Jeffrey G. MacIntosh

A Cross-Country Comparison of Full and Partial Venture Capital Exits

This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an IPO involves a sale of all of the venture capitalists holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalists holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a buyback exit (in which the entrepreneur buys out the venture capitalist) or a secondary sale, a partial exit entails a sale of only part of the venture capitalists holdings. A partial write-off involves a write down of the investment. We consider the determinants of full and partial venture capital exits for all five exit vehicles. We also perform a number of comparative empirical tests on samples of full and partial exits derived from a survey of Canadian and U.S. venture capital firms. The data offer support to the central hypothesis of the paper: that the greater the degree of information asymmetry between the selling VC and the buyer, the greater the likelihood of a partial exit to signal quality. The data also indicate differences between the U.S. and Canadian venture capital industries, and highlight the impact of legal and institutional factors on exit strategies across countries. Parts of this paper appear in an earlier and different version entitled The Extent of Venture Capital Exits: Evidence from Canada and the United States, forthcoming in a book pursuant to a conference at Tilburg University and edited by J. McCahery and L.D.R. Renneboog (Oxford University Press).

Venture capital investment duration in Canada and the United States

This paper considers efficient venture capital investment duration for different types of entrepreneurial firms so that on exit information asymmetries between the venture capitalist (as seller) and the new owners of the investment are minimized, and capital gains maximized. We hypothesize that a number of factors are likely to affect investment duration, and our empirical tests confirm the statistical significance of some of these variables (stage of firm at first investment, capital available to the venture capital industry, whether the exit was preplanned, whether the exit was made in response to an unsolicited offer). However, the fit between our theoretical model and the data is stronger in the United States than in Canada, offering evidence in support of the view that Canadian and U.S. venture capital markets are far from fully integrated.

The Determinants of R&D Expenditures: A Study of the Canadian Biotechnology Industry

The relative importance of a multitude of factors forthe allocation of expenses towards R & D are assessedin an empirical study of the Canadian biotechnologyindustry. The results show that patent protection andstrategic alliances facilitate R & D spending. Theresults also show that early-stage firms spend agreater proportion of the expenditures on R & D, whilefirms engaged in R & D in platform technologies andfirms with high debt-equity ratios spend a lowerproportion of their expenditures on R & D. Demand pulland competition variables are insignificant factors. Finally, counter to our expectations, R & Dexpenditures are more intensive among firms engaged inR & D in areas in which consumer controversies are morepronounced.

The Role of Interjurisdictional Competition in Shaping Canadian Corporate Law

While competitive corporate law production has been well documented in the United States, there is a comparative dearth of Canadian evidence. This article addresses the question of whether the competitive model of corporate law production has operated, or could operate, in Canada. To this end, both the supply side and the demand side of the Canadian incorporation market are critically examined. The theory and empirical evidence indicate that institutional barriers have limited the extent of competitive corporate law production. The Uniformity Hypothesis, which postulates a legislative maximand of uniformity of provincial laws and not revenues derived from incorporation business, is advanced as a more compelling account of the observed pattern of Canadian corporate law reform. The evidence is consistent with related research indicating that jurisdiction shopping for corporate charters has not always resulted in gains for shareholders of Canadian corporations.

Economic and Institutional Determinants of Venture Capital Investment Duration

This paper considers efficient venture capital investment duration for different types of entrepreneurial firms so that on exit information asymmetries between the venture capitalist (as seller) and the new owners of the investment are minimized, and capital gains maximized. We hypothesize that a number of factors are likely to affect investment duration, and our empirical tests confirm the statistical significance of some of these variables (stage of firm at first investment, capital available to the venture capital industry, whether the exit was preplanned, and whether the exit was made in response to an unsolicited offer). However, the fit between our theoretical model and the data is stronger in the United States than in Canada, offering evidence in support of the view that institutional factors have distorted investment duration in Canada.

Boom, Bust and Litigation in Venture Capital Finance

Venture capital is still a comparatively young industry. While Gompers and Lerner date the first venture capital firm to 1946, the industry did not really get on its feet until the late 1970s. Nonetheless, the venture capital industry has been through a sufficient number of business cycles that empiricists have mapped out a number of systematic differences in the behavior of venture capitalists (VCs) in boom and bust periods. One aim of this Article is to review this literature with a view to documenting some of these differences. Another is to draw these empirical findings together, indicating how the various strands of the empirical literature paint a remarkably consistent picture of how VCs respond to the changing economic incentives that exist in boom and bust periods. We suggest that these strands can be united by identifying three key parameters that are most responsible for prompting changes in VC behavior as between boom and bust. These are: changes in the availability and valuation of IPO exits, the inelasticity of VC managerial talent in the short run; and the rapidly increasing supply of capital to venture capital funds in boom periods. We also seek to explore how the changing availability of IPOs, and greatly enhanced IPO valuations produced widespread and systematic pathologies in IPO exits during the Internet bubble (1999-2000) - pathologies that led investment bankers and VCs to change their behavior in value-destructive ways. While the evidence suggests that these pathologies did not start during the bubble, they clearly reached their apogee during that period. If there is a silver lining in all this, it is that the bubble has provided policy makers with a taxonomy of potential abuses and markers that point to the presence of such abuses, particularly extreme underpricing of new offerings. This learning will greatly lower the likelihood that these abuses will be repeated in the future. We also discuss how a court ought to construe the VCs duties of loyalty and care in a lawsuit either by investors in a limited partnership venture capital fund, or by an investee firm whose interests were poorly served either by opportunistic or negligent VC behavior. In particular, since VC behavior differs from boom to bust, we raise the question of whether a court should look to bust period behavior in constructing a standard of care, or to boom period behavior, or some amalgam of the two. For a variety of reasons, we suggest that courts should primarily have regard to bust period behavior. We review empirical evidence that venture capitalist activities differ depending on economic conditions. We also review empirical evidence that shows venture capital fund managers tend to distort reports to institutional investors and inflate performance figures in bust periods.

Tantalus Unbound: Government Policy and Innovation in Canada

The future of the western industrialized economies, including Canada, depends on healthy and innovative high-tech sectors. In 2010, this realization spurred the Canadian government to commission a blue-ribbon panel charged with assessing the state of programs designed to support business and commercially oriented research and development. The resultant Jenkins Report contains many useful recommendations aimed at consolidating disparate offerings, measuring existing initiatives’ performance and fostering federal-provincial cooperation to improve programs’ impact on the tech sector. However, the Report erred in overlooking the squandering of government resources on tax subsidies to investors in Labour-Sponsored Venture Capital Corporations (LSVCCs) — union-sponsored specialized mutual funds meant to promote the development of high-growth small and mediums-sized businesses — which are far outperformed by the private sector and often waste capital better used elsewhere. It is also unduly harsh on the federal Scientific Research and Experimental Development Tax Credit, which is critical to the early-stage start-ups that give rise to high-tech giants. In judiciously assessing the Jenkins Report’s recommendations and offering alternatives, this paper serves as a much-needed corrective, offering policy makers clear guidance in securing Canada’s economic future.

Consumer Controversy and the Funding of Biotechnology Research

Manufacturers of the products of biotechnology confront a variety of risks in making decisions regarding how to allocate research and development budgets. This paper explores the importance of one such factor: the prospect of consumer resistance based on real or imagined harms to consumers or the environment, and/or philosophical opposition to particular biotechnologies. A survey of the Canadian biotechnology industry provides evidence that a majority of manufacturers take potential controversies into account in funding decisions. However, even in those industries in which controversies are most likely to arise, potential controversy plays a minor role compared to other determinants of research and development budgets.