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4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
4500Presentation1.ppt
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4500Presentation1.ppt

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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 <ul><li>Introduction </li></ul><ul><li>Previous Studies </li></ul><ul><li>Benefits of Venture Capital financing on start-up firms </li></ul><ul><li>Methodology and Data </li></ul><ul><li>Results </li></ul><ul><li>Implications of study and policy issues </li></ul><ul><li>Conclusion </li></ul><ul><li>Question </li></ul>
  • 4. Literature Review <ul><li>Main objective was to compare post-IPO performance of venture-backed firms to that of non-venture backed firms </li></ul><ul><li>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 </li></ul>
  • 5. Post-IPO Performance of Venture Capital Firms <ul><li>Brav and Gompers (1997) </li></ul><ul><li>Results found that venture-backed IPOs over a five year period outperformed non-venture backed IPOs only when using equally weighted returns </li></ul><ul><li>Underperformance of non-venture backed is not an IPO effect, it is an industry and firm effect </li></ul>
  • 6. Post-IPO Performance of Venture Capital Firms <ul><li>Da Silva Rosa, Velaythuen and Walter (2003) </li></ul><ul><li>Studied the strength and validation of Brav and Gompers (1997) </li></ul><ul><li>No indications that the long-run performance of venture capital and non-venture capital-backed IPOs was based on their industry </li></ul><ul><li>Concluded that in the long-run, venture capital-backed firms outperform non-venture capital-backed firms </li></ul>
  • 7. Post-IPO Performance of Venture Capital Firms <ul><li>Florin (2005) </li></ul><ul><li>Examined the difference in post IPO performance comparing firms that had received venture capital financing to firms that did not </li></ul><ul><li>Marginal differences were concluded to be insignificant </li></ul>
  • 8. Monitoring and Reputations of the Venture Capitalists <ul><li>Brau et al. (2004) </li></ul><ul><li>Found that experience and monitoring of the venture capitalists has no effect on the success of a firm </li></ul><ul><li>Findings were inconsistent </li></ul><ul><li>Jain and Kini (1995) </li></ul><ul><li>In the aftermarket venture capital-backed IPOs have stronger operating performance </li></ul><ul><li>Non-venture capital-backed firms experience a decline in operating profits </li></ul>
  • 9. Monitoring and Reputations of the Venture Capitalists <ul><li>Jain and Kini (2000) </li></ul><ul><li>Completed a survival analysis which resulted that venture capital-backed firms have a higher survival rate post-IPO </li></ul><ul><li>This is because of prestige, reputation and monitoring of the venture capitalists </li></ul>
  • 10. Literature Review Conclusion <ul><li>Enabled us to better understand how venture capital and capitalists help in the survival of a firm post-IPO </li></ul><ul><li>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 </li></ul>
  • 11. Benefits of Venture Capital <ul><li>More than just financial value is brought to the firm- expertise, experience, contacts, and credibility </li></ul><ul><li>Venture capitalists can play an integral role in helping the firm in its strategic decisions by bringing knowledge and experience from running other firms </li></ul><ul><li>Efficiently monitoring and overseeing strategy as a counter to managers’ entrenchment and cognitive limitations </li></ul>
  • 12. Benefits of Venture Capital <ul><li>Corporate governance: venture capitalists add detailed knowledge to the development and growth of the firm </li></ul><ul><li>Can also establish contractual constraints on management decisions </li></ul><ul><li>A greater stake in the firm can increase incentives for more effective oversight </li></ul><ul><li>The quality of due diligence and participation in corporate governance can send a positive signal to the markets </li></ul>
  • 13. Two Perspectives <ul><li>The Certification/Monitoring model </li></ul><ul><ul><li>(Megginson & Weiss, 1991; Lin, 1996; Lerner, 1994; Jain & Kini, 1995; Brav & Gompers, 1997) </li></ul></ul><ul><li>The Adverse Selection/Grandstanding model </li></ul><ul><ul><li>(Amit et. al., 1990; Gompers, 1996) </li></ul></ul>
  • 14. Another Perspective <ul><li>Lange, Bygrave, et. al. (2001) found that top venture capitalists, combined with top underwriters, also contribute to the success of a firm. </li></ul>
  • 15. Hypothesis <ul><li>Venture capital-backed firms will exhibit superior financial and equity returns relative to non-venture-backed firms </li></ul>
  • 16. Methodology <ul><li>Fama French (1992)… </li></ul><ul><li>Generalized Least Squares (GLS) estimator </li></ul><ul><li>Dummy Variable </li></ul><ul><li>Expected Returns </li></ul><ul><li>Significance test (t-test) </li></ul>
  • 17. Data <ul><li>Thompson/Mergent and Yahoo! Finance </li></ul><ul><li>Indices ( NYSE, AMEX, NASDAQ, Wilshire 5000) </li></ul><ul><li>2001- #US Firms IPO </li></ul><ul><li>2003-BV, ME, Market Beta </li></ul><ul><li>#VC-Backed # non-VC backed </li></ul>
  • 18. Results <ul><li>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 </li></ul><ul><ul><li>P-value of 0.004 </li></ul></ul><ul><li>Also evidence that venture-backed firms had lower unsystematic risk </li></ul>
  • 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 <ul><li>Total risk = unsystematic + systematic risk </li></ul><ul><li>Total risk measured in variance or st. dev. </li></ul><ul><li>Systematic risk measured in market beta </li></ul><ul><li>VB st. dev = 0.0958, NVB st. dev = 0.0868 </li></ul><ul><li>VB mkt beta = 0.783,NVB mkt beta =0.582 </li></ul><ul><li>Since total risk is very close, but VB has higher systematic risk, suggests VB has less unsystematic risk </li></ul><ul><li>Consistent with theory </li></ul>
  • 21. IPOs on London’s Alternative Market <ul><li>Many venture-backed Canadian firms issue their IPOs on the London Stock Exchange’s Alternative Investment Market (AIM) </li></ul><ul><li>Issue on AIM because of institutional investors interests in small-growth firms </li></ul><ul><li>About 34 Canadian companies on AIM including Ottawa based Ubiquity Software Inc. & March Networks </li></ul>
  • 22. Success of IPO’s on AIM <ul><li>2005 - the value of IPO’s on AIM more than doubled from $2.37 billion to $5.63 billion </li></ul><ul><li>International IPO’s increased to 76 from 40 </li></ul><ul><li>Value of international IPO’s has quadrupled from $2.09 billion to $529.5 billion </li></ul><ul><li>2005 - AIM’s listing rose 60% compared with TSX Venture growth rate of only 16% </li></ul>
  • 23. Advantages and Disadvantages of issuing on AIM <ul><li>ADVANTAGES </li></ul><ul><li>Pursues listings from a wide variety of sectors </li></ul><ul><li>“ Light regulation” & “User Friendly” </li></ul><ul><li>European investors are less skeptical about high-tech startups </li></ul><ul><li>Faster to issue IPO </li></ul><ul><li>DISADVANTAGES </li></ul><ul><li>Financial statements filed semi-annually, not quarterly </li></ul><ul><li>Not subject to CEO/CFO or internal control certification </li></ul><ul><li>Analysis and management discussion not required </li></ul>
  • 24. Implications <ul><li>Government should create policy to induce Canadian venture start-ups to IPO in Canada not overseas </li></ul><ul><li>Policy suggestions: </li></ul><ul><ul><li>Semi-annual reporting for first few years </li></ul></ul><ul><ul><ul><li>High costs associated with current regulations </li></ul></ul></ul><ul><ul><li>Tax incentives for investors </li></ul></ul><ul><ul><li>Examine Canadian security regulations to attempt to increase liquidity </li></ul></ul>
  • 25. QUESTIONS

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