VENTURE CAPITAL AND POST IPO PERFORMANCE

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VENTURE CAPITAL ANDPOST IPO PERFORMANCE

• Group A-8
• David Allison 100326780
• Donaldo Madrid 100292425
• Eghan Rashidi 100321747
• Suzanne Robertson 100621555
• Victor Samuel 100326398

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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

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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 firms post-IPO performance that accounts
  for both venture capital financing and the role
  of the venture capitalists

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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Another Perspective

• Lange, Bygrave, et. al. (2001) found that top
  venture capitalists, combined with top
  underwriters, also contribute to the success of a
  firm.

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Hypothesis

• Venture capital-backed firms will exhibit
  superior financial and equity returns relative to
  non-venture-backed firms

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Methodology

• Fama French (1992)
• Generalized Least Squares (GLS) estimator
• Dummy Variable
• Expected Returns
• Significance test (t-test)

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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

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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

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Table of regression results
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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

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IPOs on Londons Alternative Market

• Many venture-backed Canadian firms issue their
  IPOs on the London Stock Exchanges 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

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Success of IPOs on AIM

• 2005 - the value of IPOs on AIM more than
  doubled from 2.37 billion to 5.63 billion
• International IPOs increased to 76 from 40
• Value of international IPOs has quadrupled from
  2.09 billion to 529.5 billion
• 2005 - AIMs listing rose 60 compared with TSX
  Venture growth rate of only 16

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Advantages and Disadvantages of issuing on AIM

• ADVANTAGES
• 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

• DISADVANTAGES
• Financial statements filed semi-annually, not
  quarterly
• Not subject to CEO/CFO or internal control
  certification
• Analysis and management discussion not required

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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

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QUESTIONS