© Cumming & Johan (2013) Portfolio Size Cumming and Johan (2013 Chapter 17) 1.

© Cumming & Johan (2013) Portfolio Size

Portfolio Size

Cumming and Johan (2013 Chapter 17)

1


Chapter Objectives

• Consider 4 main factors that influence the determinants of portfolio size in terms of the number of entrepreneurial firms in the venture capital fund portfolio, as well as portfolio size per fund manager per year of investment:

– The fund’s characteristics, such as type of fund, fund size and fund management firms that operate more than one fund;

– The characteristics of the entrepreneurial firms in the venture capitalist fund managers’ portfolio, including entrepreneurial firm development stage, technology and location;

– The structure and characteristics of the financing transactions, including staging, syndication and forms of finance; and

– Market conditions.

2


Issues

• How many entrepreneurial firms do VCs have in their portfolios?

• Is efficient portfolio size affected by: Venture capital fund characteristics? Entrepreneurial firm characteristics? The nature of the financing transaction? Market Conditions?

• Nonlinearities in the predicted relationships?• Are returns to scale increasing or decreasing?

TheoryData

RegressionsConclusion/Summary

3


Basic Conjecture

• Expansion of portfolio size eventually becomes unprofitable as active VC investing and managerial advice gets diluted (Kannianen and Keuschnigg, 2003,2004)

• Add another entrepreneurial firm to the VC portfolio where the projected marginal benefits (PMB) outweigh the projected marginal costs (PMC)

• Marginal benefits and marginal costs vary according to Type of entrepreneurial firm Type of venture capital firm Nature of the deal ($ amount, forms of finance, syndication, etc.)

TheoryData


4


Number of Entrepreneurial Firms in VC ’ s Portfolio

Benefits / Costs per Firm in Portfolio

EF 0 EF 1

PMB 0

PMB 1

PMC 0

PMC 1

Figure 17.1. Efficient Venture Capital Portfolio Size and Comparative Statics

Increase in staging frequency, proportion of early stage And high - tech firms; etc.

Increase in fundraising, improvement in market conditions; etc.

5


Hypotheses: Venture Capital Fund Characteristics

6

Venture Capital

Fund Characteristics

Hypothesized Effect on PMC

Hypothesized Effect on PMB

Predicted Effect

# of Portfolio Firms

Government Funds, LSVCCs

Low cost of capital

Low PMC --- Increase

Private Independent Limited Partner Funds

High value added

High PMC

Dilution VC Effort

Low PMB Decrease

VC Fund in VC Firm with Many VC Funds

Effort Sharing Across Funds

Low PMC

Complementarities,

Co-investment

High PMB

Increase

VC Fundraising (Drawdowns) ---

More funds

High PMB Increase

VC

Fund Duration

Lower Opportunity Cost of Effort

Low PMC

Less Dilution of Effort, etc.

High PMBIncrease

# VC Managers --- High PMB Increase

TheoryData



Hypotheses: Entrepreneurial Firm Characteristics and Market Conditions

7

Entrepreneurial Firm

Characteristics



Predicted Effect


Early Stages of Development

Higher Effort

High PMC

Specialization

High PMB Ambiguous

High-Tech

Intangible Assets, Higher Effort

High PMC

Economies of Specialization

High PMCAmbiguous

Strong Market Conditions

Ease in Fundraising Low PMC

Improved chances of exit

High PMBIncrease

TheoryData



Hypotheses: Financing Characteristics

8

Financing Characteristics



Predicted Effect


Staging Frequency Intensive Monitoring High PMC

Dilution of VC Effort

Low PMB Decrease

Syndication Frequency Risk Sharing

Low PMC

Value Added

High PMB Increase

$ Invested / Total Entrepreneurial Capital

High Control Rights

Low PMC

High Control Rights

High PMB Increase

Convertible Securities High Opportunity Costs High PMC

Dilution of VC Effort

Low PMB Decrease

TheoryData


© Cumming & Johan (2013) Portfolio Size9



Figure 17. 2a. Comparative Statics and Nonlinearities

EF 1 EF 3

EF 0 EF 2 EF 4

P MB (Linear) PMB (Concave)

PMC 0

PMC 1

PMC 2




Figure 17.2b. Comparative Statics and Nonlinearities

EF 1 EF 3

EF 0 EF 2 EF 4

PMB 0

PMC (Convex)

PMB 1

PMB 2

PMC (Linear)



Figure 17.3. Nonlinearities in Hypothesis Tests

Fundraising, Proportion of Early Stage Entrepreneurial Firms, etc.

The concave shape follows from the convex shape of the PMB curve and the convex shape of the PMC curve (see Figures 18 .2a and 18.2, r espectively).

The econometric tests consider nonlinearities (both concave and convex) in the effect of the hypothesized effects on venture capital por tfolio size.

The curvature of the slope is determined by grid search methods on various Box - Cox transformations.


Canadian VC Data

• 1991-2000• 214 venture capital funds

Corporate (18)Government (15) LSVCC (29)Other (Institutional) Investors (48)Private independent Limited Partnerships (104)

• Source: Macdonald & Associates, Ltd.• Exclude funds with (possibly) unobserved investments

TheoryData


12


Table 17.2a. Summary of the Data by Type of Venture Capital Fund

Variable NamesCorporate Venture Capital

Government Venture Capital

LSVCCPrivate Limited

PartnershipOther Institutional

Venture CapitalTotal

Venture Capital Fund Characteristics

Total Number of Funds 18 15 29 104 48 214

2 or more Venture Capital Funds managed by the Venture Capital Management Firm

0 3 3 14 12 32

Venture Capital Funds Raised (Drawdowns) ('000) $70,650 $48,343 $117,273 $24,307 $110,071 $61,724

# Years Fund Investments Tracked by CVCA 4.222 5.533 4.586 4.663 4.750 4.696

Investment Duration Period (Quarters) 3.625 4.850 4.043 3.959 4.073 4.030

# Venture Capital Fund Managers 6.000 8.533 6.379 5.673 8.083 7.075

Entrepreneurial Firm Characteristics

Average # Portfolio Firms 17.056 32.467 37.966 8.221 30.500 19.692

Average # Portfolio Firms / # Venture Capital Managers

2.793 7.460 6.379 2.589 4.939 4.003

Average # Portfolio Firms / # Venture Capital Managers / # Years

0.863 1.695 1.674 0.843 1.632 1.194

Early Stage 0.819 0.900 0.897 0.857 0.776 0.844

Life Sciences 0.066 0.200 0.229 0.198 0.088 0.167

Other High-Tech 0.597 0.393 0.427 0.510 0.428 0.479

Entrepreneur / Venture Capital Different Provinces 0.297 0.083 0.052 0.161 0.286 0.180

Financing Transactions Characteristics

Staging Frequency 0.560 0.471 0.497 0.544 0.489 0.521

Syndication Frequency 0.624 0.456 0.519 0.490 0.536 0.513

Venture Capital Investments / Ent. Capital 0.526 0.509 0.409 0.481 0.630 0.511

Convertible Securities 0.237 0.201 0.272 0.262 0.200 0.243

Market Conditions

MSCI Return 0.296 0.268 0.360 0.268 0.334 0.297

Note: Data over the period 1991 - 2000. Venture capital funds that invested for 1 year only in the data are excluded. Canadian Venture capitalists only. Source: Macdonald and Associates, Ltd., .


Table 17.2b. Summary Statistics for All Types of Venture Capital Funds in the Data (214 Funds)

Variable Names Mean Standard Deviation Skewness Kurtosis Minimum Maximum

Venture Capital Firm Characteristics

Venture Capital Funds Raised (Drawdowns) ('000) $61,724 138313 5.089 34.636 150 $1,219,360

# Years Fund Investments Tracked by CVCA 4.696 2.464 0.822 2.538 2 10


# Venture Capital Fund Managers 7.075 7.505 2.804 13.965 1 48


Average # Portfolio Firms 19.692 42.220 5.698 43.403 1 408

Average # Portfolio Firms / # Venture Capital Managers 4.003 6.626 3.966 22.686 0.091 48.4

Average # Portfolio Firms / # Venture Capital Managers / # Years 1.194 1.936 5.651 47.929 0.026 20

Early Stage 0.844 0.207 -1.731 5.801 0 1

Life Sciences 0.167 0.271 2.104 6.460 0 1

Other High-Tech 0.479 0.338 0.063 1.734 0 1

Entrepreneur / Venture Capital Different Provinces 0.180 0.277 1.749 5.112 0 1


Staging Frequency 0.521 0.211 -0.434 2.789 0 0.933

Syndication Frequency 0.513 0.313 0.028 1.827 0 1

Venture Capital Investments / Ent. Capital 0.511 0.275 0.293 1.948 0.047 1

Convertible Securities 0.243 0.194 0.828 3.500 0 1

Market Conditions

MSCI Return 0.297 0.198 1.628 7.315 -0.067 1.192



Table 17.2c. Summary Statistics for Private Limited Partnership Funds Only (104 Funds)

Variable Names Mean Standard Deviation Skewness Kurtosis Minimum Maximum

Venture Capital Firm Characteristics

Venture Capital Funds Raised (Drawdowns) ('000) 24306.5 29385.7 1.969 6.645 600 149316

# Years Fund Investments Tracked by CVCA 4.663 2.400 0.808 2.489 2 10


# Venture Capital Fund Managers 5.673 4.788 1.261 3.840 1 19


Average # Portfolio Firms 8.221 6.987 2.152 9.167 1 42

Average # Portfolio Firms / # Venture Capital Managers 2.589 3.385 3.244 16.187 0.200 23

Average # Portfolio Firms / # Venture Capital Managers / # Years 0.843 0.877 1.680 5.519 0.048 4

Early Stage 0.857 0.213 -1.843 5.948 0.071 1

Life Sciences 0.198 0.321 1.626 4.224 0 1

Other High-Tech 0.510 0.364 -0.074 1.582 0 1

Entrepreneur / Venture Capital Different Provinces 0.161 0.236 1.638 5.152 0 1


Staging Frequency 0.544 0.236 -0.686 2.819 0 0.933

Syndication Frequency 0.490 0.293 -0.041 1.998 0 1

Venture Capital Investments / Ent. Capital 0.481 0.283 0.485 2.032 0.047 1

Convertible Securities 0.262 0.192 0.750 3.072 0 0.875

Market Conditions

MSCI Return 0.268 0.180 1.218 5.000 -0.067 0.944



Table 17.3. Difference Tests

All 214 Funds 104 Limited Partnerships Only

Average # Portfolio

Firms Difference Test

Average # Portfolio Firms / # Venture

Capital Managers / Years Difference Test

Average # Portfolio

Firms Difference Test

Average # Portfolio Firms / # Venture

Capital Managers / Years Difference Test

Limited Partnership Venture Capital Fund 8.221-7.483***

0.843-0.102

--- --- --- ---

Corporate Venture Capital Fund 17.056 0.863 --- ---


0.843-2.805***

--- --- --- ---

LSVCC Fund 37.966 1.674 --- ---


0.843-2.566**

--- --- --- ---

Government Venture Capital Fund 32.467 1.695 --- ---

Venture Capital Mgmt. Firm with 1 Fund 17.790-5.044***

1.2140.242

6.956-6.313***

1.059-0.517

Venture Capital Mgmt. Firm with 2 or More Funds 22.311 1.166 10.611 1.166Venture Capital Fund with More than $50,000,000

Drawdowns 50.15536.749***

1.4281.446

16.40011.085***

0.574-1.598

Venture Capital Fund with Less than $50,000,000 Drawdowns 8.365 1.107 6.843 0.889

Investment duration period > 4 years 24.73014.880***

0.985-2.780***

10.33313.136***

0.623-3.100***

Investment duration period < 4 Years 10.727 1.565 4.553 1.226

# Managers >7 35.24622.060***

0.530-5.915***

12.1858.469***

0.275-5.330***

# Managers <7 12.290 1.510 6.831 1.043

Early Stage >.75 20.0671.465

1.2110.331

8.2650.308

0.8951.265

Early Stage <.75 18.429 1.136 8.048 0.638

Life Sciences >.5 10.045-12.790***

1.3180.485

9.2501.413

0.8580.061

Life Sciences <.5 20.797 1.180 8.034 0.841

Other High-Tech >.5 15.626-8.938***

1.063-1.268

7.154-4.268***

0.794-0.541

Other High-Tech <.5 23.191 1.306 9.288 0.893

Venture Capital / Entrepreneur Different Province > .15 10.452-19.352***

0.688-4.701***

7.474-2.336**

0.633-1.956*

Venture Capital / Entrepreneur Different Province < .15 24.475 1.456 8.652 0.964

Staging Frequency >.5 21.5754.470***

0.862-3.758***

9.1644.406***

0.609-3.046***

Staging Frequency <.5 17.584 1.565 6.884 1.176

Syndication Frequency >.5 15.783-9.065***

0.700-5.588***

7.833-1.406

0.588-2.706***

Syndication Frequency <.5 23.528 1.679 8.554 1.062

Venture Capital Investments / Entrepreneurial Capital >.5 21.9704.740***

1.5143.127***

7.390-2.590***

1.0992.212**

Venture Capital Investments / Entrepreneurial Capital <.5 17.730 0.919 8.762 0.676

Convertible Securities >.5 9.333-13.839***

1.2770.314

8.7000.568

1.0830.753

Convertible Securities <.5 20.643 1.186 8.170 0.818

MSCI > .25 19.7750.216

1.3351.795*

6.980-4.816***

0.761-0.879

MSCI < .25 19.585 1.014 9.415 0.922


Variables

• Dependent Variable: Number of firms in VC fund portfolio

• Independent Variables: VC Fund Characteristics

Fund type, # funds in VC firm, duration, # VC Managers, fundraising (drawdowns)

Entrepreneurial Firm Characteristics Development stages, life sciences, other high-tech

Financing Characteristics Frequency of use of Convertible Pref Equity, Staging, Syndication, $

Invested / Firm Capital Market Conditions

TSX Index

TheoryData


17


Regressions

• (1) All funds together

with dummy variables for the type of fund)

• (2) Private Independent Funds Only

Different types of funds face different restrictive covenants; different objectives

• (3) For Portfolio Size and Portfolio Size / Manager / Year

TheoryData


18


Box-Cox Transformation

• Grid search over various values of to allow for both concavity and convexity

• Transformation applies to independent variables, not the dependent variable

0. when )log(

; 0 when 1

),(

x

xxB

TheoryData


19


Heteroscedastic Box-Cox

• Box – Cox grid-search specification as per last slide

• Also considerwhere w=fund durationpossibility of truncated observations in the data

• Likelihood dominance tests superior

• High Adjusted R2 (>.88)

)(22 ])[()( wVar

TheoryData


20


Table 17.5. Regressions with All Types of Venture Capital Funds in the Same Sample (continues on next slide)

PANEL A. Dependent Variable: # of Entrepreneurial Firms in Venture Capital Fund Portfolio (continues on next slide)

(1) Box-Cox (2) Linear (3) Box-Cox (4) Box-Cox (5) Box-Cox (6) Box-Cox

Independent Variables

Coefficient t-statistic Slope Elasticity Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Constant 21.997 4.415*** 21.997 0.579 147.656 2.365** -10.119 -2.891*** -2.547 -0.588 -11.137 -2.700*** 1.442 0.510

Venture Capital Fund Characteristics

Corporate Venture Capital

-5.027 -2.885*** -5.027 -0.010 0.847 0.094 -7.521 -3.694*** -6.307 -3.087*** -7.016 -3.429*** -5.058 -2.875***


1.141 0.639 1.141 0.003 0.610 0.061 6.614 3.203*** 5.547 2.659*** 6.461 3.120*** 5.809 3.232***

LSVCC 1.910 1.196 1.910 0.007 1.887 0.224 3.504 2.056** 4.760 2.707*** 5.699 3.238*** 7.811 5.210***

Private Independent Venture Capital

-10.757 -8.669*** -10.757 -0.136 -9.110 -1.416 -6.489 -4.708*** -7.870 -5.593*** -5.694 -4.092*** -6.469 -5.355***

2 or more Venture Capital Funds in the

Venture Capital Mgmt.Firm

-13.920 -15.435*** -13.920 -0.163 -6.379 -1.351 -15.670 -15.114*** -13.295 -12.637*** -15.406-

14.731***-14.615 -15.997***

Venture Capital Funds Raised

(Drawdowns) ('000)0.164 4.397*** 0.0002 0.4872 0.0002 7.698*** 0.338 3.857*** 0.346 3.697*** 0.329 3.682*** 0.145 4.050***

Venture Capital Fund Duration

-2.482 -3.985*** -0.870 -0.137 0.265 0.225 -2.633 -3.273*** 0.370 0.466 -1.698 -2.037** -2.067 -3.370***

# Venture Capital Fund Managers

7.954 20.253*** 2.210 0.515 1.818 5.748*** 8.297 16.847*** 8.468 16.346*** 8.441 16.377*** 8.313 19.372***


Table 17.5. Regressions with All Types of Venture Capital Funds in the Same Sample (Continued)

PANEL A. Dependent Variable: # of Entrepreneurial Firms in Venture Capital Fund Portfolio (Continued)





Early Stage 17.833 5.305*** 12.438 0.605 15.613 1.344 --- --- --- --- --- --- --- ---

Life Sciences --- --- --- --- --- --- --- --- 0.431 0.176 --- --- 2.271 1.089

Other High-Tech --- --- --- --- --- --- -19.152 -9.454*** --- --- -16.129 -7.230*** --- ---

Entrepreneur / Venture Capital

Different Provinces-23.242 -11.909*** -21.121 -0.655 -16.779 -2.000** -26.509 -11.432*** -27.626 -11.770*** -27.880

-11.940***

-23.206 -11.756***

Financing Transactions

Characteristics

Staging Frequency -33.607 -9.741*** -25.932 -1.062 -26.072 -2.093** --- --- -40.845 -10.002*** --- --- --- ---

Syndication Frequency

-32.113 -11.494*** -25.159 -1.004 -30.731 -2.952*** --- --- --- --- --- --- -25.178 -12.816***

Venture Capital Investments / Ent.

Capital-24.588 -6.717*** -19.441 -0.764 -22.264 -1.706* --- --- 0.502 0.164 5.165 1.783* --- ---

Convertible Securities

-13.253 -4.556*** -11.679 -0.382 -10.028 -0.851 --- --- --- --- -14.257 -4.224*** -12.909 -4.443***

Market Conditions

MSCI Return -10.956 -2.632*** -9.535 -0.318 -8.607 -0.697 3.357 0.711 -7.190 -1.497 1.253 0.264 -5.120 -1.243

Returns to Scale

λ 0.413 21.405*** --- --- --- --- 0.346 15.498*** 0.340 14.543*** 0.344 14.710*** 0.414 19.778***

Adjusted R2 0.891 0.443 0.869 0.870 0.869 0.887

# Observations 214 214 214 214 214 214


Table 17.5. Regressions with All Types of Venture Capital Funds in the Same Sample (continues on next slide)

PANEL B. Dependent Variable: # of Entrepreneurial Firms in Venture Capital Fund Portfolio / # Venture Capital Fund Managers / Investment Years




Constant 2.917 2.860*** 2.917 2.241 8.099 2.502** 0.631 1.160 1.095 1.364 0.305 0.460 1.487 2.802***

Venture Capital Fund

Characteristics

Corporate Venture Capital

-0.471 -1.030 -0.471 -0.030 -0.376 -0.799 -0.513 -1.055 -0.519 -1.093 -0.455 -0.941 -0.426 -0.913


0.081 0.158 0.081 0.004 0.064 0.120 0.393 0.738 0.360 0.683 0.438 0.826 0.230 0.445

LSVCC -0.206 -0.485 -0.206 -0.021 -0.212 -0.480 0.031 0.072 0.137 0.317 0.215 0.494 0.006 0.013

Private Independent Venture Capital

-0.515 -1.590 -0.516 -0.193 -0.529 -1.563 -0.266 -0.799 -0.258 -0.781 -0.187 -0.562 -0.458 -1.420

2 or more Venture Capital Funds in

the Venture Capital Mgmt. Firm

-0.160 -0.667 -0.160 -0.052 -0.194 -0.787 -0.357 -1.436 -0.223 -0.894 -0.278 -1.104 -0.172 -0.709

Venture Capital Funds Raised

(Drawdowns) ('000)0.006 0.535 0.0003 0.426 0.0002 4.628*** 0.005 0.488 0.013 0.531 0.005 0.435 0.002 0.395


Table 17.5. Regressions with All Types of Venture Capital Funds in the Same Sample (continued)

PANEL B. Dependent Variable: # of Entrepreneurial Firms in Venture Capital Fund Portfolio / # Venture Capital Fund Managers / Investment Years (continued)




Entrepreneurial Firm

Characteristics

Early Stage 0.648 0.895 0.508 0.720 0.487 0.790 --- --- --- --- --- --- --- ---

Life Sciences --- --- --- --- --- --- --- --- 0.379 0.723 --- --- 0.537 1.115

Other High-Tech --- --- --- --- --- --- -1.060 -2.445** --- --- -0.727 -1.574 --- ---

Entrepreneur / Venture Capital

Different Provinces-0.739 -1.517 -0.692 -0.627 -0.646 -1.459 -0.791 -1.554 -0.817 -1.565 -0.861 -1.691* -0.741 -1.552

Financing Transactions

Characteristics

Staging Frequency -2.088 -2.687*** -1.769 -2.068 -1.616 -2.495** --- --- -2.429 -2.914*** --- --- --- ---

Syndication Frequency

-2.476 -3.927*** -2.102 -2.443 -2.147 -3.956*** --- --- --- --- --- --- -1.952 -4.130***

Venture Capital Investments / Ent.

Capital-1.578 -1.949* -1.340 -1.556 -1.267 -1.810* --- --- 0.441 0.686 0.844 1.419 --- ---

Convertible Securities

-0.383 -0.572 -0.352 -0.336 -0.405 -0.648 --- --- --- --- -0.765 -1.117 -0.619 -0.954

Market Conditions

MSCI Return 1.764 2.494** 1.591 1.586 1.801 2.854*** 2.662 3.574*** 1.643 2.191** 2.513 3.349*** 2.258 3.284***

Returns to Scale

λ 0.605 2.549** --- --- --- --- 0.624 2.408** 0.499 2.037** 0.624 2.147** 0.724 2.307**

Adjusted R2 0.316 0.257 0.229 0.259 0.242 0.287

# Observations 214 214 214 214 214 214


Summary of Some Key Results (refer also to Ch. 18)

• Empirical support for Kannianen and Keuschnigg (2003,2004): expansion of portfolio size eventually becomes unprofitable as active

VC investing and managerial advice gets diluted

• VCs have fewer firms in their portfolios when marginal costs are greater and monitoring and value added active assistance is more intensive Greater frequency of staging and syndication Private independent VCs

• VCs have more firms in their portfolios when marginal costs are lower and marginal benefits are greater VC fund in VC firm with 2 or more VC funds More VC managers Convertible securities (for private independent funds)

TheoryData


25


Summary of Key Results (Con’t)

• Specialization and complementarities are important Life Sciences, Other High-Tech, Early Stage Firms Subsample of private independent funds only: different results

• Differences in the results across different types of VC funds Private independent funds have smaller portfolios Value added investors Concave function for full sample (λ =0.4) Less concave function for subsample of private independent funds

Less pronounced diminishing returns to scale (λ =0.8)

TheoryData


26


Conclusions

• Importance of context: type of entrepreneurial firm, type of venture capital firm, and nature of the financial contract

• Risk-taking and capital structure affect optimal portfolio size

• Future research Differences across countries? Impact on entrepreneurial firm innovation?

TheoryData


27

© Cumming & Johan (2013) Portfolio Size Cumming and Johan (2013 Chapter 17) 1.

Documents

Transcript of © Cumming & Johan (2013) Portfolio Size Cumming and Johan (2013 Chapter 17) 1.