Rainer Lauterbach

The Bright and Dark Side of Staging: Investment Performance and the Varying Motivations of Private Equity Firms

Previous papers that examined investment decisions by private equity funds are divided on whether staging has a positive or negative effect on returns. We believe these opposing views can be reconciled by studying when staging is used during the life of the investment relationship: We find that staging has a positive effect on investment returns in the beginning of the investment relationship, consistent with the notion that staging helps mitigate information asymmetry. However, staging appears to be negatively associated with returns when used prior to the exit decision. Our unique dataset allows us to measure these intertemporal effects precisely.

Venture Capital Financing from an Entrepreneur's Perspective

One option for entrepreneurs to finance and grow their companies is venture capital. After the boom and bust of the new economy, the venture capital industry has regained importance in financing innovative companies. This study contributes by providing a survey of the literature on the structural and behavioural aspects of venture capital financing from the entrepreneurs perspective. The aim of this survey is to organize and summarize existing theoretical and empirical work on venture capital financing with a view to making entrepreneurs aware of best practice for their interactions with venture capital companies. The authors conclude that entrepreneurs, before seeking venture capital finance, should consider this option carefully, as investors could pursue their own aims even if they are contradictory to those of the entrepreneur.

The Need for Diversification and its Impact on the Syndication Probability of Venture Capital Investments

In recent years, the venture capital and private equity industries have witnessed significant growth in assets under management. Investors prefer investing in funds instead of single investments primarily for the diversification benefits and hence the need to determine whether growing fund volumes are beneficial for diversification is of significant importance. To examine this issue, this article uses a unique dataset that includes fully and partially realized investments portfolio companies worldwide. The results show that diversification benefits in this industry can be limited by transaction costs due to information asymmetries. Syndication is a common instrument that is used to overcome these limitations and achieve sufficient diversification, especially for smaller fund sizes. The results also show fund size and investment experience are negatively correlated with syndication probability, while early-stage investments and venture deals are positively correlated.

Total Loss Risk in European versus US-based Venture Capital Investments

This chapter provides evidence that there are systematic differences regarding the total loss risk for European and U.S.-American venture capital (VC) and private equity investments. It measures the risk of total losses for a set of investments twofold, namely, the probability of one failure to the total number of investments in a given fund portfolio, and the fraction of capital lost in one failure to the total capital injected in all deals of a fund portfolio, which is termed as the total-loss–capital ratio. It uses a unique dataset and analyzes 1011 matched private equity and VC investments in Europe and the U.S. during the period of 1979 through 2003 in regards to total losses. This dataset is used to test three hypotheses in detail concentrating on the investment experience of the fund management, syndication of a stake with other investors, and the focus of the investor on venture capital. After analyzing the total dataset for these hypotheses, the commonalities as well as differences in regards to total losses for U.S.- versus European-based deals are investigated. The results show that more experienced European investment firms prefer a lower probability of failure at the expense of a higher total-loss–capital ratio. The more experienced European firms, because of their cultural differences, are more focused on the avoidance of a failure than on the amount of capital lost.

Simple and cross-efficiency of European venture capital firms using data envelopment analysis

Publisher Summary This chapter applies data envelopment analysis (DEA) and uses the basic and cross-efficiency models to evaluate the performance of European venture capital firms. DEA is a non-parametric technique that measures the relative efficiency of decision-making units such as VC firms on the basis of observed data, and produces an efficiency score as a single number between 0 and 1.00. Its main benefit is that it identifies the best-performing VC firm and determines the relative efficiencies of a set of similar VC firms. The power of DEA lies in its ability to deal with several inputs and outputs while not imposing a precise relation between input and output variables. With the ever-increasing number of VC firms, DEA can be used as an alternative appraisal method for ranking their efficiency. One can rank VC firms by efficiency score and compare the results among European countries where VC firms are popular. DEA can be used as an alternative selection tool to assist pension funds, institutional investors, and high net-worth individuals in selecting efficient VC firms. It can complement traditional measures and can present a more complete picture of VC performance appraisal by providing reliable results. As the DEA method slowly becomes accepted and used by more academics, money managers, and institutional investors, its functional ability can improve the process of selecting efficient and high-performing VC firms.