Klonowski The Venture Capital Deformation

Value Destruction throughout the Investment Process
1. Auflage 2018
ISBN: 978-3-319-70323-7
Verlag: Springer Nature Switzerland
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 337 Seiten

Reihe: Progress in Mathematics

In spite of the robust development of venture capital that has occurred over the last three decades, returns from venture capital have been declining. This book focuses on a simple question: why? The answer lies in the context of multiple deformations that have occurred throughout the venture capital process. The book critically assesses the ways in which interactions between different stakeholders in the venture capital ecosystem change (or 'deform') venture capital, decreasing its value. Klonowski also reveals that venture capital actually has few benefits-and some outright disadvantages-for entrepreneurs, and it can create a self-perpetuating cycle of investment and loss for the entire venture capital industry. This is especially true as corporate governance and compensation structures may create significant misalignments, incongruities, and conflicts of interest between general and limited partners.


Darek Klonowski is Professor of Business Administration at Brandon University, Canada. Prior to joining academia, he worked in the venture capital and private equity industry. He has published three books with Palgrave Macmillan: The Venture Capital Investment Process (2010), Private Equity in Poland (2011), and Private Equity in Emerging Markets (2012).

Autoren/Hrsg.

Klonowski, Darek

Inhaltsverzeichnis

1;Dedication;5
2;Preface;6
2.1;The Structure of the Book;7
2.2;The Book’s Unique Perspectives and Features;8
3;Acknowledgments;10
4;Contents;11
5;List of Figures;13
6;List of Tables;15
7;List of Boxes;16
8;Part I: Introduction to Venture Capital;17
8.1;Chapter 1: Venture Capital: A Closer Look Behind the Curtain;18
8.1.1;Venture Capital: Definitions, Characteristics, and Forms;18
8.1.2;Venture Capital and Other Modes of Entrepreneurial Finance;23
8.1.3;Perspectives on Venture Capital: Advantages and Disadvantages;26
8.1.3.1;Advantages of Venture Capital for LPs and Entrepreneurs;29
8.1.3.1.1; LPs’ Perspectives on Venture Capital;30
8.1.3.1.2; Entrepreneurial Perspectives on Venture Capital;31
8.1.3.2;Disadvantages of Venture Capital;37
8.1.3.2.1; Disadvantages for LPs;38
8.1.3.2.2; Disadvantages for Entrepreneurs;39
8.1.4;Illuminating the J-Curve in Venture Capital Investing;40
8.1.4.1;The “n”-Curve in the Venture Capital Industry;42
8.1.5;The Venture Capital Investment Process;43
8.1.6;Bibliography;46
8.2;Chapter 2: Maturation, Segmentation, and Competition in the Venture Capital Industry;48
8.2.1;The Maturation of the Venture Capital Industry;48
8.2.2;Venture Capital in the United States;58
8.2.3;The Dual-Segment Structure of the Venture Capital Industry;61
8.2.3.1;Overview of Industry Analysis;61
8.2.3.2;An Industrial Analysis of the Venture Capital Industry;63
8.2.3.3;The Investee Firms Market Sub-segment;65
8.2.3.4;The LP Market Sub-segment;68
8.2.3.5;Interactions Between the Two Market Sub-Segments;72
8.2.4;Bibliography;77
9;Part II: Venture Capital Deformations Throughout the Investment Process;79
9.1;Chapter 3: Fund Formation: Structural and Operational Deformations in Venture Capital;80
9.1.1;Structure and Operations of Venture Capital Funds;81
9.1.1.1;Corporate Governance and Agency Issues in Venture Capital;85
9.1.1.2;Information Disclosure by Venture Capital Firms;92
9.1.1.3;Legal Documentation in the Venture Capital Structure;94
9.1.2;Compensation in Venture Capital;96
9.1.2.1;Components of Venture Capital Compensation;100
9.1.2.2;The Distortion of LP Behaviors;112
9.1.3;The Ultimate Decision Makers in Venture Capital: The Investment Committee;113
9.1.3.1;Weaknesses in the Operations of Investment Committees;115
9.1.4;Human Resource Management in Venture Capital Firms;118
9.1.4.1;Team Composition;118
9.1.4.2;Turnover;121
9.1.4.3;Succession;124
9.1.5;Bibliography;126
9.2;Chapter 4: Deal Generation: Optimal Modes of Entrepreneurial Value Creation;129
9.2.1;Entrepreneurs and Value Creation;131
9.2.2;Optimal Entrepreneurial Growth and Value Generation;133
9.2.3;Value Creation Patterns: “Natural” Versus “Accelerated”;138
9.2.3.1;“Natural” Value Growth Pattern: The Entrepreneurial Style;140
9.2.3.2;“Accelerated” Value Growth Pattern: The Venture Capital Preferred Mode;142
9.2.3.3;Consolidating “Natural” and “Accelerated” Modes of Value Creation;149
9.2.4;Value Creation and Value Recognition;151
9.2.5;Bibliography;154
9.3;Chapter 5: Screening and Evaluation: Misguided Investigation of Entrepreneurial Firms;156
9.3.1;Venture Capital Investigation of Entrepreneurial Firms;156
9.3.2;Venture Capital Decision Making;160
9.3.2.1;Cognitive Biases in Venture Capital Decision Making;164
9.3.3;Commercial Attractiveness of Entrepreneurial Firms;167
9.3.3.1;Management;169
9.3.3.2;Market;172
9.3.3.3;Meaning;174
9.3.3.4;Merchandise;177
9.3.3.5;Market Share;178
9.3.3.6;Mode of Operations or Business Model;179
9.3.3.7;Margins and Money Management;180
9.3.3.8;Conclusions on Venture Capitalists’ Commercial Analysis;181
9.3.3.9;Venture Capitalists’ Rejected Deals;182
9.3.4;External Due Diligence;183
9.3.4.1;The Costs and Benefits of External Due Diligence;188
9.3.5;Bibliography;190
9.4;Chapter 6: Deal Completion: Inequitable Agreements in Venture Capital Contracting;194
9.4.1;Agency Considerations;196
9.4.2;Asymmetric Information;198
9.4.3;Moral Hazard and Adverse Selection in Venture Capital;199
9.4.3.1;Moral Hazard;200
9.4.3.2;Adverse Selection;202
9.4.4;Financial Contracting in Venture Capital;207
9.4.4.1;Deal Pricing;208
9.4.4.2;Security Type and Design;215
9.4.4.3;Rights and Provisions in Venture Capital Deals;217
9.4.5;Bibliography;230
9.5;Chapter 7: Monitoring: The Venture Capital Barren Toolbox for Entrepreneurial Firms;231
9.5.1;Understanding Venture Capital Beyond  Its Cash Contribution;235
9.5.1.1;Profiles of Venture Capitalists and the Futility of Their Hands-on Involvement;237
9.5.2;The Venture Capital “Professionalization” Toolbox;246
9.5.2.1;Entrepreneurial Professionalization Versus Corporatization;256
9.5.3;Venture Capital and Innovation: Breaking the Myth;258
9.5.4;Conflicts Between Venture Capitalists and Entrepreneurs;262
9.5.5;Bibliography;265
9.6;Chapter 8: Exiting: Distressed Value Realization in Venture Capital;268
9.6.1;Modes of Venture Capital Value Realizations;269
9.6.1.1;Venture Capitalists’ Adverse Behavioral Patterns in Exits;274
9.6.1.2;The European Experience in Venture Capital Exits;279
9.6.2;Bibliography;281
10;Part III: Conclusions: The Venture Capital Industry at the Crossroads;283
10.1;Chapter 9: Venture Capital: “Subprime” Returns and the Value Chain Analysis;284
10.1.1;Venture Capital’s “Subprime” Financial Performance;284
10.1.1.1;Quantitative Measures of Venture Capital Performance;288
10.1.1.2;Databases of Venture Capital Performance;293
10.1.1.3;Venture Capital Returns from the United States;296
10.1.1.4;Financial Returns from Buyout Deals;301
10.1.2;The Value-Chain Analysis of Venture Capital Performance;305
10.1.3;Bibliography;313
10.2;Chapter 10: Improving the Substandard Venture Capital Model;317
10.2.1;What Business Is a Venture Capitalist Really In?;317
10.2.2;LPs’ Tolerance of “Subprime” (and Declining) Returns from Venture Capital;319
10.2.3;Adjustments to the Venture Capital Industry;322
10.2.3.1;“Right-Allocating” Capital to the Venture Capital Industry;323
10.2.3.2;Improving Human Resources in Venture Capital;325
10.2.3.3;Venture Capital Decision Making;327
10.2.3.4;Fund Selection by LPs;327
10.2.3.5;The Pursuit of Superior Venture Capital Experience by Entrepreneurs;328
10.2.4;Bibliography;330
11;Index;331