Essays on the valuation and syndication of venture capital investments

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Doctoral thesis (monograph)
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Doctoral dissertations / Helsinki University of Technology, Department of Industrial Engineering and Management, Institute of Strategy and International Business, 2003 / 1
This dissertation aims at contributing to the body of literature covering the field of entrepreneurial finance. More specifically, the study focuses on the valuation and syndication of venture capital investments. The dissertation comprises a theory review and four essays, each of which makes distinct but complementary contributions to both theory and practice. The first essay of this dissertation constructs and tests a binomial pricing model for staged venture capital investments. Using the valuation data of 421 U. S. venture capital transactions and 176 initial public offerings, the essay finds that the pricing model is consistent with previous knowledge on the risk-return profile of venture capital investments. The results further confirm the hypothesis that early-stage ventures have higher implied risk and implied volatility of returns than more established ones. The results of the essay imply that pricing models that assume constant volatility, unlike the binomial model, are not likely to be applicable in venture capital or similar project valuation settings. The second essay demonstrates how investor prominence affects the valuations of venture capital backed companies. Employing a thorough data set of over 32,000 U. S. venture capital investments between 1990 and 2000, the essay shows that certification ability gives prominent venture capitalists bargaining power that they utilise when investing in ventures for the first time. In line with the asymmetric information and signalling theories, it is found that the reputation of existing venture capital investors adds value in future financing rounds. The results are robust to potential selection biases, alternative measures of investor prominence, the existence of additional value adding mechanisms, and different sampling periods. The third essay examines the relationship between investment syndication and the efficiency of venture capital firms. Arguments derived from the theoretical motives for syndication predict that syndication relationships allow venture capitalists to be more efficient in completing investments and in making their portfolio companies public. Utilising an extensive data set on the venture capital investments of the 100 largest U. S. venture capital firms between 1986 and 2000, the essay demonstrates that syndication has an impact on venture capitalists' efficiency in both of these areas. The frequency of syndicating investments accelerates the process of investing in new portfolio companies, whereas the diversity of the syndication relationships improves the venture capitalists' ability to create public companies from their portfolio companies. Furthermore, the essay demonstrates that uncertainty moderates the impact of syndication on firm efficiency. Firms with uncertain venture portfolios benefit more from syndication relationships. The fourth essay compares resource-based and social structural explanations for the network positions and the performance of venture capital firms. A distributed lag analysis of an extensive data set of the 100 largest U. S. venture capital firms and their syndicate structures between 1986 and 2000 suggests that venture capital firms in central network positions increase their market share of portfolio company initial public offerings in subsequent years. Consistent with the social structural argument, the results further demonstrate that prior network positions tend to determine future positions. An analysis of causality reveals that past network position tends to dominate the observable quality of firm resources as a determinant of the subsequent performance and position of the firm. The results further imply that the structure of venture capital syndication networks is rigid and involves high barriers to entry, and that the acquisition of general partners contributes to changes in existing network positions.
entrepreneurial finance, valuation, syndication, venture capital investments, pricing model, firms, portfolio companies, public companies
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