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VENTURE CAPITAL AND POST IPO PERFORMANCE

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Title: VENTURE CAPITAL AND POST IPO PERFORMANCE


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VENTURE CAPITAL ANDPOST IPO PERFORMANCE
  • Group A-8
  • David Allison 100326780
  • Donaldo Madrid 100292425
  • Eghan Rashidi 100321747
  • Suzanne Robertson 100621555
  • Victor Samuel 100326398

3
Agenda
  • Introduction
  • Previous Studies
  • Benefits of Venture Capital financing on start-up
    firms
  • Methodology and Data
  • Results
  • Implications of study and policy issues
  • Conclusion
  • Question

4
Literature Review
  • Main objective was to compare post-IPO
    performance of venture-backed firms to that of
    non-venture backed firms
  • To develop a model that will measure the success
    of a firms post-IPO performance that accounts
    for both venture capital financing and the role
    of the venture capitalists

5
Post-IPO Performance of Venture Capital Firms
  • Brav and Gompers (1997)
  • Results found that venture-backed IPOs over a
    five year period outperformed non-venture backed
    IPOs only when using equally weighted returns
  • Underperformance of non-venture backed is not an
    IPO effect, it is an industry and firm effect

6
Post-IPO Performance of Venture Capital Firms
  • Da Silva Rosa, Velaythuen and Walter (2003)
  • Studied the strength and validation of Brav and
    Gompers (1997)
  • No indications that the long-run performance of
    venture capital and non-venture capital-backed
    IPOs was based on their industry
  • Concluded that in the long-run, venture
    capital-backed firms outperform non-venture
    capital-backed firms

7
Post-IPO Performance of Venture Capital Firms
  • Florin (2005)
  • Examined the difference in post IPO performance
    comparing firms that had received venture capital
    financing to firms that did not
  • Marginal differences were concluded to be
    insignificant

8
Monitoring and Reputations of the Venture
Capitalists
  • Brau et al. (2004)
  • Found that experience and monitoring of the
    venture capitalists has no effect on the success
    of a firm
  • Findings were inconsistent
  • Jain and Kini (1995)
  • In the aftermarket venture capital-backed IPOs
    have stronger operating performance
  • Non-venture capital-backed firms experience a
    decline in operating profits

9
Monitoring and Reputations of the Venture
Capitalists
  • Jain and Kini (2000)
  • Completed a survival analysis which resulted that
    venture capital-backed firms have a higher
    survival rate post-IPO
  • This is because of prestige, reputation and
    monitoring of the venture capitalists

10
Literature Review Conclusion
  • Enabled us to better understand how venture
    capital and capitalists help in the survival of a
    firm post-IPO
  • The trend is that firms that have had venture
    capital as a source of financing prior to the
    IPO have a better rate of survival post IPO

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Benefits of Venture Capital
  • More than just financial value is brought to the
    firm- expertise, experience, contacts, and
    credibility
  • Venture capitalists can play an integral role in
    helping the firm in its strategic decisions by
    bringing knowledge and experience from running
    other firms
  • Efficiently monitoring and overseeing strategy as
    a counter to managers entrenchment and cognitive
    limitations

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Benefits of Venture Capital
  • Corporate governance venture capitalists add
    detailed knowledge to the development and growth
    of the firm
  • Can also establish contractual constraints on
    management decisions
  • A greater stake in the firm can increase
    incentives for more effective oversight
  • The quality of due diligence and participation in
    corporate governance can send a positive signal
    to the markets

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Two Perspectives
  • The Certification/Monitoring model
  • (Megginson Weiss, 1991 Lin, 1996 Lerner,
    1994 Jain Kini, 1995 Brav Gompers, 1997)
  • The Adverse Selection/Grandstanding model
  • (Amit et. al., 1990 Gompers, 1996)

14
Another Perspective
  • Lange, Bygrave, et. al. (2001) found that top
    venture capitalists, combined with top
    underwriters, also contribute to the success of a
    firm.

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Hypothesis
  • Venture capital-backed firms will exhibit
    superior financial and equity returns relative to
    non-venture-backed firms

16
Methodology
  • Fama French (1992)
  • Generalized Least Squares (GLS) estimator
  • Dummy Variable
  • Expected Returns
  • Significance test (t-test)

17
Data
  • Thompson/Mergent and Yahoo! Finance
  • Indices ( NYSE, AMEX, NASDAQ, Wilshire 5000)
  • 2001- US Firms IPO
  • 2003-BV, ME, Market Beta
  • VC-Backed non-VC backed

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Results
  • There is enough evidence from the data to suggest
    at a 0.10, 0.05, or 0.01 level of significance
    that venture-backed firms had higher returns than
    non-venture-backed firms
  • P-value of 0.004
  • Also evidence that venture-backed firms had lower
    unsystematic risk

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Table of regression results
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Proof of Unsystematic Risk
  • Total risk unsystematic systematic risk
  • Total risk measured in variance or st. dev.
  • Systematic risk measured in market beta
  • VB st. dev 0.0958, NVB st. dev 0.0868
  • VB mkt beta 0.783,NVB mkt beta 0.582
  • Since total risk is very close, but VB has higher
    systematic risk, suggests VB has less
    unsystematic risk
  • Consistent with theory

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IPOs on Londons Alternative Market
  • Many venture-backed Canadian firms issue their
    IPOs on the London Stock Exchanges Alternative
    Investment Market (AIM)
  • Issue on AIM because of institutional investors
    interests in small-growth firms
  • About 34 Canadian companies on AIM including
    Ottawa based Ubiquity Software Inc. March
    Networks

22
Success of IPOs on AIM
  • 2005 - the value of IPOs on AIM more than
    doubled from 2.37 billion to 5.63 billion
  • International IPOs increased to 76 from 40
  • Value of international IPOs has quadrupled from
    2.09 billion to 529.5 billion
  • 2005 - AIMs listing rose 60 compared with TSX
    Venture growth rate of only 16

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Advantages and Disadvantages of issuing on AIM
  • ADVANTAGES
  • Pursues listings from a wide variety of sectors
  • Light regulation User Friendly
  • European investors are less skeptical about
    high-tech startups
  • Faster to issue IPO
  • DISADVANTAGES
  • Financial statements filed semi-annually, not
    quarterly
  • Not subject to CEO/CFO or internal control
    certification
  • Analysis and management discussion not required

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Implications
  • Government should create policy to induce
    Canadian venture start-ups to IPO in Canada not
    overseas
  • Policy suggestions
  • Semi-annual reporting for first few years
  • High costs associated with current regulations
  • Tax incentives for investors
  • Examine Canadian security regulations to attempt
    to increase liquidity

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QUESTIONS
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