The Venture Capital Cycle (Hardcover)

~ Paul Gompers (Author), Josh Lerner (Author)

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

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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: 9.1 x 7.2 x 1.1 inches
• Shipping Weight: 1.8 pounds (View shipping rates and policies)
• Average Customer Review: 3.4 out of 5 stars  See all reviews (16 customer reviews)
• Amazon.com Sales Rank: #1,016,424 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

29 of 31 people found the following review helpful:

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

By A Customer

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.

23 of 24 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 (Ann Arbor, MI) - See all my reviews (TOP 50 REVIEWER)

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 37 people found the following review helpful:

3.0 out of 5 stars Academic concepts, May 15, 2000

By	Jad (TJ) Duwaik (Liaoyang, Liaoning China) - See all my reviews

I've only been able to read through the first 3 chapters of this book because it's written in a very dry, academic style. While it brings up a lot of interesting issues that affect VC's, it's done from an economic/academic perspective.

For example, it describes 3 different categories of covenants that restrict VC partners (overall fund management, activities of the general partners, and restrictions on the types of investments). But, rather than offer case studies on how these covenants play out in the development of the fund, it delves into statistical correlation of these covenants with different fund variables (such as size, rate of growth, and age of venture).

It's probably fascinating stuff if you're an economist, but I'm not sure it's that helpful to anyone who's setting up a fund or is interested in working for a fund.