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Venture Capital, Private Firms, and the Capital Acquisition Process

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  • Rick H. Mull

    (Fort Lewis College)

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    Abstract

    This paper presents an empirical examination of the incentives motivating venture capitalists and sample of growth option intensive private firms with acute capital requirements to interact, the gains each group achieves through this association, the types of private firms successfully attracting venture capital, and mechanisms used in this funding process. Results show that venture capital backed firms achieve growth rates (1) greater than expected, and (2) greater than a matched sample of non-venture capital backed firms. This paper also finds that low collateral asset values, low profitability, and younger firm age to be significant determinants in which firms obtain venture capital funding. Finally, this paper shows that the use of the convertible preferred stock to be positively related to increasing firm risk, and that venture capital backed firms use convertible preferred stock more frequently than do non-venture capital backed firms.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1994-03-3-d-mull.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 3 (1994)
    Issue (Month): 3 (Fall)
    Pages: 229-248

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    Handle: RePEc:pep:journl:v:3:y:1994:i:3:p:229-248
    Contact details of provider: Postal: 24255 Pacific Coast Hwy, Malibu CA
    Web page: http://bschool.pepperdine.edu/jef
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    Keywords: Capital ; Private Firm ; Venture Capital; Capital Acquisition;

    Find related papers by JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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    1. Chan, Yuk-Shee, 1983. " On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, vol. 38(5), pages 1543-68, December.
    2. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    3. Green, Richard C., 1984. "Investment incentives, debt, and warrants," Journal of Financial Economics, Elsevier, vol. 13(1), pages 115-136, March.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
    6. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    7. Smith, Clifford W, Jr & Warner, Jerold B, 1979. "Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment," Journal of Finance, American Finance Association, vol. 34(1), pages 247-51, March.
    8. Brophy, David J. & Guthner, Mark W., 1988. "Publicly traded venture capital funds: implications for institutional "fund of funds" investors," Journal of Business Venturing, Elsevier, vol. 3(3), pages 187-206.
    9. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    10. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
    11. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September.
    12. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, vol. 27(2), pages 447-471, October.
    13. Fama, Eugene F. & Jensen, Michael C., 1985. "Organizational forms and investment decisions," Journal of Financial Economics, Elsevier, vol. 14(1), pages 101-119, March.
    14. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    15. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
    16. Raphael Amit & Lawrence Glosten & Eitan Muller, 1990. "Entrepreneurial Ability, Venture Investments, and Risk Sharing," Management Science, INFORMS, vol. 36(10), pages 1233-1246, October.
    17. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    18. Pyle, David H, 1971. "On the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 26(3), pages 737-47, June.
    19. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    20. Dotan, Amihud & Ravid, S Abraham, 1985. " On the Interaction of Real and Financial Decisions of the Firm under Uncertainty," Journal of Finance, American Finance Association, vol. 40(2), pages 501-17, June.
    21. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    22. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
    23. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    24. Bygrave, William D., 1988. "The structure of the investment networks of venture capital firms," Journal of Business Venturing, Elsevier, vol. 3(2), pages 137-157.
    25. Tyzoon T. Tyebjee & Albert V. Bruno, 1984. "A Model of Venture Capitalist Investment Activity," Management Science, INFORMS, vol. 30(9), pages 1051-1066, September.
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    Cited by:

    1. Lowell W. Busenitz & James O. Fiet, 1996. "The Effects of Early Stage Venture Capitalist Actions on Eventual Venture Disposition," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(2), pages 97-114 , Summer.
    2. Elisabete Gomes Santana Félix & José Paulo Esperança & Mohamed Azzim Gulamhussen & Cesaltina Pacheco Pires, 2009. "An analysis of the Portuguese venture capital market: partial exits versus total exits," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(3), pages 239-258.

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