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  • 1.  
  • 2. VENTURE CAPITAL AND POST 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 firm’s 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
  • 11. 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
  • 12. 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
  • 13. 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.
  • 15. 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
  • 18. 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
  • 19. Table of regression results 0.004 2.978 1.34E-03 3.98E-03 DVCG 0.002 -3.289 4.09E-04 -1.34E-03 LNBTMG 0.001 3.705 3.62E-04 1.34E-03 LNMEG 0.9 0.1269 1.55E-03 1.97E-04 BG 0.003 -3.122 7.94E-03 -2.48E-02 CG P-VALUE 50 DF ERROR COEFFICIENT NAME   T-RATIO STANDARD ESTIMATED VARIABLE R-SQUARE = 0.4593 R-SQUARE ADJUSTED = 0.4161 0.004 3.009 1.32E-03 3.98E-03 DVCG 0.002 -3.324 4.03E-04 -1.34E-03 LNBTMG 0.000 3.742 3.58E-04 1.34E-03 LNMEG 0.003 -3.174 7.76E-03 -2.46E-02 CG P-VALUE 51 DF ERROR COEFFICIENT NAME   T-RATIO STANDARD ESTIMATED VARIABLE R-SQUARE = 0.4592 R-SQUARE ADJUSTED = 0.4273
  • 20. 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
  • 21. IPOs on London’s Alternative Market
    • Many venture-backed Canadian firms issue their IPOs on the London Stock Exchange’s 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 IPO’s on AIM
    • 2005 - the value of IPO’s on AIM more than doubled from $2.37 billion to $5.63 billion
    • International IPO’s increased to 76 from 40
    • Value of international IPO’s has quadrupled from $2.09 billion to $529.5 billion
    • 2005 - AIM’s listing rose 60% compared with TSX Venture growth rate of only 16%
  • 23. Advantages and Disadvantages of issuing on AIM
    • 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
    • Financial statements filed semi-annually, not quarterly
    • Not subject to CEO/CFO or internal control certification
    • Analysis and management discussion not required
  • 24. 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