- 03 May 2016
- Working Paper Summaries
Pay Now or Pay Later? The Economics within the Private Equity Partnership
Partnerships are essential to the professional service and investment sectors. Yet the partnership structure raises issues including intergenerational continuity. This study of more than 700 private equity partnerships finds 1) the allocation of fund economics is typically weighted toward the founders of the firms, 2) the distributions of carried interest and ownership substantially affect the stability of the partnership, and 3) partners’ departures have a negative effect on private equity groups’ ability to raise additional funds.
- 22 Jan 2016
- Working Paper Summaries
Financial Patent Quality: Finance Patents After State Street
Although the past few decades have seen a surge in patents of inventions related to financial services, concerns have been raised about the quality of those patents. New research shows that finance patents in aggregate cite fewer non-patent publications and especially fewer academic publications.
- 21 Jan 2016
- Working Paper Summaries
The Globalization of Angel Investments: Evidence across Countries
Examining a cross-section of 13 angel groups who considered transactions across 21 countries, this study finds that angel investors have a positive impact on the growth of the firms they fund, their performance, and survival, while the selection of firms that apply for angel funding varies across countries.
- 07 Dec 2015
- Research & Ideas
The Rise of Personalized Entrepreneurial Finance and Other VC Trends
Thanks to tools such as Kickstarter, venture capital is becoming more democratized. Josh Lerner discusses crowd funding, investment trends, and other features of the changing funding landscape. Open for comment; 0 Comments.
- 28 May 2015
- Working Paper Summaries
Lost in the Clouds: The Impact of Changing Property Rights on Investment in Cloud Computing Ventures
Looking at specific rulings in the US, France, and Germany, this paper examines the economic effect of major but largely unanticipated changes in the allocation of copyright protection on venture capital (VC) investment in cloud computing companies. Findings suggest that decisions around the allocation of copyright ownership can have significant impacts on investment in innovative enterprises. Indeed strong upstream property rights, combined with transaction costs that limited the ability to enter into licenses, can significantly deter investment in downstream innovations. Closed for comment; 0 Comments.
- 03 Nov 2014
- Working Paper Summaries
Adding Value Through Venture Capital in Latin America and the Caribbean
The process of value creation starts with the choice of a promising company, extends through the structure of the investment and into the deal management process, and ends as the venture capitalist positions the company for an exit to a situation where it can continue to grow. In all regions, value creation plays an important role in every venture capital investment. Given the relative youth of the industry in Latin America and the Caribbean (LAC), the issue of value addition is particularly critical. In this paper the authors draw on scholarship, industry statistics, and interviews with six LAC fund managers. They also place the material in the context of their combined 56 years of experience studying the VC industry in order to describe the challenges facing fund managers in value creation. The paper concludes with nine best practices that should be especially helpful in LAC as these economies develop. Key concepts include: There are nine best practices for creating value in portfolio companies. Some of them apply to the internal operations of the VC firm while others address methods through which the fund managers interact with the portfolio companies. An unwillingness to risk failure restrains LAC's innovative and entrepreneurial culture. Entrepreneurs in the LAC region are less familiar with best practices in business, such as reaching beyond family and friends for investors in their companies, and most are new to the expectations of active, equity-owning investors. Situations vary greatly between countries. What works in one LAC country may not succeed in another, forcing fund managers to be particularly flexible and creative to add value in their portfolio companies. Closed for comment; 0 Comments.
- 16 Jan 2014
- Research & Ideas
Resolving Patent Disputes that Impede Innovation
Technical standards both spur innovation and protect the innovators, but abuses in the intellectual property protection system threaten US competitiveness. Josh Lerner and Jean Tirole discuss remedies. Open for comment; 0 Comments.
- 25 Nov 2013
- Working Paper Summaries
Standard-Essential Patents
Standards play a key role in many industries, including those critical for future growth. Intellectual property (IP) owners vie to have their technologies incorporated into standards, so as to collect royalty revenues (if their patents dominate some of the functionalities embodied in the standard) or just to develop a competitive edge through their familiarity with the technology. However, it is hard to know in advance whether patents are complements or substitutes, i.e., how essential they are. Thus a major policy issue in standard setting is that patents that seem relatively unimportant may, by being included into the standard, become standard-essential patents (SEPs). In an attempt to curb the monopoly power that the standard creates, most standard-setting organizations (SSOs) require the owners of patents covered by the standard to grant licenses on fair, reasonable and non-discriminatory (FRAND) terms. Needless to say, such loose price commitments can lead to intense litigation activity. This paper constitutes a first pass at a formal analysis of standard-essential patents. It builds a framework in which essentiality and regulation functions can be analyzed, provides a precise identification of the inefficiencies attached to the lack of price commitment, and suggests a policy reform that restores the ex-ante competition called for in the literature and the policy debate. Key concepts include: Standards transform inessential patents into standard-essential ones. Price discussions within the standard setting process run the risk of expropriation of IP holders, as even balanced SSOs will "blackmail" IP owners to accept low prices in exchange for their functionalities' being selected into the standard. The ability to engage in forum shopping enables IP owners to shun SSOs that force them to charge competitive prices. This suggests imposing mandatory structured price commitments on SSOs. Closed for comment; 0 Comments.
- 09 Sep 2013
- Working Paper Summaries
The Disintermediation of Financial Markets: Direct Investing in Private Equity
As numerous news stories document, interest on the part of institutional investors in undertaking direct investments—and thus bypassing intermediaries—appears to have increased substantially. More generally, the impact of financial intermediation has also been a subject of considerable examination in the corporate finance literature. On the one hand, these middlemen should be able to overcome transaction cost and information problems; on the other, they may be prone to agency conflicts that affect their performance. In this paper, the authors focus on private equity, a setting in which disintermediation has become increasingly common. Private equity might appear to be a textbook case where the benefits from financial intermediation—in this case, specialized funds—would be substantial: not only are the transaction costs associated with structuring these investments large, but substantial information asymmetries surround the selection, monitoring, and nurturing of the investments, giving rise to potential information advantages for specialized investors. Using proprietary data covering 392 deals by a set of institutions, both co-investments and direct investments, between 1991 and 2011, the authors find a sharp contrast between the performance of solo deals and that of coinvestment deals. Outperformance of solo direct investments is due in part to their ability to exploit information advantages by investing locally and in settings where information problems are not too great, as well as to their relative outperformance during market peaks. The underperformance of coinvestments appears to be associated with the higher risk of deals available for coinvestments. Closed for comment; 0 Comments.
- 01 Jul 2013
- Research & Ideas
Crowdfunding a Poor Investment?
Crowdfunding promises to democratize funding of startups. But is that necessarily a good thing? Entrepreneurial finance experts Josh Lerner, Ramana Nanda, and Michael J. Roberts on the promises and problems with the newest method for funding small businesses. Closed for comment; 0 Comments.
- 29 May 2013
- Research & Ideas
Faculty Symposium Showcases Breadth of Research
Faculty present their latest research on the human tendency toward dishonesty, the use of crowdsourcing to solve major scientific problems, and the impact of private equity investments. Closed for comment; 0 Comments.
- 19 Sep 2012
- Research & Ideas
Book Excerpt: “The Architecture of Innovation”
In his new book, The Architecture of Innovation, Josh Lerner explores flaws in how corporations fund R&D. This excerpt discusses the corporate venturing model and how incentive schemes make it successful. Open for comment; 0 Comments.
- 19 Sep 2012
- Research & Ideas
Funding Innovation: Is Your Firm Doing it Wrong?
Many companies are at a loss about how to fund innovation successfully. In his new book, The Architecture of Innovation, Professor Josh Lerner starts with this advice: get the incentives right. Open for comment; 0 Comments.
- 16 Nov 2011
- Working Paper Summaries
Private Equity and Employment
Is there truth to the claim that leveraged buyouts bring huge job losses? In this paper, the authors examine employment responses to US private equity buyouts at a much more granular level than earlier research, exploiting a much larger sample of transactions, a more extensive set of controls, and a novel ability to track outcomes at firms and establishments (e.g., individual factories and offices). They also exploit the strengths of their data to explore new questions about private equity's role in the creative destruction process and its impact on restructuring activity inside target firms. Overall, they find that private equity buyouts catalyze the creative destruction process in the labor market as measured by gross job flows and the purchase and sale of business establishments, with only a modest net impact on employment. Research by Steven J. Davis, John C. Haltiwanger, Ron S. Jarmin, Josh Lerner, Javier Miranda. Key concepts include: While private equity transactions dramatically increase the turnover of workers-both hiring and layoffs, acquisitions and divestitures-the net effect of the increased activity is modest. Employment responses to private equity buyouts vary considerably across industries and by type of transaction. The largest employment losses at targets relative to controls occur in public-to-private transactions. In contrast, in most other firms the effect is neutral or even positive. Future research should investigate experiences outside the United States. While US private equity outcomes are especially interesting because of the industry's large size and maturity, the impact of private equity might differ across environments depending on corporate governance, financial depth, legal institutions, and economic development. Closed for comment; 0 Comments.
- 29 Sep 2011
- Sharpening Your Skills
Sharpening Your Skills: Leveraging Intellectual Property
Many companies lack a coherent policy for maximizing the value of their intellectual property. In this collection from our archives, Harvard Business School faculty offer insights on the importance of IP and how best to protect and use it. Closed for comment; 0 Comments.
- 22 Aug 2011
- Research & Ideas
Getting to Eureka!: How Companies Can Promote Creativity
As global competition intensifies, it's more important than ever that companies figure out how to innovate if they are going to maintain their edge, or maintain their existence at all. Six Harvard Business School faculty share insights on the best ways to develop creative workers. Closed for comment; 0 Comments.
- 18 Aug 2011
- Lessons from the Classroom
Business Plan Contest: 15 Years of Building Better Entrepreneurs
Since 1997, Hundreds of student-entrepreneurs have tested their ideas at Harvard Business School's annual Business Plan Contest. Here is what they have learned about success, failure, and themselves. From the HBS Alumni Bulletin. Open for comment; 0 Comments.
- 27 Jul 2011
- Working Paper Summaries
With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship
While starting a new company usually requires an independent spirit and self-sufficient nature, the decision to jump into entrepreneurship is often influenced by the acts of others. In this paper, Josh Lerner and Ulrike Malmendier explore how the entrepreneurial tendencies of peers affect not only one's decision to start a company, but whether that company will succeed. The researchers use data from a decade of first-year class sections at Harvard Business School. Key concepts include: A higher share of students with a pre-MBA entrepreneurial background in any given section leads to lower rates of post-MBA entrepreneurship among students without an entrepreneurial background. But this "discouragement effect" is narrowly focused: students in sections with more pre-MBA entrepreneurs are less likely to start unsuccessful ventures, but equally (if not more) likely to start successful ones. Sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful post-MBA entrepreneurship. Closed for comment; 0 Comments.
- 22 Jun 2011
- Sharpening Your Skills
Sharpening Your Skills: Motivation
Can employers motivate employees to work more creatively, ethically, or productively? Or does that power reside solely within the individual? Recent research at Harvard Business School suggests workers can be motivated by their environment. Closed for comment; 0 Comments.
Is Greed Ruining Private Equity Firms?
In a first-ever look at the internal economics driving private equity partnerships, Victoria Ivashina and Josh Lerner find that founding partners who take an unequal share of the pie can ruin their firms. Open for comment; 0 Comments.