Smart Money
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Fingerle, C. (2005). Smart Money. Influence of Venture Capitalists on High Potential Companies. Verlag Wissenschaft & Praxis. https://doi.org/10.3790/978-3-89644-951-1
Fingerle, Christian. Smart Money: Influence of Venture Capitalists on High Potential Companies. Verlag Wissenschaft & Praxis, 2005. Book. https://doi.org/10.3790/978-3-89644-951-1
Fingerle, C (2005): Smart Money: Influence of Venture Capitalists on High Potential Companies, Verlag Wissenschaft & Praxis, [online] https://doi.org/10.3790/978-3-89644-951-1
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Smart Money
Influence of Venture Capitalists on High Potential Companies
Entrepreneurial and Financial Studies, Vol. 7
(2005)
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Abstract
While it has become widely acknowledged that high potential companies are a vital force in securing innovation and social prosperity, the manifold influence of venture capitalists on these companies has called for the development of a theoretical framework. This study makes a comprehensive enquiry into the nature of venture capitalists’ contribution to the development of their portfolio companies and discusses their involvement in managerial processes. Three in-depth case studies on German high potential companies complement the theoretical findings and allow a detailed insight into the reality of venture capital financing. As a result, this book provides valuable knowledge for scholars, entrepreneurs, investors and venture capitalists.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Foreword | V | ||
| Acknowledgments | VII | ||
| Table of Contents | IX | ||
| Table of Figures | XV | ||
| Table of Abbreviations | XIX | ||
| Table of Interview Partners | XXI | ||
| 1 Introduction | 1 | ||
| 1.1 Relevance of Smart Money | 1 | ||
| 1.2 Aims of Analysis | 4 | ||
| 1.3 Research Approach and Dataset | 6 | ||
| 1.4 Structure of Analysis | 10 | ||
| 2 Characteristics of High Potential Companies | 13 | ||
| 2.1 Introductory Remarks | 13 | ||
| 2.2 Fundamentals of the Resource-based View | 13 | ||
| 2.2.1 Resources in Strategic Management Research | 13 | ||
| 2.2.2 Resources and Competitive Advantage | 17 | ||
| 2.2.3 A Comprehensive Resource-based View | 19 | ||
| 2.3 Resource Profile of High Potential Companies | 24 | ||
| 2.3.1 Resource Needs in Stage Models | 24 | ||
| 2.3.2 Resource Categorization | 26 | ||
| 2.3.3 Technological Resources | 27 | ||
| 2.3.4 Financial Resources | 28 | ||
| 2.3.5 Managerial Resources | 31 | ||
| 2.3.6 Personnel Resources | 33 | ||
| 2.3.7 Physical Resources | 34 | ||
| 2.3.8 Organizational Resources | 34 | ||
| 2.3.9 Reputational Resources | 35 | ||
| 2.3.10 Social Resources | 37 | ||
| 2.4 Mechanisms to Fill the Resource Gap | 38 | ||
| 2.5 Return and Risks of Investments in High PotentialCompanies | 39 | ||
| 2.5.1 Investment Decision Trade-Off | 39 | ||
| 2.5.2 High Expected Return | 40 | ||
| 2.5.3 High Risks | 44 | ||
| 2.5.3.1 Liability of Newness | 44 | ||
| 2.5.3.2 Liability of Smallness | 45 | ||
| 2.5.3.3 Uncertainty of Supply | 45 | ||
| 2.5.3.4 Uncertainty of Demand | 46 | ||
| 2.5.3.5 Competitive Uncertainty | 47 | ||
| 2.5.3.6 Dependency on Founders | 47 | ||
| 3 Business Model of Venture Capital Firms | 49 | ||
| 3.1 Introductory Remarks | 49 | ||
| 3.2 Definition of Business Model Concept | 49 | ||
| 3.3 Customers of Venture Capital Firms | 51 | ||
| 3.4 Value Creation Architecture of Venture Capital Firms | 54 | ||
| 3.4.1 Organizational Structure | 54 | ||
| 3.4.2 Personnel Structure | 59 | ||
| 3.4.3 Refinancing Process | 62 | ||
| 3.4.3.1 Overview | 62 | ||
| 3.4.3.2 Fundraising Process | 63 | ||
| 3.4.3.3 Investor Relations Process | 66 | ||
| 3.4.3.4 Distribution of Returns Process | 68 | ||
| 3.4.4 Investment Process | 69 | ||
| 3.4.4.1 Overview | 69 | ||
| 3.4.4.2 Investment Origination | 70 | ||
| 3.4.4.3 Investment Due Diligence | 73 | ||
| 3.4.4.4 Investment Structuring | 77 | ||
| 3.4.4.5 Investment Development | 81 | ||
| 3.4.4.6 Investment Exit | 82 | ||
| 3.5 Customer Value Proposition of Venture Capital Firms | 87 | ||
| 3.5.1 Enhancement of Performance of Portfolio Companies | 87 | ||
| 3.5.2 Enhancement of Asset Allocation of Investors | 90 | ||
| 3.6 Profit Model of Venture Capital Firms | 99 | ||
| 3.6.1 Management Fee | 99 | ||
| 3.6.2 Participation in Value Creation | 100 | ||
| 4 Venture Capitalists’ Influence through Contractual Agreements | 103 | ||
| 4.1 Introductory Remarks | 103 | ||
| 4.2 Deal-specific Risks for Venture Capital Firms | 103 | ||
| 4.2.1 Risk of False Investment Decision | 103 | ||
| 4.2.2 Risk of Managerial Opportunism | 104 | ||
| 4.2.3 Risk of Competitive Opportunism | 107 | ||
| 4.2.4 Risk of Unfavorable Decision-Taking | 108 | ||
| 4.2.5 Risk of Exit Obstruction | 109 | ||
| 4.3 Influence through Contractual Provisions | 110 | ||
| 4.3.1 Information Rights | 110 | ||
| 4.3.2 Conversion Rights | 111 | ||
| 4.3.3 Control Rights | 113 | ||
| 4.3.3.1 Voting Rights | 113 | ||
| 4.3.3.2 Veto Rights | 114 | ||
| 4.3.3.3 Supervisory Board Representation Right | 115 | ||
| 4.3.4 Management Covenants | 117 | ||
| 4.3.4.1 Affirmative Covenants | 117 | ||
| 4.3.4.2 Non-Compete Clause | 118 | ||
| 4.3.4.3 Vesting | 119 | ||
| 4.3.4.4 Representations and Warranties | 120 | ||
| 4.3.5 Milestone Agreements | 121 | ||
| 4.3.5.1 Milestones | 121 | ||
| 4.3.5.2 Earn-out | 122 | ||
| 4.3.5.3 Ratchets | 123 | ||
| 4.3.5.4 Management Dismissal | 123 | ||
| 4.3.5.5 Staging | 124 | ||
| 4.3.6 Cash Flow Rights | 126 | ||
| 4.3.6.1 Dividend Preference | 126 | ||
| 4.3.6.2 Liquidation Preference | 127 | ||
| 4.3.6.3 Anti-Dilution Protection | 128 | ||
| 4.3.7 Preemptive Rights | 130 | ||
| 4.3.7.1 Right of First Refusal | 130 | ||
| 4.3.7.2 Right of First Offer | 131 | ||
| 4.3.8 Disinvestment Rights | 132 | ||
| 4.3.8.1 Tag-Along Right | 132 | ||
| 4.3.8.2 Drag-Along Right | 133 | ||
| 4.3.8.3 Redemption Right | 133 | ||
| 4.3.8.4 Registration Rights | 134 | ||
| 4.3.8.5 Cancellation Right | 135 | ||
| 4.3.9 Summary | 137 | ||
| 4.4 Loss of Formal Autonomy through Venture Capital Firms | 138 | ||
| 5 Venture Capitalists’ Influence through Provision of Resources | 141 | ||
| 5.1 Introductory Remarks | 141 | ||
| 5.2 Content of Resource Provision | 141 | ||
| 5.2.1 Activities of Venture Capital Firms | 141 | ||
| 5.2.2 Certification through Venture Capital Firms | 144 | ||
| 5.2.3 Resource-Based View on Activities of Venture Capital Firms | 145 | ||
| 5.2.3.1 Redefining Activities as Resources | 145 | ||
| 5.2.3.2 Direct vs. Indirect Resource Provision | 147 | ||
| 5.3 Determinants of Resource Provision | 148 | ||
| 5.3.1 Differences in Intensity of Resource Provision | 148 | ||
| 5.3.2 Size of Investment | 151 | ||
| 5.3.3 Performance of Portfolio Company | 153 | ||
| 5.3.4 Stage of Portfolio Company | 156 | ||
| 5.3.5 Technology Intensity of Portfolio Company | 156 | ||
| 5.3.6 Venture Capitalists’ Incentives for Resource Provision | 157 | ||
| 5.3.7 Syndication | 158 | ||
| 5.4 Loss of Real Autonomy through Venture Capital Firms | 159 | ||
| 5.4.1 Sources of Venture Capital Firm’s Power | 159 | ||
| 5.4.2 Loss of Real Autonomy by Levels of Management | 160 | ||
| 5.4.3 Loss of Real Autonomy by Levels of Decision-taking | 164 | ||
| 5.4.4 Benefit of a Loss of Autonomy | 167 | ||
| 6 Case Study Bullith Batteries AG | 169 | ||
| 6.1 Case Description | 169 | ||
| 6.1.1 Preliminary Remark | 169 | ||
| 6.1.2 Development before First Round Financing | 169 | ||
| 6.1.3 First Round Financing | 174 | ||
| 6.1.4 Further Development until Second Round Financing | 176 | ||
| 6.1.5 Second Round Financing | 184 | ||
| 6.1.6 Further Development | 186 | ||
| 6.2 Case Analysis | 187 | ||
| 6.2.1 Gi Ventures’ Influence through Contracting | 187 | ||
| 6.2.1.1 Investment Agreement Structure | 187 | ||
| 6.2.1.2 Influence on Deal-specific Risks | 191 | ||
| 6.2.1.3 Influence on Management’s Formal Autonomy | 192 | ||
| 6.2.2 Gi Ventures’ Influence through Resource Provision | 193 | ||
| 6.2.2.1 Influence on Resource Pool | 193 | ||
| 6.2.2.2 Influence on Management’s Real Autonomy | 197 | ||
| 7 Case Study GPC Biotech AG | 201 | ||
| 7.1 Case Description | 201 | ||
| 7.1.1 Development before First Round Financing | 201 | ||
| 7.1.2 First Round Financing | 203 | ||
| 7.1.3 Development until Second Round Financing | 206 | ||
| 7.1.4 Second Round Financing | 213 | ||
| 7.1.5 Further Development and MPM Capital’s and TVM’s Exit | 215 | ||
| 7.2 Case Analysis | 219 | ||
| 7.2.1 MPM Capital’s and TVM’s Influence through Contracting | 219 | ||
| 7.2.1.1 Preliminary Remark | 219 | ||
| 7.2.1.2 Investment Agreement Structure | 219 | ||
| 7.2.1.3 Influence on Deal-specific Risks | 223 | ||
| 7.2.1.4 Influence on Management’s Formal Autonomy | 224 | ||
| 7.2.2 MPM Capital’s and TVM’s Influence through Resource Provision | 226 | ||
| 7.2.2.1 Influence on Resource Pool | 226 | ||
| 7.2.2.2 Influence on Management’s Real Autonomy | 230 | ||
| 8 Case Study varetis AG | 235 | ||
| 8.1 Case Description | 235 | ||
| 8.1.1 Development before First Round Financing | 235 | ||
| 8.1.2 First Round Financing | 238 | ||
| 8.1.3 Development until Second Round Financing | 241 | ||
| 8.1.4 Second Round Financing | 245 | ||
| 8.1.5 Further Development and BayBG’s Exit | 247 | ||
| 8.2 Case Analysis | 251 | ||
| 8.2.1 BayBG’s Influence through Contracting | 251 | ||
| 8.2.1.1 Investment Agreement Structure | 251 | ||
| 8.2.1.2 Influence on Deal-specific Risks | 256 | ||
| 8.2.1.3 Influence on Management’s Formal Autonomy | 258 | ||
| 8.2.2 BayBG’s Influence through Resource Provision | 259 | ||
| 8.2.2.1 Influence on Resource Pool | 259 | ||
| 8.2.2.2 Influence on Management’s Real Autonomy | 263 | ||
| 9 Comparative Case Study Analysis | 267 | ||
| 9.1 Venture Capitalists’ Influence through ContractualAgreements | 267 | ||
| 9.1.1 Contracting Negotiations | 267 | ||
| 9.1.2 Content of Investment Agreements | 268 | ||
| 9.1.3 Portfolio Companies’ Loss of Formal Autonomy | 269 | ||
| 9.2 Venture Capitalists’ Influence through Resource Provision | 271 | ||
| 9.2.1 Direct Resource Provision | 271 | ||
| 9.2.2 Indirect Resource Provision | 274 | ||
| 9.2.3 Dynamic Aspects of Resource Provision | 278 | ||
| 9.2.4 Venture Capitalists’ Influence on Competitive Advantage | 279 | ||
| 9.2.5 Portfolio Companies’ Loss of Real Autonomy | 281 | ||
| 10 Conclusion and Further Implications | 285 | ||
| 10.1 Conclusion | 285 | ||
| 10.2 Implications for Researchers and Practitioners | 288 | ||
| 11 References | 293 |