Venture Capital Investment: An Agency Analysis of UK Practice

383 Pages·1998·1.46 MB·English

by  Gavin Reid

VENTURE CAPITAL INVESTMENT:
AN AGENCY ANALYSIS OF PRACTICE

Venture capital is a relatively new investment form, especially in the UK and
Europe. However, there exists no systematic analysis of what drives investor-
investee relations in venture capital markets using a unified and coherent
framework. Venture Capital Investment fills this gap by employing a principal-
agent framework to provide a contemporary, global analysis of contracting
relations practice. By deploying this state of the art framework, Gavin Reid is
able to develop a powerful organizing principle for viewing the bewildering
complexity of real-world venture capital activity.
The principal-agent framework is simply and clearly expounded, and
background information on the UK venture capital industry provided, before
the reader is presented with the main body of the work. This utilizes in-depth
case studies of investor-investee relations, based on extensive empirical research
and organized around the principal-agent method, which provide valuable
insights into contemporary UK venture capital practice. Venture Capital
Investment also considers risk management from the perspective of both
contracting parties, information system development post-contract, and the
‘trading’ of risk and information in pursuit of superior contracting between
investors and investees. The author concludes by employing the principal-
agent method both to anticipate trends in UK venture capital activity and
prescribe better business practice.
Written in a clear and accessible fashion this volume will be an excellent
resource for students and instructors of economics and business studies and
for all those wanting to know more about the important area of venture
capital investment.
Gavin C.Reid is Professor in Economics and Director of the Centre for
Research into Industry, Enterprise, Finance and the Firm (CRIEFF) at the
University of St Andrews. He is a graduate of the Universities of Aberdeen,
Southampton, and Edinburgh, and at the latter was awarded his PhD for a
thesis on industrial price leadership. Formerly Reader in Economics at the
University of Edinburgh, he has held visiting professorships at Queen’s
University, Ontario, the University of Denver, Colorado, and the University
of Nice, and has been a Visiting Scholar at Darwin College, University of
Cambridge. He has published extensively in the academic journals on industrial
organization, small firms, microeconomic theory, business ethics, venture
capital and intellectual property. He is author of six previous books, including
Theories of Industrial Organization (1987), The Small Entrepreneurial Firm
(1988) (with L.R.Jacobsen), and Small Business Enterprise (1993). He has
been a Leverhulme Trust Research Fellow, and completed this current book
while holding a Nuffield Foundation Research Fellowship.
VENTURE CAPITAL
INVESTMENT

An agency analysis of practice

Gavin C.Reid

London and New York
First published 1998
by Routledge
11 New Fetter Lane, London EC4P 4EE
This edition published in the Taylor & Francis e-Library, 2003.

Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
© 1998 Gavin C.Reid
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data
Reid, Gavin C.
Venture capital investment: an agency analysis of practice/
Gavin C.Reid
p. cm.
Includes bibliographical references and index.
1. Venture capital—Great Britain. I. Title.
HG5441.R45 1998
332.66–dc21 98–6504
CIP

ISBN 0-203-06624-3 Master e-book ISBN
ISBN 0-203-20804-8 (Adobe eReader Format)
ISBN 0-415-17969-6 (Print Edition)
ROUTLEDGE STUDIES IN THE MODERN
WORLD ECONOMY

1 INTEREST RATES AND BUDGET DEFICITS
A study of the advanced economies
Kanhaya L.Gupta and Bakhtiar Moazzami
2 WORLD TRADE AFTER THE URUGUAY ROUND
Prospects and policy options for the twenty-first century
Edited by Harald Sander and András Inotai
3 THE FLOW ANALYSIS OF LABOUR MARKETS
Edited by Ronald Schettkat
4 INFLATION AND UNEMPLOYMENT
Contributions to a new macroeconomic approach
Edited by Alvaro Cencini and Mauro Baranzini
5 MACROECONOMIC DIMENSIONS OF PUBLIC FINANCE
Essays in honour of Vito Tanzi
Edited by Mario I.Blejer and Teresa M.Ter-Minassian
6 FISCAL POLICY AND ECONOMIC REFORMS
Essays in honour of Vito Tanzi
Edited by Mario I.Blejer and Teresa M.Ter-Minassian
7 COMPETITION POLICY IN THE GLOBAL ECONOMY
Modalities for co-operation
Edited by Leonard Waverman, William S.Comanor and Akira Goto
8 WORKING IN THE MACROECONOMY
A Study of the US labor market
Martin F.J.Prachowny
9 HOW DOES PRIVATIZATION WORK?
Edited by Anthony Bennett
10 THE ECONOMICS AND POLITICS OF INTERNATIONAL
TRADE
Freedom and Trade: Volume II
Edited by Gary Cook
11 THE LEGAL AND MORAL ASPECTS OF INTERNATIONAL
TRADE
Freedom and Trade: Volume III
Edited by Asif Qureshi, Hillel Steiner and Gemint Parry
12 CAPITAL MARKETS AND CORPORATE GOVERNANCE IN
JAPAN, GERMANY AND THE UNITED STATES
Organizational response to market inefficiencies
Helmut M.Dietl
13 COMPETITION AND TRADE POLICIES
Coherence or conflict
Edited by Einar Hope
14 RICE
The primary commodity
A.J.H.Latham
15 TRADE, THEORY AND ECONOMETRICS
Essays in honour of John S.Chipman
Edited by James C.Moore, Raymond Riezman and James R.Melvin
16 WHO BENEFITS FROM PRIVATISATION?
Edited by Moazzem Hossain and Justin Malbon
17 TOWARDS A FAIR GLOBAL LABOUR MARKET
Avoiding the New Slavery
Edited by Ozay Mehmet, Errol Mendes and Robert Sinding
18 MODELS OF FUTURES MARKETS
Edited by Barry Goss
19 VENTURE CAPITAL INVESTMENT
An agency analysis of practice
Gavin C.Reid
TO KENNETH CLYDESDALE REID
Choice your Seeds from the high, streight, young
and well thriving Trees; and the fairest, weyghtiest,
and brightest thereon.
John Reid, The Scots Gard’ner, 1683

CONTENTS

List of figures xiv
List of tables xv
Preface xvi
List of abbreviations xxi
PART 1
Background
1 The analysis of venture capital practice 3
1.1 Introduction 3
1.2 Fast-growing mature small firms (MSFs) 4
1.3 Venture capital investors (VCIs) 6
1.4 Principal-agent analysis 7
1.5 Empirical background 9
1.6 Interview instrumentation 12
1.7 Conclusion 13
2 Venture capital 14
2.1 Introduction 14
2.2 The venture capital industry 16
2.3 Theories of venture capital 21
2.4 Trends for the typical UK venture capital fund 26
2.5 Conclusion 28
Appendix: The impact of the VCI on the MSF’s value and risk 29
3 Investigating investor-investee relations 34
WITH FALCONER MITCHELL AND NICHOLAS G.TERRY
3.1 Introduction 34
3.2 The investor and investee 35
ix