Venture Capital and Bank Finance Prof. Christian Keuschnigg, IFF-HSG

Dates: 24.10. - 28.10. and 31.10. - 4.11.2005

Schedule and Location at HSG: Monday, 24.10 14:00 - 18:00, Room A201 Tuesday, 25.10. 08:00 - 12:00, Room A202 Thursday, 27.10./3.11. 14:00 - 18:00, Room AN17 Friday, 28.10./4.11. 08:00 - 12:00, Room D103

PEF Course Outline

Part I: Contact Studies 1. Start-up Finance and Adverse Selection 2. Adverse Selection and Public Policy 3. Start-up Finance and Moral Hazard 4. Informed and Uninformed Investors 5. Convertible Securities in Venture Capital Finance 6. Venture Capital versus Banks 7. Venture Capital and Entrepreneurial Failure 8. Venture Capital in Equilibrium 9. Venture Capital and Public Policy

Part II: Selfstudies 1. Introduction to Start-up Finance 2. Project Selection and Contracts 3. Advice and Control 4. Selection versus Advice 5. Banks and Venture Capital Financing 6. Quality of Venture Capital Note: The course outline is not binding and may be updated prior to the start of the lectures. The course requires a solid background knowledge of the economics of information and principal agent theory.

Literature

Part I: Contact Studies

Start-up Finance and Adverse Selection • DE MEZA, David and David WEBB (1999), Wealth, Enterprise and Credit Policy,

Economic Journal 109, 153-163. • DE MEZA, David and David C. WEBB (1988), Credit Market Efficiency and Tax Policy in

the Presence of Screening Costs, Journal of Public Economics 36, 1-22.

Adverse Selection and Public Policy • BOADWAY, Robin and Michael KEEN (2002), Financing New Investments Under

Asymmetric Information: A General Approach, Working Paper, Queens University and International Monetary Fund.

Start-up Finance and Moral Hazard • TIROLE, Jean (2001), Corporate Governance, Econometrica 69, 1-35.

Informed and Uninformed Investors • HOLMSTROM, Bengt and Jean TIROLE (1997), Financial Intermediation and the Real

Sector, Quarterly Journal of Economics 62, 663-691. • AGHION, Philippe and Jean TIROLE (1994), The Management of Innovation, Quarterly

Journal of Economics 109, 1185-1209.

Convertible Securities in Venture Capital Finance • CASAMATTA, Cathrine (2002), Financing and Advising: Optimal Contracts with Venture

Capitalists, Journal of Finance 58, 2058-2085. • SCHMIDT, Klaus (2003), Convertible Securities and Venture Capital Finance, Journal of

Finance 58, 1139-1166.

Venture Capital versus Banks • LANDIER, Augustin (2002), Start-up Financing: From Banks to Venture Capital,

Discussion Paper, University of Chicago. • UEDA, Masako (2004), Banks versus Venture Capital: Project Evaluation, Screening, and

Expropriation, Journal of Finance 59, 601-621.

Venture Capital and Entrepreneurial Failure • GROMB, Denis and David SCHARFSTEIN (2002), Entrepreneurship in Equilibrium, NBER

Working Paper 9001.

Venture Capital in Equilibrium • INDERST, Roman and Holger M. MÜLLER (2004), The Effect of Capital Market

Characteristics on the Value of Start-Up, Journal of Financial Economics 72, 319-356. • MICHELACCI, Claudio and Javier SUAREZ (2004), Business Creation and the Stock

Market, Review of Economic Studies 71, 459-481.

Venture Capital and Public Policy • KEUSCHNIGG, Christian (2004), Taxation of a Venture Capitalist with a Portfolio of Firms,

Oxford Economic Papers 56, 1-22. • KEUSCHNIGG, Christian and Soren Bo NIELSEN (2004), Start-ups, Venture Capitalists, and

the Capital Gains Tax, Journal of Public Economics 88, 1011-1042.

Part II: Selfstudies

Introduction to Start-up Finance • KAPLAN, Steven N. and Per STRÖMBERG (2001), Venture Capitalists as Principals:

Contracting, Screening, and Monitoring, American Economic Review 91, 426-430. • HART, Oliver (2001), Financial Contracting, Journal of Economic Literatur 39, 1079-

1100. • BLACK, Bernard S. and Ronald J. GILSON (1998), Venture Capital and the Structure of

Capital Markets: Banks versus Stock Markets, Journal of Financial Economics 47, 243-277.

Project Selection and Contracts • KAPLAN, Steven N. and Per STRÖMBERG (2003), Financial Contracting Theory Meets the

Real World: An Empirical Analysis of Venture Capital Contracts, Review of Econonic Studies 70, 281-315.

• KAPLAN, Steven N. and Per STRÖMBERG (2004), Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses, Journal of Finance 59, 2177-2210.

Advice and Control • HELLMANN, Thomas and Manju PURI (2002), Venture Capital and the Professionalization

of Start-ups: Empirical Evidence, Journal of Finance 57, 169-167. • HELLMANN, Thomas and Manju PURI (2000), The Interaction Between Product Market

and Financing Strategy: The Role of Venture Capital, Review of Financial Studies 13, 959-984.

Selection versus Advice • SORENSEN, MORTEN (2005), How Smart is Smart Money? An Empirical Two-Sided

Matching Model of Venture Capital, Working Paper, University of Chicago.

Banks and Venture Capital Financing • HELLMANN, Thomas, Laura LINDSEY and Manju PURI (2004), Building Relationships

Early: Banks in Venture Capital, NBER WP 10535. • FIEDLER, Marc-Oliver and Thomas HELLMANN (2001), Against all Odds: The Late But

Rapid Development of the German Venture Capital Industry, Journal of Private Equity, forthcoming.

The European Market for Venture Capital • BOTTAZZI, Laura and Marco DA RIN (2002), Venture Capital in Europe and the Financing

of Innovative Companies, Economic Policy 17, 229-270. • AUDRETSCH, David B. and Erik LEHMANN (2002), Debt or Equity? The Role of Venture

Capital in Financing the New Economy in Germany, CEPR DP. 3656. • Becker, Ralf and Thomas Hellmann (2005), The Genesis of Venture Capital: Lessons

from the German Experience, in: V. Kanniainen and C. Keuschnigg (eds.), Venture Capital, Entrepreneurship, and Public Policy, Cambridge: MIT Press, 33-67.

• BOTTAZZI, Laura, Marco DA RIN and Thomas HELLMANN (2004), Active Financial Intermediation: Evidence on the Role of Organizational Specialization and Human Capital, Discussion Paper.

Part III: Background Literature

Microeconomic Methods • BOLTON, Patrick and Mathias DEWATRIPONT (2005), Contract Theory, Cambridge: MIT

Press. • LAFFONT, Jean-Jaques and David MARTIMORT (2001), The Theory of Incentives: The

Principal-Agent Model, Princeton University Press. • SALANIE, Bernard (1997), The Economics of Contracts. A Primer, Cambridge: MIT Press.

Venture Capital • GOMPERS, Paul A. and Josh LERNER (1999), The Venture Capital Cycle, Cambridge: MIT

Press. • Gladstone, David and Laura Gladstone (2002), Venture Capital Handbook. An

Entrepreneur's Guide to Raising Venture Capital, New Jersey: Prentice Hall. • KANNIAINEN, Vesa and Christian KEUSCHNIGG (eds.), Venture Capital, Entrepreneurship,

and Public Policy, Cambridge: MIT Press.

Objective: The course discusses problems of venture capital and bank financing of start-up firms. According to a general definition, venture capital financing describes external financing of investments exposed to high entrepreneurial risk and subject to informational asymmetries between the entrepreneur and the investor. Apart from conveying solid basic knowledge in theoretical and empirical issues of venture capital, the lecture aims at developing analytical skills, enabling participants to analyze financial and incentive problems of young start-ups independently. The lecture should make PhD students familiar with key contributions to the relevant literature. Special emphasis is on knowledge and methodological skills that enable students to gain access to the specialized literature and prepare them for potential thesis work in this area.

Organisation: • Student evaluation is based on: (1) written exam, (2) participation in the discussion. (3)

Potentially, presentation of assigned self-study literature may also be considered. In this case, slides, handouts etc. used in the presentation have to be handed in as well.

• The written exam (90 minutes) will take place during the semester, presumably before Christmas. Details to questions and grading rules will be announced in course.

• Students obtain published articles from the library. Unpublished work will be made available in PDF format.