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2001, 01
This paper analyzes a comprehensive data set of 108 non venture-backed, 58 venture-backed and 33 bridge financed companies going public at Germany s Neuer Markt between March 1997 and March 2000. I examine whether these three types of issues differ with regard to issuer characteristics, balance sheet data or offering characteristics. Moreover, this empirical study contributes to the underpricing literature by focusing on the complementary or rather competing role of venture capitalists and underwriters in certifying the quality of a company when going public. Companies backed by a prestigious venture capitalist and/or underwritten by a top bank are expected to show less underpricing at the initial public offering (IPO) due to a reduced ex-ante uncertainty. This study provides evidence to the contrary: VC-backed IPOs appear to be more underpriced than non VCbacked IPOs.
2001, 01 r
This paper analyzes a comprehensive data set of 160 non venture-backed, 79 venture-backed and 61 bridge financed companies going public at Germany´s Neuer Markt between March 1997 and March 2002. I examine whether these three types of issues differ with regard to issuer characteristics, balance sheet data or offering characteristics. Moreover, this empirical study contributes to the underpricing literature by focusing on the complementary or rather competing role of venture capitalists and underwriters in certifying the quality of a company when going public. Companies backed by a prestigious venture capitalist and/or underwritten by a top bank are expected to show less underpricing at the initial public offering (IPO) due to a reduced ex-ante uncertainty. This analysis provides evidence to the contrary: VC-backed IPOs appear to be more underpriced than non VC-backed IPOs.
2002, 07
We analyze the desinvestment decision of venture capitalists in the course of an IPO of their portfolio firms. The capital market learns of the project quality only in the period following the IPO. Venture capitalists with high-quality firms face a trade-off between immediately selling their stake in the venture at a price below the true value and having to wait until the true value is revealed. We show that the dilemma may be resolved via a reputation-acquiring mechanism in a repeated game set-up. Thereby, we can explain, e.g., the advent of "hot-issue market behavior" involving early disinvestments and a high degree of price uncertainty. Furthermore, we provide a new rationale for underpricing. Young venture capitalists may use underpricing as a device for credibly committing themselves to acquiring reputation.
2002, 08
This paper investigates the financial contracting behavior of German venture capitalists against the results of recent theoretical work on the design of venture capital contracts, especially with regard to the use of convertible securities. First, we identify a special feature of the German market, namely that public-private partnership agencies require significantly lower returns than private and young venture capitalists. The latter are most likely to follow their North-American counterpart by refinancing themselves with closed-end funds. Second, with regard to financing practices it is shown that the use of convertibles, relative to other instruments, is influenced by the anticipated severity of agency problems. Klassifikation: C24; G24; G32
2002, 01
Die vorliegende empirische Studie analysiert die Vertragsgestaltung zwischen Investoren und europäischen Venture Capital-Fonds. Im Zentrum steht die Analyse der Vergütung des Fondsmanagements sowie der zum Einsatz kommenden Vertragsklauseln. Deren Ausgestaltung ist entscheidend für die Überwindung der Prinzipal-Agenten-Beziehung innewohnenden Agency-Probleme. Hierzu werden 122 Fondsprospekte sowie 46 Gesellschafterverträge von europäischen Venture Capital-Fonds ausgewertet, die in den Jahren 1996 bis 2001, der ersten großen Boomphase des europäischen Venture Capital-Marktes, aufgelegt wurden. Während die jährliche Vergütung des Fondsmanagements auf den ersten Blick sehr standardisiert erscheint, ergeben sich bei einer Barwertbetrachtung aller zu leistenden Management Fees über die gesamte Fondslaufzeit deutliche Anzeichen für Preisdifferenzierung. In Bezug auf den Einsatz von Vertragsklauseln kann eine Zunahme im Zeitablauf und mithin eine zunehmende Komplexität des Vertragsdesigns festgestellt werden. Vor dem Hintergrund der Erfahrungen aus dem US-amerikanischen Venture Capital-Markt kann diese Entwicklung jedoch noch nicht als abgeschlossen gelten. Der europäische Markt bewegt sich in Bezug auf die Verwendung vertraglicher Restriktionen auf dem Niveau, das in den USA bereits Anfang der neunziger Jahre erreicht war.
2003, 48
This paper proposes an intertemporal model of venture capital investment with screening and advising where the venture capitalist´s time endowment is the scarce input factor. Screening improves the selection of firms receiving finance, advising allows firms to develop a marketable product, both have a variable intensity. In our setup, optimal linear contracts solves the moral hazard problem. Screening however asks for an entrepreneur wage and does not allow for upfront payments which would cause severe adverse selection. Project characteristics have implications for screening and advising intensity and the distribution of profits. Finally, we develop a formal version of the "venture capital cycle" by extending the basic setup to a simple model of venture capital supply and demand.
2003, 24
Using a unique, hand-collected database of all venture-backed firms listed on Germany´s Neuer Markt, we analyze the history of venture capital financing of these firms before the IPO and the behavior of venture capitalists at the IPO. We can detect significant differences in the behavior and characteristics of German vs. foreign venture capital firms. The discrepancy in the investment and divestment strategies may be explained by the grandstanding phenomenon, the value-added hypothesis and certification issues. German venture capitalists are typically younger and smaller than their counterparts from abroad. They syndicate less. The sectoral structure of their portfolios differs from that of foreign venture capital firms. We also find that German venture capitalists typically take companies with lower offering volumes on the market. They usually finance firms in a later stage, carry through fewer investment rounds and take their portfolio firms public earlier. In companies where a German firm is the lead venture capitalist, the fraction of equity held by the group of venture capitalists is lower, their selling intensity at the IPO is higher and the committed lock-up period is longer.
2003, 25
We analyze the venture capitalist´s decision on the timing of the IPO, the offer price and the fraction of shares he sells in the course of the IPO. A venture capitalist may decide to take a company public or to liquidate it after one or two financing periods. A longer venture capitalist´s participation in a firm (later IPO) may increase its value while also increasing costs for the venture capitalist. Due to his active involvement, the venture capitalist knows the type of firm and the kind of project he finances before potential new investors do. This information asymmetry is resolved at the end of the second period. Under certain assumptions about the parameters and the structure of the model, we obtain a single equilibrium in which high-quality firms separate from low-quality firms. The latter are liquidated after the first period, while the former go public either after having been financed by the venture capitalist for two periods or after one financing period using a lock-up. Whether a strategy of one or two financing periods is chosen depends on the consulting intensity of the project and / or on the experience of the venture capitalist. In the separating equilibrium, the offer price corresponds to the true value of the firm. An earlier version of this paper appeared as: The Decision of Venture Capitalists on Timing and Extent of IPOs (ZEW Discussion Paper No. 03-12). This version July 2003.
2003, 26
We present a survey on the role of initial public offerings (Epos) and venture capital (VC) in Germany after the Second World War. Between 1945 and 1983 IPOs hardly played a role at all and only a minor role thereafter. In addition, companies that chose an IPO were much older and larger than the average companies going public for the first time in the US or the UK. The level of IPO underpricing in Germany, in contrast, has not been fundamentally different from that in other countries. The picture for venture capital financing is not much different from that provided by IPOs in Germany. For a long time venture capital financing was hardly significant, particularly as a source of early stage financing. The unprecedented boom on the Neuer Markt between 1997 and 2000, when many small venture capital financed firms entered the market, provides a striking contrast to the preceding era. However, by US standards, the levels of both IPO and venture capital activities remained rather low even in this boom phase. The extent to which recent developments will have a lasting impact on the financing of German firms, the level of IPO activity, and venture capital financing, remains to be seen. At the time of writing, activity has come to a near stand still and the Neuer Markt has just been dissolved. The low number of IPOs and the fairly low volume of VC financing in Germany before the introduction of the Neuer Markt are a striking and much debated phenomenon. Understanding the reasons for these apparent peculiarities is vital to understanding the German financial system. The potential explanations that have been put forward range from differentces in mentality to legal and institutional impediments and the availability of alternative sources of financing. Moreover the recent literature discusses how interest groups may have benefited and influenced the situation. These groups include politicians, unions/workers, managers/controlling-owners of established firms as well as banks. Revised version forthcoming in "The German Financial System", edited by Jan P. Krahnen and Reinhard H. Schmidt, Oxford University Press.
2004, 02
This paper aims to analyze the impact of different types of venture capitalists on the performance of their portfolio firms around and after the IPO. We thereby investigate the hypothesis that different governance structures, objectives and track record of different types of VCs have a significant impact on their respective IPOs. We explore this hypothesis by using a data set embracing all IPOs which occurred on Germany's Neuer Markt. Our main finding is that significant differences among the different VCs exist. Firms backed by independent VCs perform significantly better two years after the IPO compared to all other IPOs and their share prices fluctuate less than those of their counterparts in this period of time. Obviously, independent VCs, which concentrated mainly on growth stocks (low book-to-market ratio) and large firms (high market value), were able to add value by leading to less post-IPO idiosyncratic risk and more return (after controlling for all other effects). On the contrary, firms backed by public VCs (being small and having a high book-to-market ratio) showed relative underperformance. Klassifikation: G10, G14, G24 . 29th January 2004 .