OLA BENGTSSON

Overview of Research

Entrepreneurship, Venture Capital, and Private Equity

I do research in empirical corporate finance with focus on the two major types of private equity - buyouts and venture capital. Private equity as a research field is attracting attention because of the rapid growth in buyout and venture investments in the last decade. In 2006 alone, buyout investors bought 654 U.S. companies for $375 billion and venture capital investors invested $22 billion in 2,239 U.S. deals. Private equity is also relevant to study from an academic standpoint because this setting is a good testing ground for many theories in finance and economics. Investors and borrowers in private capital markets are subject to less regulation as compared to those who operate in public equity and debt markets. As a result, venture capitalists and buyout investors have more freedom in how to structure investments and design financial contracts. The need for such optimal structures is large in private companies due to the severity of information and agency problems, especially for the innovative risky startup companies which are backed by venture capitalists.

Despite the importance of private equity, relatively little is known about private equity investors and the companies that they finance. Private companies are “black boxes” in the sense that they are not required to file financial reports to the SEC, are not covered by analysts and do not have publicly traded equity. A major challenge for this line of research is to obtain reliable data that can be analyzed with formal statistical techniques. A significant part of my research effort is spent on compiling such datasets from legal filings, surveys and other sources.

Research on Venture Capital Contracts

The first strand of my research centers around the financial contracting between venture capitalists and entrepreneurs. Analyzing a large proprietary dataset of U.S. VC contracts (about 2,000 deals from 1,500 companies), I study the empirical determinants of various contract terms and the implications of different contract designs. I relate my findings to existing contract theories and explain how the findings from venture capital contracts provide more general insights on corporate finance.

One of my findings is that the inclusion of investor-friendly cash flow contingencies depends on geographical factors such as the locations of the VC and company and the concentration of the local VC market. Although soft information and monitoring can partly explain these findings, the result that contracts are markedly different for companies located in California is hard to reconcile with traditional theoretical models. Instead, it suggests that regional culture and habits may play a role in private opaque capital markets. In a related study I find that investor-friendly cash flow contingencies are used less by more experienced VCs. Because more experienced VCs have better screening and monitoring skills, these investors rely less on high-powered incentive contracts and more on other governance techniques. Overall, this result is direct evidence that investor governance abilities and contracting interact in practice. My analysis of the VC contracts also shows that the inclusion of investor-friendly cash flow contingencies is less prevalent when the entrepreneur employs a lawyer with specialized knowledge about how to negotiate VC contracts. The typical entrepreneur has little experience with VC contracts whereas his VC counterpart has negotiated several such documents. I show that entrepreneurs can overcome this disadvantage if they employ a skilled lawyer.

The above discussed results reflect cross-sectional differences in VC contracts. One of my studies also examine time-series differences of VC contracts. Specifically, I study how contracts differ between financing rounds for the same company. I show that follow-up contracts retain most of the contract terms from the previous-round contract. This recycling is beneficial since it lowers negotiation costs and computational costs associated with an overly complex contractual nexus. To the extent they occur, changes to contracts are more common when company performance is bad and when new VCs join in the follow-up round.

Another study examines the allocation of control rights in VC contracts. I show that in addition to board control, VCs often receive the right to veto important financial and operating decisions. Such restrictive covenants are more common when conflicts of interests are amplified by the basic design of the venture capital contract. In particular, contracts that give VCs a higher debt-like payoffs and less board control include more covenants as compared with other contracts.

Research on How Entrepreneurs Evaluate and Select Venture Capital Investors

The second strand of my research investigates how entrepreneurs evaluate the myriad of potential venture capital investors. I find that serial founders (i.e. individuals who have started more than one venture-backed company) often forgo relational financing from VCs that were investors in the founder's previous company. This finding by itself indicates that informational frictions is not a major motivation for relational financing in the venture capital setting. I show, however, that this conclusion is incorrect since relational financing is indeed very common for VCs that possess significant private information about the founder. The fact that many relationships are foregone can be explained partly by most VCs not gathering sufficient private information, partly by serial founders starting new companies that don't fit with specialized VCs' investment focus.

I also study the matching between VC partners and founders. The personal relationships are important in the VC setting but are not well understood by academic researchers. I focus on the economic role of personal similarities and professional complementarities. My results show that matching is more likely if the VC partner and founder have a shared ethnicity or educational background. In such cases, the VC invests more aggressively in the startup. The results on matching based on professional complementarities are more mixed.

A growing literature in finance studies how various characteristics of a VC investor affects the financing pattern and the ultimate success of a venture-backed company. The main challenges with this research is that outcome variables are both noisy and subject to a time-lag (it often takes 5-7 years for a startup to realize an exit). I add to this literature by studying entrepreneurs' preferences about VCs. I explore a large survey dataset from an on-line community of entrepreneurs (which includes more than 1,500 unique entrepreneurs), and show that entrepreneurs systematically hold a more favorable view of independent private partnership VCs. Somewhat surprisingly, I find that even though entrepreneurs can identify the VCs with the best track record, they do not view that such VCs can add more value to a startup. I also find evidence consistent with the thesis that an entrepreneur's experience with VCs affect his or her evaluation of investors. In particular, entrepreneurs who have encountered a greater number of VCs hold less favorable views of the ability of VCs to add value to startups.

Research on How Entrepreneurs Are Compensated

There exist a considerable amount of academic work on executive compensation, however, almost all existing studies on public companies. One difference between public and private companies is that raising external capital is considerably more difficult for the latter type - private markets are plagued with high search costs, liquidity problems, information asymmetries and other financing frictions. Studying a proprietary survey database, I show that CEOs of venture-backed companies who have successfully raised more capital are rewarded with higher cash compensation. This result is unlikely to reflect a substitution from equity compensation to cash pay since the value of the CEO's options and shares are higher for companies that have raised more venture financing.

Abstract and downloadable papers could be found by clicking on "Papers" or "SSRN page" in the menu.