely to be rational responses to abnormal returns. The evidence is consistent with the notion that mismatched self-designated benchmarks result from strategic fund behavior driven by the incentive to improve flows.

Mutual Funds, Performance Evaluation, Flows, Incentives, Benchmarks

Abstract:
Researchers increasingly have used the two primary venture capital databases - VentureOne and Venture Economics - to study venture capital (VC) financings. These data are largely self-reported. In this paper, we compare the actual contracts in 143 VC financings to their characterizations in the databases. The databases exclude roughly 15% of the financing rounds. The Venture Economics database oversamples larger rounds and California companies while the financing rounds included in the VentureOne database exhibit no significant bias. The databases provide unbiased, but noisy measures of financing amounts and their valuations. The databases also are less successful in measuring milestone rounds. The VentureOne database oversamples valuations for highly valued firms even controlling for firm characteristics. We discuss the implications of these findings for researchers and practitioners.

venture capital, databases, investments

Abstract:
Using a large, new database of contractual provisions governing the allocation of cash flow rights between venture capitalists (VCs) and entrepreneurs, we investigate how contract design is impacted by VC abilities to monitor and provide value-added services to the entrepreneur. In doing so, this paper is the first to demonstrate that VC characteristics, in addition to portfolio company characteristics, have a significant impact on VC contract design in the U.S. We find that more experienced VCs, who have superior monitoring and value-added abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. This result is robust to extensive controls and several methods to account for endogenous selection effects. The relation between VC experience and downside protections is weaker when entrepreneurial agency problems are less severe and stronger when VC ownership is greater. The results, together with the existing literature, suggest that VCs with better governance abilities optimally focus less on obtaining downside protections, which are costly from a risk-sharing perspective, and more on upside payoffs and obtaining board representation during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.

Venture capital, Financial Contracting, Entrepreneurship

Abstract:
We study empirically how financial contracts evolve and are renegotiated as venture capital (VC)-backed companies secure new rounds of financing. Because VC contract designs vary considerably between companies according to their economic circumstances, it is plausible to expect that the contracts governing successive financing rounds of a quickly-evolving company should often be dissimilar. The data offer little support for this intuitive hypothesis. In fact, the majority of cash flow provisions in a new round contract are recycled from the previous round contract, even when the company has evolved substantially. Such recycling may be beneficial in typical situations because it alleviates information problems in negotiations and reduces the complexity of the company’s nexus of financial contracts (Fama, 1980). However, in some situations restructuring contract design may be necessary to entice investors to provide new capital. Consistent with debt overhang arguments (Myers, 1977), we show that venture capital contracts evolve to include more investor-friendly cash flow provisions when the valuation of the company has not increased since the previous round, when new investors join the new round, or when new round investors hold larger debt-like claims. Although major renegotiations of previous round contracts are rare, minor renegotiations appear to be more common and almost uniformly result in making the previous round contract more similar to the new round contract. Overall, our findings suggest that the tradeoff relevant for changing a company’s nexus of financial contracts is different from the tradeoffs relevant for the initial structuring of this nexus.

Venture capital, financial contracting, renegotiation, debt overhang

Abstract:
Working with a sizeable (greater than $15 billion in assets) anonymous money manager, we exogenously shift the supply of lendable shares for certain stocks by randomly making available for lending 2/3 of the stocks in the manager’s portfolio and withholding 1/3 of the stocks from the loan market. The lending program commenced in early September 2008 and the loans were recalled in mid-September 2008, with over $700 million of securities lent out at the peak of the study. During the lending (recall) period, returns to stocks randomly made available for lending were not lower (not greater) than returns to stocks randomly withheld from lending. Stocks randomly made available for lending experienced no differences in volatility, bid-ask spreads, or skewness than stocks randomly withheld from lending during either the lending or recall period. We find some evidence that loan supply increases volatilities and spreads for stocks with high short interest and expected loan spreads.

Abstract:
We study how firm characteristics evolve from early business plan to initial public offering to public company for 49 venture capital financed companies. The average time elapsed is almost 6 years. We describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Our analysis focuses on the nature and stability of those firm attributes. Firm business lines remain remarkably stable from business plan through public company. Within those business lines, non-human capital aspects of the businesses appear more stable than human capital aspects. In the cross-section, firms with more alienable assets have substantially more human capital turnover.

Abstract:
We study how firm characteristics evolve from early business plan, to initial public offering, to public company for 49 venture capital financed companies. The average time elapsed is almost six years. We describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Our analysis focuses on the nature and stability of those firm attributes. Firm business lines remain remarkably stable from business plan through public company. Within those business lines, non-human capital aspects of the businesses appear more stable than human capital aspects. In the cross-section, firms with more alienable assets have substantially more human capital turnover.

Entrepreneurship, theory of the firm, venture capital

Abstract:
We investigate whether mutual funds time their self-designated benchmark indexes. Using data on fund portfolio holdings, we consider two possible sources of timing attempts: variation in cash holdings and variation in the benchmark beta of the fund portfolio. The results are mixed. Inconsistent with timing, funds do not successfully time the benchmark by varying their cash holdings. If anything, funds are more likely to increase cash or maintain high levels of cash before positive, not negative, benchmark excess returns. At the same time, consistent with timing ability, changes in the benchmark betas of fund portfolios are positively associated with future benchmark excess returns at horizons of 3, 6, and 12 months. The relation is driven by changes in the benchmark beta of the equity portion of fund portfolios rather than changes in portfolio weights on equity.

Mutual Funds, Market Timing, Benchmarks, Cash