The Venture Capital Cycle [Hardcover]

Paul Gompers (Author), Josh Lerner (Author)

Book Description

ISBN-10: 0262072556 | ISBN-13: 978-0262072557 | Publication Date: November 5, 2004 | Edition: second edition

In 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-raising and 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.

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 --This text refers to an out of print or unavailable edition of this title.

Review

"Gompers and Lerner bring cutting-edge theory to bear on venture capital practice. The second edition of The Venture Capital Cycle belongs on the bookshelf of academics and practitioners alike." Ronald J. Gilson, Meyers Professor of Law and Business, Stanford Law School, and Stern Professor of Law and Business, Columbia Law School

"A valuable set of perspectives on financial systems in transition economies from many of the leading scholars in finance."--Andrei Shleifer, Professor of Economics, Harvard University

Praise for the first edition "Insightful and well documented—excellent reading for veterans as well as anyone exploring this fascinating and challenging 'industry' for the first time. Peter O. Crisp, Founding and Former Managing Partner, Venrock Associates

Praise for the first edition: "Insightful and well documentedexcellent reading for veterans as well as anyone exploring this fascinating and challenging 'industry' for the first time." Peter O. Crisp , Founding and Former Managing Partner, Venrock Associates

"*The Venture Capital Cycle* provides an accurate, comprehensive, and insightful description of the economics and business of venture capital. This second edition is essential reading for entrepreneurs, venture capitalists, policymakers, and academics interested in the economics of venture capital and innovation."--Steven N. Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago Graduate School of Business

"Gompers and Lerner bring cutting-edge theory to bear on venture capital practice. The second edition of *The Venture Capital Cycle* belongs on the bookshelf of academics and practitioners alike."--Ronald J. Gilson, Meyers Professor of Law and Business, Stanford Law School, and Stern Professor of Law and Business, Columbia Law School

See all Editorial Reviews

Product Details

• Reading level: Ages 18 and up
  
• Hardcover: 581 pages
• Publisher: The MIT Press; second edition edition (November 5, 2004)
• Language: English
• ISBN-10: 0262072556
• ISBN-13: 978-0262072557
• Product Dimensions: 9.1 x 7 x 1.8 inches
• Shipping Weight: 2.8 pounds
• Average Customer Review: 3.4 out of 5 stars  See all reviews (16 customer reviews)
• Amazon Best Sellers Rank: #309,793 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.