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Title: Valuation and strategy in venture capital investment
Author: Beal, Wesley Martin
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2000
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This research's aim is to describe the particular features of the venture capital investment process, criteria venture capitalist use to make investment decisions, the deal structure, and post-investment management support in formal terms. Based on these we develop, apply, and validate a real options valuing model against a sample of venture investments made contemporaneously with the research. Venture capital fills a niche in the financial markets by supplying capital to high risk, high growth, entrepreneurial managed and controlled unquoted companies. At the stage venture capitalists invest, many of these companies are unsuitable for raising capital by means of traditional bank finance or public equity markets. It is reported that venture capitalists provide a high level of management support along side capital in an attempt to improve risk reward performance of portfolio investments. A specialised system of governance set forth in the shareholding agreement is reported to align the interests of all parties and to provide for venture capital control a key stages in the process. Venture capitalists generally undertake a lengthy review of the entrepreneur's background and credentials, composition of the management team, and characteristics of the target market prior to investing. The quality of the entrepreneur is reported to form the basis of most investment decisions. Quantitative corporate finance tools often do not feature in the review process. Enterprises of the type that attract venture capital often adopt contingent investment strategies to deal with the high level of risk that is characteristic of an enterprise attempting a several factor growth transformation. It is suggested that venture capitalists' review of an enterprise's contingent investment opportunities represents the core of investment decision-making. Discounted cash flow methods may not be well suited for evaluating contingent investment opportunities. Real options theory has been suggested as a means to analyse this value, however in a venture capital situation it may not be possible to model the process with the level of precision required for quantitative real option tools. The research develops an alternative qualitative real options valuing model based on decision criteria featured in the venture investment evaluation process that may signal real option value. Ten case studies are presented of venture capital investments and private equity· investments representative of venture capital situations made contemporaneously with the research. We report the criteria put forward by investors as the basis of investment decisions. We also report capital arrangements and subsequent investment and enterprise operating performance. We represent the processes encountered as a subjective evaluation of real option value. We suggest that the proposed real options valuing model reflects decision criteria, effectively screens prospective investments, provides the same broad ranking as formal quantitative models, signals real option value, and may also contain additional information. We estimate the value of a real option in one of the case studies. we suggest that venture capitalists' post-investment management support is an attempt to Increase option value, and the deal structure provides for greater venture capital control of and proportional claim to an enterprise's real options.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available