When starting a company, entrepreneurs must decide how to divide shares among the founders. The simplest way is to split the shares equally, which is what one third of startups decide to do. But that may not be the fairest or most effective way—especially in cases where some founders are doing more for the company than others. In this paper, Thomas F. Hellman (University of British Columbia) and Noam Wasserman (Harvard Business School) examine when and whether teams are likely to divide shares equally among all the founders, and explore whether such an equity split is good for the company.
Published in 2010
While start-up firms are key to any technological revolution, they also run a high risk of failure. To that end, investors often provide limited capital in several careful stages, gaining confidence in a firm before doling out another round of funding. However, these investors still face the possibility that other investors won't provide follow-on funding, even when the firm's prospects remain sound. That's a big risk for individual investors who can't afford to fund a new firm all by themselves, and whose investment will flounder if others don't invest, too.
Research by HBS professors Ramana Nanda and Matthew Rhodes-Kropf explores why future investors may not fund the project at its next stage even if the fundamentals of the project have not changed.
Clean-tech start-ups depend on patience and public policy to thrive—the Internet models for VC funding don't apply. That's why Harvard Business School professor Joseph Lassiter is making an unusual recommendation to his entrepreneurship students: Spend a few years serving time in a government job.
What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance.
Published in 2009
From Silicon Valley to Herzliya, Israel, venture capital firms are concentrated in very few locations. More than half of the 1,000 venture capital offices listed in Pratt's Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas: San Francisco, Boston, and New York. More than 49 percent of the U.S.-based companies financed by venture capital firms are located in these three cities. This paper examines the location decisions of venture capital firms and the impact that venture capital firm geography has on investments and outcomes. Findings are informative both to researchers in economic geography and to policymakers who seek to attract venture capital.
Published in 2008
Managers of the ABRY Fund V were so successful they had investors waiting to pour in an additional $3 billion. But to invest that much would require trade-offs that could jeopardize the chemistry that made the fund successful in the first place. Take the money or walk away? From HBS Bulletin.
Professor Josh Lerner provides a summary report on the recently held HBS Centennial colloquium on venture capital.
In the wake of World War II, Georges Doriot helped found the world's first public venture capital firm, American Research and Development. Doriot (1899–1987) was also a professor at Harvard Business School for 40 years. Our book excerpt from Creative Capital: Georges Doriot and the Birth of Venture Capital (HBS Press) describes how ARD first came to "marry" investors and innovators.
The acquisition of new capabilities through the purchase of small venture capital-backed start-ups is a strategy that has been employed by many large technology firms including Cisco, Microsoft, Google, and EMC. Young venture capital-backed companies, for their part, often develop innovative technologies that can be exploited by existing technology companies. The value inherent in these start-ups is typically tied up in the intellectual property or human capital that has been developed during the early stages of the company's life. The opportunity to acquire valuable intangible assets, however, is balanced by the difficulty in assessing the value of the underlying assets. Unlike purchasing companies with substantial operating profits and a long track record of sales, the ability to fully assess the prospects of intangible assets is subject to substantial asymmetric information and uncertainty. This paper explores mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies. The results also shed light on the value that venture capitalists add to their portfolio companies as well as to companies in their venture capital network.
Published in 2007
The U.S Department of Justice has begun an inquiry into potentially anti-competitive behavior on the part of leading private equity firms. Professor Josh Lerner looks to history to underscore why this move carries the prospect of damaging what is actually an incredibly competitive industry that creates much value.
Published in 2006
Podcast: On just one day in November, $52 billion worth of private equity deals were announced, and more than $200 billion worth of deals have been agreed to so far in 2006. The deals include such major names as Qantas ($8.7 billion), Hertz ($15 billion), and Clear Channel ($ 18.7 billion). Are public markets being eclipsed? Are investors and employees being victimized? Professor Josh Lerner looks at historical trends and current deals to put it all in perspective.
Venture capital firms often consider investments in companies located far away or in unfamiliar industries. How do they spot these opportunities and also reduce risk? It's the power of networks, says Harvard Business School professor Toby Stuart—and understanding how they work in VC is just now starting to be understood.
It's a fundamental tension many entrepreneurs face, the conflict between wanting to become rich and wanting to keep control of their new company. Few can have both. Professor Noam Wasserman discusses his research into the motivations of entrepreneurs and the people who invest in them.
RLBOs have a bad rap, but Josh Lerner says the reputation is not deserved. Studying almost 500 private equity-led IPOs over a 22-year period, Lerner and co-researcher Jerry Cao conclude that reverse leveraged buyouts in general outperformed other IPOs and the market as a whole. Quick flips, however, are another story.
Published in 2005
At the annual Cyberposium conference held at Harvard Business School, venture capitalists pondered what makes for winners and losers in the new VC landscape.
Four venture capitalists explain to Harvard Business School professor Mike Roberts and senior research associate Lauren Barley how they evaluate potential investments.
The VC money "overhang" continues as investors compete to get into a small number of deals each year. How do smart venture firms approach the challenge? A report from the 11th Annual Venture Capital & Private Equity Conference.
Published in 2004
If the private equity industry has a life cycle, these are the teenage years for Europe, according to panelists at the conference session on European private equity.
Published in 2003
In an e-mail Q&A, HBS professor Josh Lerner discusses issues including transparency and private equity, buyout firms, Sarbanes-Oxley, and the role of VC on innovation.
Published in 2002
Using a case discussion on Gray Security Services, Harvard Business School associate professor Walter Kuemmerle highlights issues confronting entrepreneurs and investors interested in Africa.
