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Venture Capital

Fund Certification, Performance Prediction and Learnings from the Past

Series:

Armin Höll-Steiner

This book contains three studies. The first study investigates the relationship between private equity investors and fund managers and how intermediaries can mitigate their agency problems. The incentive structure of three intermediary types and their behavior in signaling fund qualities to investors are studied theoretically. A recommendation which intermediary to consult is given. The second study presents a new statistical method to predict the performance distribution of venture capital direct investments. The accuracy of this method is investigated and compared to existing approaches. The third study is about the European venture capital market’s historic development before and after the internet bubble and reasons for the bad development especially after the bubble.

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1 Introduction 1

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.1 Markets for Risky Assets Innovation is one of the keys to success and prosperity of a modern econ- omy. Beyond the innovation which occurs in large well established compa- nies, mainly small start-ups and young companies developing new ideas and trying new concepts often change whole markets. For example the exploiting of the internet search potential for marketing by Google changed the whole Advertising and Marketing as well as print industry. Generally speaking, young growth companies support structural industry changes securing and creating new jobs (Kortum and Lerner, 2000; Harhoff et al., 1996) in an economy. Success and failure of start-ups are very close to each other. In a popu- lation of young companies usually only few are really successful while a big share of them fails completely. Moreover, it usually takes several years until it turns out whether a new business idea is successful or not (Chan, 1983). This reflects the high risks any person or institution faces when investing in start-ups and new business ideas. However, taking these risks is necessary to achieve the innovations mentioned above. To be able to invest in the start-ups, to take these risks and to handle them professionally an industry - the Private Equity (PE) and Venture Capital (VC) industry - developed (mainly) during the last decades. This industry involves specialized professional players who try to mitigate the key issues in this market: Most important players are PE and VC funds. These in- stitutions are huge capital collectors who mediate...

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