Risk appraisal and venture capital in high technology new ventures

This book examines how risk is handled in high technology ventures in the UK (with some comparative US evidence). Using unique field work evidence, based on face to face interviews with venture capitalists and high technology entrepreneurs, it enquires into attitudes to risk, and skills in risk managment, in the relationship between high technology firms and their venture capital backers.

Based on research funding from the CIMA research foundation, the Carnegie Trust, the British Academy and the ESRC, the work uses an inter-disciplinary approach involving a synthesis of economics, accounting and finance. The methods used are both quantitiatve and qualitative. The quantititive methods involve, for example, the statistical analysis of attitudes to risk of investors and entrepreneurs, and of the significance of reporting, risk and intangibles for investments practice; and the econometric analysis of behavioural determinants of investment funds allocated. The qualitative methods involve investigating in interviews (then measuring and calibrating) attitudes to risk; and ten analytical case studies, looking at a range of high technologies, including: thermal imaging; e-commerce acceleration; light emitting polymer displays; laser and infrared detectors; animal robotics; and automated baggage security inspection.

The principal findings of this work are: standard determinants of company risk are a poor guide to an overall risk assessment of high technolgy firms; business risk, agency risk and innovation risk are crucial risk categories in a high technology context; venture capitalists emphasise agency risk and investees emphasise business risk; investors focus most on novelty in the marketplace and sales, while entrepreneurs focus most on getting to market and meeting innovation milestones; there is considerable consensus in the venture capital industry on the spectrum of investments by risk, and on key commercial factors affecting risk; there is little industry consensus on innovation risk; investors tend to rely on their own procedures and processes (rather than those of entrepreneurs) when evaluating potential investments; financial accounts seem to offer little to investors, in terms of risk disclosure, or the valuation of intangible assets like intellectual property; investors generally would not welcome risk disclosure, as this would provide too much information to rival investors; statistical models can explain the levels of investment funds allocated by venture capitalists, using risk based behavioural variables.