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The Staging of Venture Capital Investmentssfb649.wiwi.hu-berlin.de/fedc/events/Motzen10/The...
Transcript of The Staging of Venture Capital Investmentssfb649.wiwi.hu-berlin.de/fedc/events/Motzen10/The...
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Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Staging of Venture Capital Investments
Tobias Scheinert
Humboldt Universität zu Berlin
June 4, 2010
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Outline
1 Venture Capital Framework
2 Motivations for StagingProject Characteristic vs. Real OptionsInformation GenerationAgency Problems
Moral HazardHold-UpAdverse Selection
Diversi�cation vs. Specialization
3 Costs of StagingWindow DressingProject Delay
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrainedThe venture capitalist (she) provides the funding in return fora claim on the ventures returnCompetitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrained
The venture capitalist (she) provides the funding in return fora claim on the ventures returnCompetitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrainedThe venture capitalist (she) provides the funding in return fora claim on the ventures return
Competitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrainedThe venture capitalist (she) provides the funding in return fora claim on the ventures returnCompetitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrainedThe venture capitalist (she) provides the funding in return fora claim on the ventures returnCompetitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrainedThe venture capitalist (she) provides the funding in return fora claim on the ventures returnCompetitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
The Venture Capital Framework
Two players: Entrepreneur (E) and Venture Capitalist (VC)
The entrepreneur (he) is cash constrainedThe venture capitalist (she) provides the funding in return fora claim on the ventures returnCompetitive Market, thus various VCs are competing forlucrative investments
(Un-)certainty about the venture's quality, the entrepreneur'squality, and/or the general market development
Complete information vs. information asymmetries
Decision faced by the VC: How to organize the investment intothe entrepreneur's �rm (staged �nancing vs. lump-sum�nancing, if stages how to structure them)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Outline
1 Venture Capital Framework
2 Motivations for StagingProject Characteristic vs. Real OptionsInformation GenerationAgency Problems
Moral HazardHold-UpAdverse Selection
Diversi�cation vs. Specialization
3 Costs of StagingWindow DressingProject Delay
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministic
Financing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the project
VC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)
Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Staging is the outcome of the project's nature
Project stages might be deterministicFinancing stages simply mimic the development process of theproject
Alternatively, projects consist of a sequence of real options
There is uncertainty about the state of nature and thus aboutthe success probability of the projectVC holds an option (or a sequence of options) to wait
Observe the state of nature (e.g. market demand for a certainproduct)Financing is only provided if certain thresholds are reached
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Empirical Evidence
Kaplan and Strömberg (2004)
External risk is associated with [...] tighter staging, inthe sense of a shorter period between �nancing rounds.
Li (2008)
... the portfolio company will receive the staged�nancing much later when there is a higher level ofmarket uncertainty.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Empirical Evidence
Kaplan and Strömberg (2004)
External risk is associated with [...] tighter staging, inthe sense of a shorter period between �nancing rounds.
Li (2008)
... the portfolio company will receive the staged�nancing much later when there is a higher level ofmarket uncertainty.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Empirical Evidence
Kaplan and Strömberg (2004)
External risk is associated with [...] tighter staging, inthe sense of a shorter period between �nancing rounds.
Li (2008)
... the portfolio company will receive the staged�nancing much later when there is a higher level ofmarket uncertainty.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Empirical Evidence
Kaplan and Strömberg (2004)
External risk is associated with [...] tighter staging, inthe sense of a shorter period between �nancing rounds.
Li (2008)
... the portfolio company will receive the staged�nancing much later when there is a higher level ofmarket uncertainty.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Project Characteristic vs. Real Options
Empirical Evidence
Kaplan and Strömberg (2004)
External risk is associated with [...] tighter staging, inthe sense of a shorter period between �nancing rounds.
Li (2008)
... the portfolio company will receive the staged�nancing much later when there is a higher level ofmarket uncertainty.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
There is not only exogenous uncertainty, the venture alsoentails endogenous uncertainty
Waiting is not valuable since the uncertainty does notautomatically clears up over time
Investment can produce valuable information about thepro�tability of a project
However, if all the funding is provided up-front, then thegenerated information cannot be used in the negotiation oflater �nancing round
Thus, staging the investment can balance this trade-o�
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
There is not only exogenous uncertainty, the venture alsoentails endogenous uncertainty
Waiting is not valuable since the uncertainty does notautomatically clears up over time
Investment can produce valuable information about thepro�tability of a project
However, if all the funding is provided up-front, then thegenerated information cannot be used in the negotiation oflater �nancing round
Thus, staging the investment can balance this trade-o�
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
There is not only exogenous uncertainty, the venture alsoentails endogenous uncertainty
Waiting is not valuable since the uncertainty does notautomatically clears up over time
Investment can produce valuable information about thepro�tability of a project
However, if all the funding is provided up-front, then thegenerated information cannot be used in the negotiation oflater �nancing round
Thus, staging the investment can balance this trade-o�
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
There is not only exogenous uncertainty, the venture alsoentails endogenous uncertainty
Waiting is not valuable since the uncertainty does notautomatically clears up over time
Investment can produce valuable information about thepro�tability of a project
However, if all the funding is provided up-front, then thegenerated information cannot be used in the negotiation oflater �nancing round
Thus, staging the investment can balance this trade-o�
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
There is not only exogenous uncertainty, the venture alsoentails endogenous uncertainty
Waiting is not valuable since the uncertainty does notautomatically clears up over time
Investment can produce valuable information about thepro�tability of a project
However, if all the funding is provided up-front, then thegenerated information cannot be used in the negotiation oflater �nancing round
Thus, staging the investment can balance this trade-o�
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Theoretical Modeling
Pindyck (1993)Roberts and Weitzman (1981)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Theoretical Modeling
Pindyck (1993)
Roberts and Weitzman (1981)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Theoretical Modeling
Pindyck (1993)Roberts and Weitzman (1981)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Empirical Evidence
Kaplan and Stromberg (2003)
[...] ex ante staging is more common in earlier rounds.
Li (2008)
The funding duration for a Seed/Startup-stagecompany is 10% shorter than that for an expansion- orlate-stage company.
Further evidence: Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Empirical Evidence
Kaplan and Stromberg (2003)
[...] ex ante staging is more common in earlier rounds.
Li (2008)
The funding duration for a Seed/Startup-stagecompany is 10% shorter than that for an expansion- orlate-stage company.
Further evidence: Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Empirical Evidence
Kaplan and Stromberg (2003)
[...] ex ante staging is more common in earlier rounds.
Li (2008)
The funding duration for a Seed/Startup-stagecompany is 10% shorter than that for an expansion- orlate-stage company.
Further evidence: Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Empirical Evidence
Kaplan and Stromberg (2003)
[...] ex ante staging is more common in earlier rounds.
Li (2008)
The funding duration for a Seed/Startup-stagecompany is 10% shorter than that for an expansion- orlate-stage company.
Further evidence: Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Empirical Evidence
Kaplan and Stromberg (2003)
[...] ex ante staging is more common in earlier rounds.
Li (2008)
The funding duration for a Seed/Startup-stagecompany is 10% shorter than that for an expansion- orlate-stage company.
Further evidence: Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Information Generation
Empirical Evidence
Kaplan and Stromberg (2003)
[...] ex ante staging is more common in earlier rounds.
Li (2008)
The funding duration for a Seed/Startup-stagecompany is 10% shorter than that for an expansion- orlate-stage company.
Further evidence: Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuouslyIn reality, however, VCs face monitoring costsThus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuouslyIn reality, however, VCs face monitoring costsThus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuouslyIn reality, however, VCs face monitoring costsThus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuously
In reality, however, VCs face monitoring costsThus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuouslyIn reality, however, VCs face monitoring costs
Thus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuouslyIn reality, however, VCs face monitoring costsThus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
E and VC do likely have di�erent objective functions
If there is an information asymmetry between both parties, Emight choose to perform actions which are not in the interestof the VC
In order to reduce this information asymmetry, the VC canmonitor E
If the VC could monitor costlessly, she would monitor andinvest continuouslyIn reality, however, VCs face monitoring costsThus the trade-o� between agency costs and monitoring costsmeans that funding will be provided in a staged manner
Financing can also be made contingent on reached milestones
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
1 If the VC holds a claim on the portfolio �rm that is senior toE's claim then there is a asset substitution problem
E could increase the riskiness of the project, and thus increasethe value of his claimStaging could be used to incentivize E not to take excessiverisk
2 Since E obtains also private bene�ts from running the �rm hemight want to choose risk below the value maximizing level
If you view staged �nancing as a compounded option, it can beshown that the chance to obtain funding in later rounds(exercise of one of the compounded options) is higher athigher risk levelsThus, staging can help to mitigate the agency issue that Ewant's to take overly conservative actions
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
1 If the VC holds a claim on the portfolio �rm that is senior toE's claim then there is a asset substitution problem
E could increase the riskiness of the project, and thus increasethe value of his claim
Staging could be used to incentivize E not to take excessiverisk
2 Since E obtains also private bene�ts from running the �rm hemight want to choose risk below the value maximizing level
If you view staged �nancing as a compounded option, it can beshown that the chance to obtain funding in later rounds(exercise of one of the compounded options) is higher athigher risk levelsThus, staging can help to mitigate the agency issue that Ewant's to take overly conservative actions
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
1 If the VC holds a claim on the portfolio �rm that is senior toE's claim then there is a asset substitution problem
E could increase the riskiness of the project, and thus increasethe value of his claimStaging could be used to incentivize E not to take excessiverisk
2 Since E obtains also private bene�ts from running the �rm hemight want to choose risk below the value maximizing level
If you view staged �nancing as a compounded option, it can beshown that the chance to obtain funding in later rounds(exercise of one of the compounded options) is higher athigher risk levelsThus, staging can help to mitigate the agency issue that Ewant's to take overly conservative actions
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
1 If the VC holds a claim on the portfolio �rm that is senior toE's claim then there is a asset substitution problem
E could increase the riskiness of the project, and thus increasethe value of his claimStaging could be used to incentivize E not to take excessiverisk
2 Since E obtains also private bene�ts from running the �rm hemight want to choose risk below the value maximizing level
If you view staged �nancing as a compounded option, it can beshown that the chance to obtain funding in later rounds(exercise of one of the compounded options) is higher athigher risk levelsThus, staging can help to mitigate the agency issue that Ewant's to take overly conservative actions
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
1 If the VC holds a claim on the portfolio �rm that is senior toE's claim then there is a asset substitution problem
E could increase the riskiness of the project, and thus increasethe value of his claimStaging could be used to incentivize E not to take excessiverisk
2 Since E obtains also private bene�ts from running the �rm hemight want to choose risk below the value maximizing level
If you view staged �nancing as a compounded option, it can beshown that the chance to obtain funding in later rounds(exercise of one of the compounded options) is higher athigher risk levels
Thus, staging can help to mitigate the agency issue that Ewant's to take overly conservative actions
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
1 If the VC holds a claim on the portfolio �rm that is senior toE's claim then there is a asset substitution problem
E could increase the riskiness of the project, and thus increasethe value of his claimStaging could be used to incentivize E not to take excessiverisk
2 Since E obtains also private bene�ts from running the �rm hemight want to choose risk below the value maximizing level
If you view staged �nancing as a compounded option, it can beshown that the chance to obtain funding in later rounds(exercise of one of the compounded options) is higher athigher risk levelsThus, staging can help to mitigate the agency issue that Ewant's to take overly conservative actions
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Theoretical Modeling
Bergemann and Hege (1998)Wang and Zhou (2004)Hsu (2008)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Theoretical Modeling
Bergemann and Hege (1998)
Wang and Zhou (2004)Hsu (2008)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Theoretical Modeling
Bergemann and Hege (1998)Wang and Zhou (2004)
Hsu (2008)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Theoretical Modeling
Bergemann and Hege (1998)Wang and Zhou (2004)Hsu (2008)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Empirical Evidence
Gompers (1995)
Venture capitalists weigh potential agency andmonitoring costs when determining how frequently theyshould reevaluate projects and supply capital.
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk.
Further evidence: Kaplan and Stromberg (2003), Hege et al.(2003), Krohmer et al. (2009), Li (2008), and Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Empirical Evidence
Gompers (1995)
Venture capitalists weigh potential agency andmonitoring costs when determining how frequently theyshould reevaluate projects and supply capital.
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk.
Further evidence: Kaplan and Stromberg (2003), Hege et al.(2003), Krohmer et al. (2009), Li (2008), and Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Empirical Evidence
Gompers (1995)
Venture capitalists weigh potential agency andmonitoring costs when determining how frequently theyshould reevaluate projects and supply capital.
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk.
Further evidence: Kaplan and Stromberg (2003), Hege et al.(2003), Krohmer et al. (2009), Li (2008), and Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Empirical Evidence
Gompers (1995)
Venture capitalists weigh potential agency andmonitoring costs when determining how frequently theyshould reevaluate projects and supply capital.
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk.
Further evidence: Kaplan and Stromberg (2003), Hege et al.(2003), Krohmer et al. (2009), Li (2008), and Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Empirical Evidence
Gompers (1995)
Venture capitalists weigh potential agency andmonitoring costs when determining how frequently theyshould reevaluate projects and supply capital.
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk.
Further evidence: Kaplan and Stromberg (2003), Hege et al.(2003), Krohmer et al. (2009), Li (2008), and Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Moral Hazard
Empirical Evidence
Gompers (1995)
Venture capitalists weigh potential agency andmonitoring costs when determining how frequently theyshould reevaluate projects and supply capital.
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk.
Further evidence: Kaplan and Stromberg (2003), Hege et al.(2003), Krohmer et al. (2009), Li (2008), and Sahlman (1990)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract termsCould prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddownEarly �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract termsCould prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddownEarly �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract terms
Could prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddownEarly �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract termsCould prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddownEarly �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract termsCould prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddownEarly �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract termsCould prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddown
Early �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Entrepreneur is crucial for the success of the venture
VC faces hold-up after the initial investment is sunk
E could try to repudiate and renegotiate new contract termsCould prevent �nancing of actually pro�table projects ex ante
Staging could mitigate the hold-up problem
Smaller initial investment results in smaller claim on theventure's returns and is less susceptible of being renegotiateddownEarly �nancing rounds generate collateral that can supportlater rounds
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Theoretical Modeling
Neher (1999)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Theoretical Modeling
Neher (1999)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Empirical Evidence
Sahlman (1990)
Further evidence: Kaplan and Strömberg (2004), Kaplan andStrömberg (2004)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Empirical Evidence
Sahlman (1990)
Further evidence: Kaplan and Strömberg (2004), Kaplan andStrömberg (2004)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Hold-Up
Empirical Evidence
Sahlman (1990)
Further evidence: Kaplan and Strömberg (2004), Kaplan andStrömberg (2004)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
There are good and bad entrepreneurs / projects
Staging can be used as a screening device to distinguishbetween both types
Since the entrepreneur faces the risk of project abandonmentby the VC following bad news, bad managers are less likely toselect a staged contract
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
There are good and bad entrepreneurs / projects
Staging can be used as a screening device to distinguishbetween both types
Since the entrepreneur faces the risk of project abandonmentby the VC following bad news, bad managers are less likely toselect a staged contract
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
There are good and bad entrepreneurs / projects
Staging can be used as a screening device to distinguishbetween both types
Since the entrepreneur faces the risk of project abandonmentby the VC following bad news, bad managers are less likely toselect a staged contract
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Theoretical Modeling
Diamond (1991)For the decision to �nance with short-term or long-term debt
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Theoretical Modeling
Diamond (1991)For the decision to �nance with short-term or long-term debt
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Empirical Evidence
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk. This is consistent with ex ante staging beinga way for good �rms to signal their type (or for VCs toscreen out bad �rms), similar to the way short-term debtis used [...]
Hege et al. (2003)
US VCs have better screening skills [...] than theirEuropean counterparts.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Empirical Evidence
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk. This is consistent with ex ante staging beinga way for good �rms to signal their type (or for VCs toscreen out bad �rms), similar to the way short-term debtis used [...]
Hege et al. (2003)
US VCs have better screening skills [...] than theirEuropean counterparts.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Empirical Evidence
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk. This is consistent with ex ante staging beinga way for good �rms to signal their type (or for VCs toscreen out bad �rms), similar to the way short-term debtis used [...]
Hege et al. (2003)
US VCs have better screening skills [...] than theirEuropean counterparts.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Empirical Evidence
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk. This is consistent with ex ante staging beinga way for good �rms to signal their type (or for VCs toscreen out bad �rms), similar to the way short-term debtis used [...]
Hege et al. (2003)
US VCs have better screening skills [...] than theirEuropean counterparts.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Agency Problems - Adverse Selection
Empirical Evidence
Kaplan and Strömberg (2004)
Ex ante staging using explicit milestones is related tointernal risk. This is consistent with ex ante staging beinga way for good �rms to signal their type (or for VCs toscreen out bad �rms), similar to the way short-term debtis used [...]
Hege et al. (2003)
US VCs have better screening skills [...] than theirEuropean counterparts.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
1 Diversi�cation
Staging can be used to hold a portfolio of investments that arediversi�ed across stages which may give better risk/returncharacteristicsSince funds should be disbursed quickly and due to the limitedlifetime of a VC fund, it is not possible to achievediversi�cation across stages by investing in ventures thatmature at di�erent ratesAchieving diversi�cation via selling stakes in later-stageprojects could also be problematic since this sends a negativemarket signal and valuable information, which VCs acquireover time would be lost during a transfer of ownership.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
1 Diversi�cation
Staging can be used to hold a portfolio of investments that arediversi�ed across stages which may give better risk/returncharacteristics
Since funds should be disbursed quickly and due to the limitedlifetime of a VC fund, it is not possible to achievediversi�cation across stages by investing in ventures thatmature at di�erent ratesAchieving diversi�cation via selling stakes in later-stageprojects could also be problematic since this sends a negativemarket signal and valuable information, which VCs acquireover time would be lost during a transfer of ownership.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
1 Diversi�cation
Staging can be used to hold a portfolio of investments that arediversi�ed across stages which may give better risk/returncharacteristicsSince funds should be disbursed quickly and due to the limitedlifetime of a VC fund, it is not possible to achievediversi�cation across stages by investing in ventures thatmature at di�erent rates
Achieving diversi�cation via selling stakes in later-stageprojects could also be problematic since this sends a negativemarket signal and valuable information, which VCs acquireover time would be lost during a transfer of ownership.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
1 Diversi�cation
Staging can be used to hold a portfolio of investments that arediversi�ed across stages which may give better risk/returncharacteristicsSince funds should be disbursed quickly and due to the limitedlifetime of a VC fund, it is not possible to achievediversi�cation across stages by investing in ventures thatmature at di�erent ratesAchieving diversi�cation via selling stakes in later-stageprojects could also be problematic since this sends a negativemarket signal and valuable information, which VCs acquireover time would be lost during a transfer of ownership.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
2 Specialization
Financing stages are usually linked to important steps in theventure's development process (e.g. design completion,development of a patent or a prototype, development of theproduct to a marketable stage, marketing activities, etc.)If, besides providing capital, VCs do also provide advice andservices, they might specialize in stages where they have acompetitive advantage.Thus staged �nancing occurs because of the specialization ofVCs on certain stages in the venture's life cycle
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
2 Specialization
Financing stages are usually linked to important steps in theventure's development process (e.g. design completion,development of a patent or a prototype, development of theproduct to a marketable stage, marketing activities, etc.)
If, besides providing capital, VCs do also provide advice andservices, they might specialize in stages where they have acompetitive advantage.Thus staged �nancing occurs because of the specialization ofVCs on certain stages in the venture's life cycle
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
2 Specialization
Financing stages are usually linked to important steps in theventure's development process (e.g. design completion,development of a patent or a prototype, development of theproduct to a marketable stage, marketing activities, etc.)If, besides providing capital, VCs do also provide advice andservices, they might specialize in stages where they have acompetitive advantage.
Thus staged �nancing occurs because of the specialization ofVCs on certain stages in the venture's life cycle
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
2 Specialization
Financing stages are usually linked to important steps in theventure's development process (e.g. design completion,development of a patent or a prototype, development of theproduct to a marketable stage, marketing activities, etc.)If, besides providing capital, VCs do also provide advice andservices, they might specialize in stages where they have acompetitive advantage.Thus staged �nancing occurs because of the specialization ofVCs on certain stages in the venture's life cycle
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Gorman and Sahlman (1989)
It seems likely that venture capitalists [...] tend tospecialize in terms of the stage at which they invest [...]
Sahlman (1990)
Venture-capital �rms tend to specialize by industry orstage of investment.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Gorman and Sahlman (1989)
It seems likely that venture capitalists [...] tend tospecialize in terms of the stage at which they invest [...]
Sahlman (1990)
Venture-capital �rms tend to specialize by industry orstage of investment.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Gorman and Sahlman (1989)
It seems likely that venture capitalists [...] tend tospecialize in terms of the stage at which they invest [...]
Sahlman (1990)
Venture-capital �rms tend to specialize by industry orstage of investment.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Gorman and Sahlman (1989)
It seems likely that venture capitalists [...] tend tospecialize in terms of the stage at which they invest [...]
Sahlman (1990)
Venture-capital �rms tend to specialize by industry orstage of investment.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Gorman and Sahlman (1989)
It seems likely that venture capitalists [...] tend tospecialize in terms of the stage at which they invest [...]
Sahlman (1990)
Venture-capital �rms tend to specialize by industry orstage of investment.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Dean and Giglierano (1990)
... VCs do not specialize, but, rather, create uniqueportfolio strategies.
Hege et al. (2003)
[...] �relationship �nancing� (measured by earlycontinuity, average continuity, and the presence of at leastone VC in all rounds) is signi�cantly more important inEurope than in the United Stages [...]
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Dean and Giglierano (1990)
... VCs do not specialize, but, rather, create uniqueportfolio strategies.
Hege et al. (2003)
[...] �relationship �nancing� (measured by earlycontinuity, average continuity, and the presence of at leastone VC in all rounds) is signi�cantly more important inEurope than in the United Stages [...]
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Dean and Giglierano (1990)
... VCs do not specialize, but, rather, create uniqueportfolio strategies.
Hege et al. (2003)
[...] �relationship �nancing� (measured by earlycontinuity, average continuity, and the presence of at leastone VC in all rounds) is signi�cantly more important inEurope than in the United Stages [...]
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Dean and Giglierano (1990)
... VCs do not specialize, but, rather, create uniqueportfolio strategies.
Hege et al. (2003)
[...] �relationship �nancing� (measured by earlycontinuity, average continuity, and the presence of at leastone VC in all rounds) is signi�cantly more important inEurope than in the United Stages [...]
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Project Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversi�cation vs. Specialization
Diversi�cation vs. Specialization
Empirical Evidence
Dean and Giglierano (1990)
... VCs do not specialize, but, rather, create uniqueportfolio strategies.
Hege et al. (2003)
[...] �relationship �nancing� (measured by earlycontinuity, average continuity, and the presence of at leastone VC in all rounds) is signi�cantly more important inEurope than in the United Stages [...]
Tobias Scheinert The Staging of Venture Capital Investments
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Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Outline
1 Venture Capital Framework
2 Motivations for StagingProject Characteristic vs. Real OptionsInformation GenerationAgency Problems
Moral HazardHold-UpAdverse Selection
Diversi�cation vs. Specialization
3 Costs of StagingWindow DressingProject Delay
Tobias Scheinert The Staging of Venture Capital Investments
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Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Staged �nancing can induce the entrepreneur to manipulateinterim results in order to signal positive information and toincrease the chance of obtaining additional funds by the VC
The VC can be hurt in two ways:
Window dressing likely sacri�ces long term pro�t for a goodshort term signalWindow dressing also reduces the information content of thesignal that is used by the VC to determine whether or not todisburse additional funding
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Staged �nancing can induce the entrepreneur to manipulateinterim results in order to signal positive information and toincrease the chance of obtaining additional funds by the VC
The VC can be hurt in two ways:
Window dressing likely sacri�ces long term pro�t for a goodshort term signalWindow dressing also reduces the information content of thesignal that is used by the VC to determine whether or not todisburse additional funding
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Staged �nancing can induce the entrepreneur to manipulateinterim results in order to signal positive information and toincrease the chance of obtaining additional funds by the VC
The VC can be hurt in two ways:
Window dressing likely sacri�ces long term pro�t for a goodshort term signal
Window dressing also reduces the information content of thesignal that is used by the VC to determine whether or not todisburse additional funding
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Staged �nancing can induce the entrepreneur to manipulateinterim results in order to signal positive information and toincrease the chance of obtaining additional funds by the VC
The VC can be hurt in two ways:
Window dressing likely sacri�ces long term pro�t for a goodshort term signalWindow dressing also reduces the information content of thesignal that is used by the VC to determine whether or not todisburse additional funding
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Theoretical Modeling
Cornelli and Yosha (2003)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Theoretical Modeling
Cornelli and Yosha (2003)
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Empirical Evidence
Krohmer et al. (2009)
[...] fund managers may be �window dressing� theirportfolio to impress sponsors, injecting just enough cashto keep losing projects a�oat.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Empirical Evidence
Krohmer et al. (2009)
[...] fund managers may be �window dressing� theirportfolio to impress sponsors, injecting just enough cashto keep losing projects a�oat.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Window Dressing
Empirical Evidence
Krohmer et al. (2009)
[...] fund managers may be �window dressing� theirportfolio to impress sponsors, injecting just enough cashto keep losing projects a�oat.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Withholding funds might delay the growth of the venture asthe entrepreneur needs to �waste� his time assemblinginformation used in the �nancing process
This would be especially costly if there is strong competition
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Withholding funds might delay the growth of the venture asthe entrepreneur needs to �waste� his time assemblinginformation used in the �nancing process
This would be especially costly if there is strong competition
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Empirical Evidence
Li (2008)
[...] the portfolio company will receive the staged�nancing much sooner when a larger number of VC �rmscompete in the same industry.
Dean and Giglierano (1990)
[...] 25% reported a delay in the introduction of thenew product tht was due to delay or failure in �nding�nancing.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Empirical Evidence
Li (2008)
[...] the portfolio company will receive the staged�nancing much sooner when a larger number of VC �rmscompete in the same industry.
Dean and Giglierano (1990)
[...] 25% reported a delay in the introduction of thenew product tht was due to delay or failure in �nding�nancing.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Empirical Evidence
Li (2008)
[...] the portfolio company will receive the staged�nancing much sooner when a larger number of VC �rmscompete in the same industry.
Dean and Giglierano (1990)
[...] 25% reported a delay in the introduction of thenew product tht was due to delay or failure in �nding�nancing.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Empirical Evidence
Li (2008)
[...] the portfolio company will receive the staged�nancing much sooner when a larger number of VC �rmscompete in the same industry.
Dean and Giglierano (1990)
[...] 25% reported a delay in the introduction of thenew product tht was due to delay or failure in �nding�nancing.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Project Delay
Empirical Evidence
Li (2008)
[...] the portfolio company will receive the staged�nancing much sooner when a larger number of VC �rmscompete in the same industry.
Dean and Giglierano (1990)
[...] 25% reported a delay in the introduction of thenew product tht was due to delay or failure in �nding�nancing.
Tobias Scheinert The Staging of Venture Capital Investments
-
Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
Window DressingProject Delay
Thank you for your attention
Tobias Scheinert The Staging of Venture Capital Investments
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Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
References I
Bergemann, D. and U. Hege (1998). Venture capital �nancing, moral hazard, andlearning. Journal of Banking & Finance 22(6-8), 703�735.
Cornelli, F. and O. Yosha (2003). Stage �nancing and the role of convertiblesecurities. The Review of Economic Studies 70(1), 1�32.
Dean, B. V. and J. J. Giglierano (1990). Multistage �nancing of technical start-upcompanies in silicon valley. Journal of Business Venturing 5(6), 375�389.
Diamond, D. W. (1991, August). Debt maturity structure and liquidity risk. TheQuarterly Journal of Economics 106(3), 709�737.
Gompers, P. A. (1995). Optimal investment, monitoring, and the staging of venturecapital. The Journal of Finance 50(5), 1461�1489.
Gorman, M. and W. A. Sahlman (1989, July). What do venture capitalists do?Journal of Business Venturing 4(4), 231�248.
Hege, U., F. Palomino, and A. Schwienbacher (2003, November). Dereminants ofventure capital performance:europe and the united states. Technical Report 3, LSEWorking Paper.
Hsu, Y.-W. (2008, November). Staging of venture capital investment: a real optionsanalysis. Small Business Economics.
Tobias Scheinert The Staging of Venture Capital Investments
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Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
References II
Kaplan, S. N. and P. Strömberg (2004, October). Characteristics, contracts, andactions: Evidence from venture capitalist analyses. Journal of Finance 59(5),2177�2210.
Kaplan, S. N. and P. Stromberg (2003, April). Financial contracting theory meets thereal world: An empirical analysis of venture capital contracts. Review of EconomicStudies 70(2), 281�315.
Krohmer, P., R. Lauterbach, and V. Calanog (2009). The bright and dark side ofstaging: Investment performance and the varying motivations of private equity�rms. Journal of Banking & Finance 33(9), 1597�1609.
Li, Y. (2008). Duration analysis of venture capital staging: A real options perspective.Journal of Business Venturing 23(5), 497�512.
Neher, D. V. (1999). Staged �nancing: An agency perspective. The Review ofEconomic Studies 66(2), 255�274.
Pindyck, R. S. (1993, August). Investments of uncertain cost. Journal of FinancialEconomics 34(1), 53�76.
Roberts, K. and M. L. Weitzman (1981, September). Funding criteria for research,development, and exploration projects. Econometrica 49(5), 1261�1288.
Tobias Scheinert The Staging of Venture Capital Investments
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Venture Capital FrameworkMotivations for Staging
Costs of StagingReferences
References III
Sahlman, W. A. (1990). The structure and governance of venture-capitalorganizations. Journal of Financial Economics 27(2), 473�521.
Wang, S. and H. Zhou (2004). Staged �nancing in venture capital: moral hazard andrisks. Journal of Corporate Finance 10(1), 131�155.
Tobias Scheinert The Staging of Venture Capital Investments
Venture Capital FrameworkMotivations for StagingProject Characteristic vs. Real OptionsInformation GenerationAgency ProblemsDiversification vs. Specialization
Costs of StagingWindow DressingProject Delay
References