Carsten Bienz

The Dynamics of Venture Capital Contracts

We analyze the degree of contract completeness with respect to staging of venture capital investments using a hand-collected German data set of contract data from 464 rounds into 290 entrepreneurial firms. We distinguish three forms of staging (pure milestone financing, pure round financing and mixes). Thereby, contract completeness reduces when going from pure milestone financing via mixes to pure round financing. We show that the decision for a specific form of staging is determined by the expected distribution of bargaining power between the contracting parties when new funding becomes necessary and the predictability of the development process. To be more precise, parties choose the more complete contracts the lower the entrepreneur’s expected bargaining power - the maximum level depending on the predictability of the development process.

Venture Capital Exit Rights

Theorists argue that exit rights can mitigate hold-up problems in venture capital. Using a hand-collected data-set of venture capital contracts from Germany we show that exit rights are included more frequently in venture capital contracts when a hold-up problem associated with the venture capitalists exit decision is likely. Examples include drag-along and tag-along rights. Additionally, we find that almost all exit rights are allocated to the venture capitalist rather than to the entrepreneur. In addition, we show that besides the basic hold-up mechanism there are other mechanisms such as ex-ante bargaining power and the degree of pledgeable income that drive the allocation of exit rights.

A Pecking Order of Venture Capital Exits

We develop a model of exits from venture capital backed companies based on post-exit moral hazard. It captures the trade-off between the two most important exit choices: IPOs and trade sales. The model shows that highly profitable companies that need few oversight will go public, while less profitable companies that require more control will be sold in a trade sale. This suggests that the common notion that IPOs per se are more profitable than sales is wrong and observed returns suffer from a measurement bias. This is consistent with empirical evidence that IPOs have indeed higher rates of return than trade sales.

Strategic Valuation Management in Private Equity Fundraising

This paper investigates the effect of fundraising events on private equity funds self-reported valuations of existing portfolio companies. In the typical private equity fund structure, the general partners (GP) of the funds have both the incentives and the ability to manage their current fund’s track record in order to facilitate fundraising. We show that GPs actively use this ability to manage the valuations of their portfolio companies in practice. For this purpose, we construct a unique dataset containing quarterly valuations for the portfolio companies of a sample of Nordic GPs. Using a matching approach with double treatment, we isolate the fundraising specific valuation effect for Norwegian portfolio companies. We find that this effect materialises through a particular valuation pattern where unrealised returns are shifted in time in order to enable a boost in returns during the run-up to fundraising. This pattern cannot be explained by underlying (good) firm performance.