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The Venture Capital Cycle : Second Edition

The Venture Capital Cycle : Second Edition

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Amazon.comIn the last 25 years, the venture-capital industry has grown from a less than $1 billion to an over $60 billion business--growth that has far surpassed any other class of investment products. Today, the industry consists of several thousand professionals working at about 500 funds concentrated in California, Massachusetts, and a handful of other states. Despite the industry's size, there are many misconceptions about the nature and role of venture capitalists; their trade remains shrouded in mystery.

Paul Gompers and Josh Lerner's Venture Capital Cycle is an illuminating academic examination of the form and function of venture-capital funds. Gompers and Lerner are Harvard Business School professors who have researched extensive original data to analyze venture-capital fundraising, investing, and exiting methods. Beginning with a historical overview of entrepreneurial finance, the book examines how venture partnerships are structured, how venture capitalists are compensated, the staging of investments in operating companies, and the relative performance of venture-capital-backed offerings. There's also an interesting comparison of corporate venture organizations, such as Xerox PARC, with those of independent and other venture groups. Venture capitalists use industry knowledge and monitoring skills to finance projects with significant uncertainty, typically concentrating investments in early-stage companies and high-tech industries. Large information gaps between entrepreneurs and investors create conflicted interests, and the book looks at some of the novel checks and balances most often employed.

One of the book's themes is that the whole venture-capital process is best understood as a cycle: from the raising of a fund; to investing in, monitoring, and adding value to firms; then exiting deals; returning capital to investors; and finally renewing itself by raising additional funds. The need to exit an investment successfully shapes all aspects of the venture-capital cycle, from the ability to raise capital to the types of investments made. Another theme is that because venture funds must make long-term illiquid investments, they need to secure funds from their investors for periods of 10 years or more. The supply of venture capital consequently cannot adjust quickly to changes in the investment environment.

The authors conclude that increasing familiarity with the venture-capital process has made the long-term prospects for venture investment more attractive than ever. Entrepreneurs, venture capitalists, and investors will find this book a scholarly, well-documented examination of the industry. --Scott Harrison Book DescriptionIn The Venture Capital Cycle, Paul Gompers and Josh Lerner correct widespread misperceptions about the nature and role of the venture capitalist and provide an accessible and comprehensive overview of the venture capital industry. Bringing together fifteen years of ground-breaking research into the form and function of venture capital firms, they examine the fund-raising, investing, and exit stages of venture capitalists. Three major themes run throughout the process: venture investors confront tremendous information and incentive problems; venture capital processes are inherently interrelated, and a complete understanding of the industry requires a full understanding of the venture cycle; and, unlike most financial markets, the venture capital industry adjusts very slowly to shifts in the demand for and the supply of investment capital.

This second edition has been thoroughly revised in light of recent research findings, and includes six new chapters. The first part, on fund-raising, now includes a chapter that examines what determines the level of venture capital fund-raisingand how tax policy influences the demand for venture capital. Three new chapters in the second part, on investing, examine what kind of distortions are introduced when the venture capital market goes dramatically up, a question prompted by the 1999-2000 market bubble; demonstrate that the venture capital industry does indeed spur innovation, an important determinant of economic growth; and examine whether and under what circumstances governments can be effective venture capitalists. Two new chapters in the third part, on exiting venture capital investments, discuss whether venture capital firms affiliated with investment-banks are prone to conflicts of interest with public offerings and how lockups on initial public offerings are used to limit conflicts of interest.