Business Finance and Venture
Business Finance and Venture
Businesses often have different types of financiers, with banks and public markets being the most common types. However, other businesses are not able to acquire funding from banks and other traditional sources. The lack of assets, as well as the size of the business, is a major reason why some entrepreneurial ventures may not get capital from banks. These businesses often seek capital from venture investors. Venture capital investors provide equity to businesses that cannot get financing from traditional sources. Venture capitalism often involves an exchange of cash for an active role in the running of the new company. Venture capitalism differs from traditional financial sources as it mainly focuses on high growth business, and focuses on long-term investment. Research has revealed that businesses funded by venture capitalists tend to perform better as compared to those funded by traditionally financed businesses. Hochberg (2011) studied the impact of venture capitalism on the corporate governance of firms transitioning to public entities. A review of the article will explain how the findings relate to the course readings as well as the research problem.
Hochberg (2011) paper explored the difference in governance between venture capital backed businesses, and non-venture backed businesses. The study involved the use of three tests, which compared governance issues that may exist between non-venture and venture companies, especially when transitioning from private ownership to public entities. The transition from private to public results in several changes within a business as different rules apply to the two types of companies. The study which involved 2827 IPOs conducted within a period of one year revealed that ventured-organizations experienced a higher positive reaction stakeholder rights adoption, Ventured organizations were also explained have more independent board structures as compared to non-ventured organizations (Hochberg, 2011). The findings from Hochberg (2011) study relate to other readings on the impact of venture capitalism on the governance of a company.
The existence of venture capitalist in a business affects the post-IPO performance of a firm. The reputation and experience of a venture capitalist are a major determinant of success after a business transitions to being a public entity. Krishnan, Ivanov, Masulis, & Singh (2009) explained reputable venture capitalists are often associated with a long-term high performance of business even after a company’s initial public offer. Experienced venture capitalists were explained to take up more active roles in a company after the IPO, which often translates to improved business performance (Krishnan, Ivanov, Masulis, & Singh, 2009). Hochberg (2011) reiterated these views by explaining that the presence of a venture capitalist in business was likely to result in better management in a company after the transition to public entities. The availability of sound management structures often resulted in better performance for the company (Hochberg, 2011). Findings from these two studies explain that business that employs venture capitalism are likely to achieve higher performance as compared to non-ventured organizations before and after the initial public offer.
Wongsunwai (2007) investigated the effect of venture capitalism on the quality of corporate governance in different firms. The study focused on issues of financial reporting and the characteristics of the board of governors. According to Wongsunwai (2007), the presence of a high-quality venture capitalist in a business resulted in a more independent board as well as increased financial reporting. The study results reflect the same results as Hochberg (2011), who explains that firms funded through venture capitalism tend to have independent boards as well as experience minimal instances of financial restatement after the initial public offer. Wongsunwai (2007) however explained that low-quality venture capitalists did not promote the development of business, as they had little experience. Both these studies, however, explain that the presence of a high-quality venture capitalist ensures that a business remains profitable even after changing to a public entity.
Critical Analysis
Hochberg (2011) article main aim is to study the impact of the presence of venture capitalists on the success rates of business. Honcberg’s (2011) conclusion that venture capitalist backed firms performed better than non-ventured organizations agrees with my opinion that the use of venture capitalists to finance business is more profitable than the use f traditional funding sources. The use of traditional funding sources including banks has both positive and negative effects in business. A major reason towards agreeing with the Hochberg (2011) is that banks do not offer support for running a business. Traditional capital sources only provide funding for entrepreneurial ideas for companies tat have enough assets to repay the loan. These sources do not provide advice on how to use the money provided. Venture capitalists, on the other hand, provide capital, as well as participate in the running of the business. Venture capitalists provide experience and advice to entrepreneurs which ensure the success of the business. Hochberg (2011) explained that venture capitalists provided advice on issues of management, which promoted the easy transition from private to public entities. Non-ventured firms suffered from issues of management due to lack of experience, especially after the first IPO. Hochberg (2011) also studied the impact of venture capitalists on the board of directors characteristics. Venture-backed enterprises tend to have better management structures as the roles are divided between the owners and the venture capitalists. This division of roles may results in better performance as compared to companies funded using non-ventured sources.
The article also agrees with my opinion that businesses funded by venture capitalists experience more profits as compared to businesses funded by traditional means. The use of traditional funding sources results in an enterprise being in debt. These companies often use the profits gained to pay back the debt; therefore, a reduction in profits. Venture capitalists, on the other hand, provide capital for a specific number of shares within the firm. The buying of shares allows the venture capitalist some stake in the business. A firm backed by a venture capitalist does not pay back the capital invested; therefore, keeps the majority of the profits. Hochberg (2011) explained the presence of venture capitalists to lead to increased profitability as these capitalists provided knowledge on different financial issues including how to maintain financial records. This sharing of knowledge results in increased profitability. By buying into a business, a venture capitalist has to ensure that their invested money brings back returns. Traditional capital sources however only focus on how a loan can be repaid and pay less attention to the learning of the business funded, which resulted in ventured-backed firms being more profitable as compared to non-ventured firms. These findings agree with my research that venture capitalists play a greater role in promoting entrepreneurship as compared to traditional financial sources.
References
Hochberg, Y. V. (2011). Venture Capital and Corporate Governance in the Newly Public Firm. Review of Finance, 0, 1-52. doi:10.1093/rof/rfr035 Retrieved from http://yael-hochberg.com/assets/portfolio/VCCG.pdf
Krishnan, C., Ivanov, V. I., Masulis, R. W., & Singh, A. K. (2009). Venture Capital Reputation, Post-IPO Performance and Corporate Governance. Journal of Financial and Quantitative Analysis, 1-56. Retrieved from https://www.researchgate.net/profile/Ronald_Masulis/publication/227406487_Venture_Capital_Reputation_Post-IPO_Performance_and_Corporate_Governance/links/0fcfd50b55ca8355d3000000.pdf
Wongsunwai, W. (2007). Does Venture Capitalist Quality Affect Corporate Governance? Harvard Business School, 1-49. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.151.2847&rep=rep1&type=pdf
