Subject: VCEF

Chapter 6 (6.2,6.3,6.3,6.4,6.5) + Entre strategies (end of chap 6)

Summary

Two aspects that determine 70% of portfolio performance

1. Deal Sourcing
2. Deal Screening

Principal-Agent Problem

• When one entity makes decisions on behalf of the other

• Problem: Differing interests and asymmetric information

  Asymmetric Information

  • Entrepreneurs likely to present optimistic estimates and withhold negative information
  • Startup might not know reasons of interest of investors

  Adverse Selection

  • Market failure due to information asymmetry
  • Entrepreneurs may oversell merits and viability to secure more favourable valuation

  Opportunistic & Overoptimistic behaviour

  • Manipulation and misjudgement of outcomes

• Remedies

  • Pre-nego
    • Signalling
      • Claims of positive future development (hockey stick chart)
    • Self selection
      • VC proposes different deals for entrepreneur to self select based on risk tolerance and expected outcome
  • Post-nego
    • Bonding
      • Arrangements to penalise agent for violating interests of principal, or reward for achieving goals
      • Eg. Staging of an investment deal
    • Monitoring
      • Observing behaviour of agent

• Generating investment opportunities

  • Typical sources: Previous invested entrepreneurs, referrals, referral from existing portfolio founder, friend of VC, known professionals, support orgs / hubs, other investors

• Investment Strategy

  • Size
    • Ticket size to justify effort of staging and monitoring deal, good return
    • Related to size of portfolio and # of companies invested
  • Diversification
    • Control uncertainty and reduce unsystematic risk
    • Choice between more diversification and specialisation to build network
  • Industry
  • Stage of Development
  • Geography
    • Easier support

Notes