The Venture Capital Cycle [Hardcover]

Paul Gompers (Author), Josh Lerner (Author)

Book Description

Publication Date: September 24, 1999 | ISBN-10: 0262071940 | ISBN-13: 978-0262071949 | Edition: 1st

The venture capital industry in the United States has grown dramatically over the last two decades. Annual inflows to venture funds have expanded from virtually zero in the mid-1970s to more than $9 billion in 1997. Many of the most visible new firms—including Apple Computer, Genentech, Intel, Lotus, Microsoft, and Yahoo—have been backed by venture capital funds. Yet despite this tremendous growth and its visible success, venture capital remains a mysterious industry. Numerous misconceptions persist about the nature and role of venture capitalists.

Paul Gompers and Josh Lerner's extensive research on venture capital organizations is based largely on original data sets developed through close relationships with institutional investors in venture capital funds and investment advisors. The Venture Capital Cycle synthesizes their path-breaking work. After a historical overview, the book looks at the formation of funds, the investment of the funds in operating companies, and the liquidation of these investments. The concluding chapter provides a road map for future research in this growing area.

Three themes run throughout the book. The first is that all venture capitalists confront tremendous incentive and information problems. The second is that because the various stages of the venture capital processes are related, the entire process is best viewed as a cycle. The third is that, unlike most financial markets, the venture capital industry adjusts very slowly to shifts in the supply of capital and the demand for financing.

Editorial Reviews

Amazon.com Review

In 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

Review

“Paul Gompers and Josh Lerner’s book on venture capital will become the standard reference on venture finance, and, hopefully, a catalyst in a new wave of corporate law research...An academic achievement of the first order.”
—Michael Whincop, Companies & Securities Law Journal (Australia)

"In The Venture Capital Cycle Paul Gompers and Josh Lerner bridge the gap between practice and theory, systematicaly describing and analyzing important issues influencing investment in entrepreneurial start-ups. By undertaking rich empirical analysis in the context of an analytically sound framework, the authors combine real-world sensibility and intellectual rigor, making this book essential reading for investors, venture capitalists, and students of finance."
—David F. Swensen, Chief Investment Officer, Yale University

See all Editorial Reviews

Product Details

• Hardcover: 385 pages
• Publisher: The MIT Press; 1st edition (September 24, 1999)
• Language: English
• ISBN-10: 0262071940
• ISBN-13: 978-0262071949
• Product Dimensions: 8.9 x 7.1 x 1.1 inches
• Shipping Weight: 2 pounds (View shipping rates and policies)
• Average Customer Review: 3.4 out of 5 stars  See all reviews (16 customer reviews)
• Amazon Best Sellers Rank: #658,303 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

26 of 27 people found the following review helpful:

5.0 out of 5 stars Valuable and clear info for both sides of the vc process, October 31, 2002

By 

Craig Matteson (Saline, MI) - See all my reviews
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This review is from: The Venture Capital Cycle (Hardcover)

We used this book in an MBA course on Venture Capital here at the University of Michigan b-school. I think this is an excellent book.

First, do NOT expect to be a book full of venture capital anecdotes. While that is always intersting, this book is a serious treatment of what the venture capital business is about: how funds are raised, how venture capitalists arrange deals to ensure adequate compensation for their risk, how investments are staged, how the investments are managed, exit strategies and methods, and more.

This is a lot to cover in a book of approximately 350 pages, but it is all covered very well. The writing is quite clear and readable. Though this is not a book for the general reader, it is not difficult to read if you have some background understanding of business theory and a touch of finance.

What is so helpful about reading this book is that people seeking venture capital will understand more about why things are structured they way they are. It isn't just arbitrary greed and control. It is a business deal that requires an expected positive return - you know - making money (which does concern self-interest (greed) and structure (control) - but with slightly more reasoning).

While people seeking to make venture investments will immediately understand why they need something like this book and a whole lot more, I believe it is essential for people seeking investment money to also have a significant understanding of this process. Why? Because the venture capitalists understand this process completely and the people seeking investments usually don't do enough of these deals to really know what is going on. And if they are too blind they will be sheared like sheep. They need to understand all the interests involved so they can argue on their own behalf and make the deal as favorable as they can.

In any case, while this isn't the only book you should read on the subject it is certainly a good one. It is of manageable length with a great deal of clear and helpful information. I find this topic fascinating.

32 of 35 people found the following review helpful:

3.0 out of 5 stars Not a practical book for VCs, July 8, 2000

By A Customer

This review is from: The Venture Capital Cycle (Hardcover)

The authors are two Harvard b-school academics who carried out a rigorous, disciplined, statistical analysis of a venture capital deal database. Their research identified a variety of patterns -- some of them interesting, others predictable.

Frankly, the conclusions could've been handily summarized in a SHORT article written for the Harvard Business Review. Therefore, I recommend that VC practitioners skim each chapter's conclusions, and skip over the rest.

Only if you love the blow-by-blow minutiae of academic statistical analysis, would you feel impelled to slog through the book's dry, methodical expositions of hypotheses, statistical procedures, and summary tables.

Besides, a substantial portion of the book betrays an academic's fascination with why VCs do things the way they do, rather than with identifying profitable new alternatives. All in all, not a practical book for VCs.

10 of 11 people found the following review helpful:

4.0 out of 5 stars Excellent & Intellectual, July 30, 2001

By 

CLARK (San Antonio, TX United States) - See all my reviews

This review is from: The Venture Capital Cycle (Hardcover)

Loved the book. It won't appeal to someone not accustomed to reading academic work, but is thoroughly informative. They've really gone the extra mile to bring to you detailed information about this secretive industry. They leave no stone unturned. I also appreciated the non-judgemental approach. They explore all reasonable hypothesis of each question or topic - and back up their conclusions with real analysis. This is not a book of some opinionated gurus telling you thoughts off-the-cuff. Everything is substatiated.