Matthew Rhodes-Kropf

Associate Professor of Business Administration

Unit: Entrepreneurial Management

Contact:

(617) 496-3911

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Professor Matthew Rhodes-Kropf is an Associate Professor in the Entrepreneurial Management Unit at Harvard Business School, and a faculty research fellow at the National Bureau of Economic Research. Currently, Professor Rhodes-Kropf teaches courses on Venture Capital and Private Equity in the MBA elective curriculum and in executive education programs.  He was formerly the Daniel W. Stanton Associate Professor of Business at the Columbia University Graduate School of Business, where he received the Dean’s Award for Teaching Excellence.

Professor Rhodes-Kropf specializes in mergers and acquisitions, venture capital, and corporate governance. His work seeks to understand how capital markets interact with the creation of new firms, their financing, growth, governance, and their ultimate exit through a successful IPO or sale or through failure.  He has published in leading finance and economic journals, including The Journal of Finance, Journal of Financial Economics, Review of Financial Studies, The RAND Journal of Economics, and The Journal of Business. His 2004 paper "Market Valuation and Merger Waves," published in The Journal of Finance, was nominated for the Brattle Prize for Best Paper in Corporate Finance in 2005.

Professor Rhodes-Kropf is also an advisor or board member for Ada Investment Management, Correlation Ventures, Xenex, Neighborhood Trust, and Duke University’s Graduate School.

A graduate of Duke University, Professor Rhodes-Kropf holds a BA in computer science and economics and an MA and Ph.D. in economics.

Publications

Journal Articles

  1. Is a VC Partnership Greater Than the Sum of Its Partners?

    This paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists' investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner's human capital is two to five times more important than the VC firm's organizational capital in explaining performance.

    Citation:

    Rhodes-Kropf, Matthew, and Michael Ewens. "Is a VC Partnership Greater Than the Sum of Its Partners?" Journal of Finance (forthcoming). View Details
  2. Governance and CEO Turnover: Do Something or Do the Right Thing?

    We study how corporate governance affects firm value through the decision of whether to fire or retain the CEO. We present a model in which weak governance—which prevents shareholders from controlling the board—protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994–2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making.

    Keywords: Governing and Advisory Boards; Value; Retention; Resignation and Termination; Corporate Governance; Management Teams; Business and Shareholder Relations;

    Citation:

    Fisman, Ray, Rakesh Khurana, Matthew Rhodes-Kropf, and Soojin Yim. "Governance and CEO Turnover: Do Something or Do the Right Thing?" Management Science 60, no. 2 (February 2014): 319–337. View Details
  3. Entrepreneurship as Experimentation

    Entrepreneurship research is on the rise but many questions about its fundamental nature still exist. We argue that entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed and unknowable until an investment is made. At a macro level experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency and coordination problems, often before a new idea even has a chance to compete in a market. We contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences.

    Keywords: Entrepreneurship; Innovation and Invention;

    Citation:

    Kerr, William R., Ramana Nanda, and Matthew Rhodes-Kropf. "Entrepreneurship as Experimentation." Journal of Economic Perspectives (forthcoming). View Details
  4. The Price of Diversifiable Risk in Venture Capital and Private Equity

    This paper explores the private equity and venture capital (VC) markets and extends the standard principal-agent problem between the investors and venture capitalist to show how it alters the interaction between the venture capitalist and the entrepreneur. Since the investor-VC contract is set before the VC finds any investments, we show that it is the entrepreneur who must compensate the venture capitalist for any extra risk in the project even though it is the investor who requires the VC to hold the risk and even though the entrepreneur holds all of the market power in the model. Furthermore, although perfectly competitive investors expect zero alpha in equilibrium, the nature of the three way interaction results in a correlation between total risk and investor returns even net of fees. Thus, we show how and why diversifiable risk should be priced in VC deals even though investors are fully diversified. We then take our theory to a unique data set and show that while investors do earn zero alpha on average there is a strong correlation between realized risk and investor returns, exactly as predicted by the theory.

    Keywords: Price; Risk and Uncertainty; Venture Capital; Private Equity; Contracts; Investment; Competition; Agency Theory; Investment Return; Forecasting and Prediction; Theory; Diversification;

    Citation:

    Ewens, Michael, Charles Jones, and Matthew Rhodes-Kropf. "The Price of Diversifiable Risk in Venture Capital and Private Equity." Review of Financial Studies 26, no. 8 (August 2013): 1854–1889. View Details
  5. Investment Cycles and Startup Innovation

    We find that VC-backed firms receiving their initial investment in hot markets are more likely to go bankrupt, but conditional on going public are valued higher on the day of their IPO, have more patents, and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is true even for the most experienced VCs. Furthermore, our results suggest that the flood of capital in hot markets also plays a causal role in shifting investments to more novel startups—by lowering the cost of experimentation for early stage investors and allowing them to make riskier, and more novel, investments.

    Keywords: venture capital; innovation; Market Cycles; Financing Risk; Risk and Uncertainty; Venture Capital; Investment; Innovation and Invention;

    Citation:

    Nanda, Ramana, and Matthew Rhodes-Kropf. "Investment Cycles and Startup Innovation." Journal of Financial Economics 110, no. 2 (November 2013): 403–418. View Details
  6. Concentrating on Governance

    This paper develops a novel trade-off view of corporate governance. Using a simple model that integrates agency costs and bargaining benefits of management friendly provisions, we identify the economic determinants of the resulting trade-offs for shareholder value. Consistent with the theory, our empirical analysis shows that provisions that allow managers to delay takeovers have a significant bargaining effect and a positive relation with shareholder value in concentrated industries. By contrast, non-delay provisions have an unambiguously negative relation with value, and more so in concentrated industries. Overall, our analysis suggests that there are governance trade-offs for shareholders, and industry concentration is an important determinant of their severity.

    Keywords: Market Participation; Corporate Governance; Business and Shareholder Relations;

    Citation:

    Kadyrzhanova, Dalida, and Matthew Rhodes-Kropf. "Concentrating on Governance." Journal of Finance 66, no. 5 (October 2011): 1649–1685. View Details
  7. The Market for Mergers and the Boundaries of the Firm

    We relate the property rights theory of the firm to empirical regularities in the market for mergers and acquisitions. We first show that high market-to-book acquirers typically do not purchase low market-to-book targets. Instead, mergers pair together firms with similar ratios. We then build a continuous-time model of investment and merger activity combining search, scarcity, and asset complementarity to explain this like-buys-like result. We test the model by relating like-buys-like to search frictions. Search frictions and assortative matching vary inversely, supporting the model over standard explanations.

    Keywords: Mergers and Acquisitions; Assets; Investment; Property; Mathematical Methods; Boundaries;

    Citation:

    Rhodes-Kropf, Matthew, and David Robinson. "The Market for Mergers and the Boundaries of the Firm." Journal of Finance 63, no. 3 (June 2008): 1169–1211. View Details
  8. Do Funds-of-Funds Deserve Their Extra Fees?

    Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in publicly reported databases. Instead, the correct funds-of-funds benchmark is the set of direct hedge fund investments an investor could achieve on her own without recourse to funds-of-funds. We use asset allocation concepts to estimate characteristics of the funds-of-funds benchmark distribution. Since the benchmark characteristics are reasonable, we conclude that funds-of-funds, on average, deserve their fees-of-fees.

    Keywords: Investment Funds; Investment Return; Value; Assets; Resource Allocation;

    Citation:

    Ang, Andrew, Matthew Rhodes-Kropf, and Rui Zhao. "Do Funds-of-Funds Deserve Their Extra Fees?" Journal of Investment Management 6, no. 4 (Fourth Quarter 2008). View Details
  9. The Consequences of Information Revealed in Auctions

    This paper considers the ramifications of post-auction competition on bidding behavior under different bid announcement policies. In equilibrium, the auctioneer's announcement policy has two distinct effects. First, announcement entices players to signal information to their post-auction competitors through their bids. Second, announcement can lead to greater bidder participation in certain instances while limiting participation in others. Specifically, the participation effect works against the signalling effect, thus reducing the impact of signalling found in other papers. Revenue, efficiency, and surplus implications of various announcement policies are examined.

    Keywords: Information; Auctions; Bids and Bidding;

    Citation:

    Katzman, Brett E., and Matthew Rhodes-Kropf. "The Consequences of Information Revealed in Auctions." Special Issue on Theoretical, Empirical and Experimental Research on Auctions. Applied Economics Research Bulletin 2 (March 2008): 53–87. View Details
  10. A New Measure for Measuring

    Keywords: Measurement and Metrics;

    Citation:

    Ang, Andrew, Matthew Rhodes-Kropf, and Rui Zhao. "A New Measure for Measuring." Alpha (July–August 2006). View Details
  11. Valuation Waves and Merger Activity: The Empirical Evidence

    To test recent theories suggesting that valuation errors affect merger activity, we develop a decomposition that breaks the market-to-book ratio (M/B) into three components: the firm-specific pricing deviation from short-run industry pricing; sector-wide, short-run deviations from firms' long-run pricing; and long-run pricing to book. We find strong support for recent theories by Rhodes-Kropf and Viswanathan (forthcoming) and Shleifer and Vishny (2003), which predict that misvaluation drives mergers. So much of the behavior of M/B is driven by firmspecific deviations from short-run industry pricing, that long-run components of M/B run counter to the conventional wisdom: Low long-run value to book firms buy high long-run value-to-book firms. Misvaluation affects who buys whom, as well as method of payment, and combines with neoclassical explanations to explain aggregate merger activity.

    Keywords: Valuation; Mergers and Acquisitions; Forecasting and Prediction; Price; Theory; Behavior;

    Citation:

    Rhodes-Kropf, Matthew, David Robinson, and S. Viswanathan. "Valuation Waves and Merger Activity: The Empirical Evidence." Journal of Financial Economics 77 (2005): 561–603. View Details
  12. Financing Auction Bids

    In many auctions, bidders do not have enough cash to pay their bid. If bidders have asymmetric cash positions and independent private values then auctions will be inefficient. However, what happens if bidders have access to financial markets? We characterize efficient auctions and show that in an efficient auction the information rent that a bidder earns depends generally on both his valuation and his cash position. In contrast a competitive capital market that is efficient must have information rents that only depend on valuation. This tension between information rents in an efficient auction and zero profits in a competitive equilibrium implies that most often, competitive financing is not efficient.

    Keywords: Financing and Loans; Auctions; Bids and Bidding; Financial Markets; Valuation; Cash; Capital Markets; Profit; Competition;

    Citation:

    Rhodes-Kropf, Matthew, and S. Viswanathan. "Financing Auction Bids." RAND Journal of Economics 36, no. 4 (winter 2005): 789–815. View Details
  13. Price Improvement in Dealership Markets

    Price improvement refers to the practice whereby dealers order executions that improve on quoted prices. Why are these improvements given? Standard thinking is that competition causes dealers to give better prices to customers with less information. This paper contrasts this with a novel theory in which customers negotiate improvements and differential pricing arises from differences in customers' market power. Each theory impacts the formation of bid/ask spreads in empirically distinguishable ways. Understanding price improvement and its impact on market participants is critical the regulation of markets, particularly since equal execution is such an important stated goal of the SEC.

    Keywords: Price; Markets; Competition; Information; Customers; Negotiation; Mission and Purpose; Practice; Theory; Performance Improvement; Bids and Bidding; Governing Rules, Regulations, and Reforms;

    Citation:

    Rhodes-Kropf, Matthew. "Price Improvement in Dealership Markets." Journal of Business 78, no. 4 (July 2005): 1137–1172. View Details
  14. Market Valuation and Merger Waves

    Does valuation affect mergers? Data suggest that periods of stock merger activity are correlated with high market valuations. The naïve explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over- and undervaluation of the stock market. Thus, valuation fundamentally impacts mergers.

    Keywords: Mergers and Acquisitions; Valuation; Market Transactions; Value; Cash; Stocks; Corporate Social Responsibility and Impact; Bids and Bidding; Market Design; Stock Shares; Accounting Audits; Performance Evaluation;

    Citation:

    Rhodes-Kropf, Matthew, and S. Viswanathan. "Market Valuation and Merger Waves." Journal of Finance 59, no. 6 (December 2004): 2685–2718. View Details
  15. Corporate Reorganizations and Non-Cash Auctions

    This paper extends the theory of non-cash auctions by considering the revenue and efficiency of using different securities. Research on bankruptcy and privatization suggests using non-cash auctions to increase cash-constrained bidder participation. We examine this proposal and demonstrate that securities may lead to higher revenue. However, bidders pool unless bids include debt, which results in possible repossession by the seller. This suggests all-equity outcomes are unlikely and explains the high debt of reorganized firms. Securities also inefficiently determine bidders' incentive contracts and the firm's capital structure. Therefore, we recommend a new cash auction for an incentive contract.

    Keywords: Auctions; Revenue; Debt Securities; Insolvency and Bankruptcy; Privatization; Capital Structure; Bids and Bidding; Motivation and Incentives; Performance Efficiency; Contracts;

    Citation:

    Rhodes-Kropf, Matthew, and S. Viswanathan. "Corporate Reorganizations and Non-Cash Auctions." Journal of Finance 55, no. 4 (August 2000): 1807–1849. View Details

Working Papers

  1. Corporate Financial Policies in Misvalued Credit Markets

    We theoretically and empirically investigate the repercussions of credit market misvaluation for a firm's borrowing and investment decisions. Using an ex-post measure of the accuracy of credit ratings to capture debt market misvaluation, we find evidence that firms take advantage of inaccuracies by issuing more debt and increasing leverage. The result goes beyond a wealth transfer and has real investment implications: approximately 75% of the debt issuance funds increased capital expenditures and cash acquisitions. In the cross section, misvaluation affects financially constrained firms the most, supporting the theoretical prediction that debt overvaluation loosens financial constraints.

    Citation:

    Harford, Jarrad, Marc Martos-Vila, and Matthew Rhodes-Kropf. "Corporate Financial Policies in Misvalued Credit Markets." Harvard Business School Working Paper, No. 14-097, April 2014. View Details
  2. Innovation and the Financial Guillotine

    We examine how investors' tolerance for failure impacts the types of projects they are willing to fund. We show that actions that reduce short-term accountability and thus encourage agents to experiment more simultaneously reduce the level of experimentation financial backers are willing to fund. Failure tolerance has an equilibrium price that increases in the level of experimentation. More experimental projects that don't generate enough to pay the price cannot be started. In fact, an endogenous equilibrium can arise in which all competing financiers choose to be failure tolerant in the attempt to attract entrepreneurs, leaving no capital to fund the most radical, experimental projects in the economy. The tradeoff between failure tolerance and a sharp guillotine help explain when and where radical innovation occurs.

    Keywords: innovation; venture capital; Investing; abandonment option; failure tolerance; Venture Capital; Attitudes; Investment; Failure; Innovation and Invention;

    Citation:

    Nanda, Ramana, and Matthew Rhodes-Kropf. "Innovation and the Financial Guillotine." Harvard Business School Working Paper, No. 13-038, October 2012. (Revised November 2012.) View Details
  3. Governing Misvalued Firms

    Equity overvaluation is thought to create the potential for managerial misbehavior, while monitoring and corporate governance curb misbehavior. We combine these two insights from the literatures on misvaluation and governance to ask, when does governance matter? Examining firms with standard long-run measures of corporate governance as they are shocked by plausible misvaluation, we provide consistent evidence that firm performance is impacted by governance when firms become overvalued—overvaluation causes weaker performance in poorly governed firms. Our findings imply that firm oversight is important during market booms, just when stock prices suggest all is well.

    Keywords: Valuation; Performance; Corporate Governance;

    Citation:

    Kadyrzhanova, Dalida, and Matthew Rhodes-Kropf. "Governing Misvalued Firms." Harvard Business School Working Paper, No. 13-037, October 2012. (Revised January 2014. NBER Working Paper Series, No. 19799, January 2014) View Details
  4. Financing Risk and Innovation

    We provide a model of investment into new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk―a forecast of limited future funding―by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need "hot" financial markets to get through the initial period of discovery or diffusion.

    Keywords: Business Startups; Venture Capital; Financial Markets; Financing and Loans; Investment; Price Bubble; Innovation and Invention; Technological Innovation; Risk and Uncertainty;

    Citation:

    Nanda, Ramana, and Matthew Rhodes-Kropf. "Financing Risk and Innovation." Harvard Business School Working Paper, No. 11-013, August 2010. (Revised March 2014.) View Details
  5. Financial vs. Strategic Buyers

    This paper introduces the impact of debt misvaluation on merger and acquisition activity. Debt misvaluation helps explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). The effects of overvalued debt might seem limited since both acquirer types and target firms can access the debt markets. However, fundamental differences in governance and project co-insurance between the two types of acquirer interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

    Keywords: Misvaluation; Mergers and Acquisitions; Private Equity;

    Citation:

    Martos-Vila, Marc, Matthew Rhodes-Kropf, and Jarrad Harford. "Financial vs. Strategic Buyers." Harvard Business School Working Paper, No. 12-098, April 2012. (Revised April 2014.) View Details

Cases and Teaching Materials

  1. Texas Teachers and the New Texas Way

    In 2011 Britt Harris, the Chief Investment Officer for the $107.4 billion Teachers Retirement System of Texas (TRS), was considering whether to pursue strategic partnerships with a group of large private equity firms. After spending four years aggressively moving the fifth largest pension fund in the United States into alternative asset classes, Harris felt that TRS shouldn't just participate in private equity funds as a typical limited partner. Rather, under his proposal TRS would offer carefully vetted firms multi-billion dollar investments through a customized fund structure that had fewer allocation mandates than traditional fund structures, and guarantees to reinvest 50% of any investment gains back into the investment vehicle. In exchange, Harris hoped to receive a highly customized compensation structure and gain greater access to investment professionals within the participating firms.

    Keywords: Texas; TRS; Texas Teachers; Private Equity; Texas;

    Citation:

    Rhodes-Kropf, Matthew, Luis M. Viceira, John Dionne, and Nathaniel Burbank. "Texas Teachers and the New Texas Way." Harvard Business School Case 214-091, April 2014. (Revised June 2014.) View Details
  2. VCPE Strategy Vignettes I, II and 2012

    Citation:

    Rhodes-Kropf, Matthew, and Nathaniel Burbank. "VCPE Strategy Vignettes I, II and 2012." Harvard Business School Teaching Note 814-086, March 2014. View Details
  3. The Impact of Waves in Venture Capital and Private Equity

    Citation:

    Rhodes-Kropf, Matthew. "The Impact of Waves in Venture Capital and Private Equity." Harvard Business School Module Note 814-084, March 2014. View Details
  4. The Canada Pension Plan Investment Board: October 2012 (CW)

    Citation:

    Rhodes-Kropf, Matthew, and Josh Lerner. "The Canada Pension Plan Investment Board: October 2012 (CW)." Harvard Business School Spreadsheet Supplement 814-704, March 2014. View Details
  5. The Venture Capital and Private Equity Investing Simulation: The Concepts

    Citation:

    Rhodes-Kropf, Matthew, and Nathaniel Burbank. "The Venture Capital and Private Equity Investing Simulation: The Concepts." Harvard Business School Module Note 814-083, March 2014. View Details
  6. The Canada Pension Plan Investment Board: October 2012

    Citation:

    Lerner, Josh, Matthew Rhodes-Kropf, and Nathaniel Burbank. "The Canada Pension Plan Investment Board: October 2012." Harvard Business School Teaching Note 814-085, March 2014. View Details
  7. Investcorp and the Moneybookers Bid Spreadsheet Supplement (CW)

    Citation:

    Rhodes-Kropf, Matthew. "Investcorp and the Moneybookers Bid Spreadsheet Supplement (CW)." Harvard Business School Spreadsheet Supplement 814-701, March 2014. View Details
  8. VCPE Simulation User's Guide

    This user guide is intended for HBS students and ExEd participants who are using the Private Equity and Venture Capital Simulation.

    Keywords: Venture Capital; Private Equity;

    Citation:

    Rhodes-Kropf, Matthew, and Nathaniel Burbank. "VCPE Simulation User's Guide." Harvard Business School Background Note 814-091, March 2014. View Details
  9. Investcorp and the Moneybookers Bid

    Citation:

    Rhodes-Kropf, Matthew, and Annelena Lobb. "Investcorp and the Moneybookers Bid." Harvard Business School Teaching Note 814-093, February 2014. View Details
  10. Brazos Partners and the Tri-Northern Exit

    Citation:

    Rhodes-Kropf, Matthew, and Nathaniel Burbank. "Brazos Partners and the Tri-Northern Exit." Harvard Business School Teaching Note 814-057, March 2014. View Details
  11. Hardina Smythe and the Healthcare Investment Conundrum

    Citation:

    Rhodes-Kropf, Matthew. "Hardina Smythe and the Healthcare Investment Conundrum." Harvard Business School Teaching Note 814-076, January 2014. (Revised March 2014.) View Details
  12. Bay Partners (B) (Abridged)

    Abridged supplement for case 213102, for instructors who wish to have students review in class.

    Citation:

    Lerner, Josh, and Matthew Rhodes-Kropf. "Bay Partners (B) (Abridged)." Harvard Business School Case 214-042, October 2013. View Details
  13. Brazos Partners and the Tri-Northern Exit

    Randall Fojtasek, a partner at the Dallas-based Brazos Private Equity Partners, must decide whether now is the time to sell his firm's investment in Tri-Northern Distribution. Brazos, a middle-market leveraged buyout group, created the company two years earlier through the acquisition of two electronic security distribution companies: Tri-Ed Distribution and Northern Video Systems. Twenty-four months after successfully integrating the two companies, Brazos has received two attractive offers for the combined distributor. With the company's management projecting double-digit growth for 2012, however, it is far from clear that now is the optimal time to exit from the firm's third fund.

    Keywords: Private Equity Exit; LBO; Leveraged Buyout Transaction; Texas; Distribution; Security; Brazos; Tri-Northern; Tri-Ed; Northern Video; private equity; Private Equity; Partners and Partnerships; Distribution; Leveraged Buyouts; Decision Choices and Conditions; Investment Funds; Financial Services Industry; Distribution Industry; Texas;

    Citation:

    Rhodes-Kropf, Matthew, and Nathaniel Burbank. "Brazos Partners and the Tri-Northern Exit." Harvard Business School Case 813-157, March 2013. (Revised March 2014.) View Details
  14. The Canada Pension Plan Investment Board: October 2012

    The Canada Pension Plan Investment Board (CPPIB) is one of the largest and fastest-growing pools of investment capital in the world and follows an unusually active program of investment management. In October of 2012, Mark Wiseman was just 12 weeks into his role as chief executive officer, and he must decide how to lead the organization to outperform the market as it grows larger and more geographically dispersed. After seven years of eschewing the use of intermediaries and successfully practicing its "do-it-yourself mega-investing" approach, CPPIB had garnered admiration from institutions on Bay Street and Wall Street alike. It had even been heralded as a "Maple Revolutionary" by The Economist. With assets under management projected to grow to C$275 billion by 2020, however, Wiseman faced the challenge of how to scale the organization's investment strategy for the future. As Wiseman settled into the chief executive's role, would he be able to lead CPPIB to meet its goals?

    Keywords: Canada; CPPIB; Pensions; Private Equity; Financial Services Industry; Canada;

    Citation:

    Lerner, Josh, Matthew Rhodes-Kropf, and Nathaniel Burbank. "The Canada Pension Plan Investment Board: October 2012." Harvard Business School Case 813-103, October 2012. (Revised January 2013.) View Details
  15. Iris Running Crane: December 2009 (TN)

    Citation:

    Lerner, Josh, Matthew Rhodes-Kropf, and Ann Leamon. "Iris Running Crane: December 2009 (TN)." Harvard Business School Teaching Note 812-087, December 2011. View Details
  16. Grove Street Advisors: September 2009 (TN)

    Citation:

    Rhodes-Kropf, Matthew, and Ann Leamon. "Grove Street Advisors: September 2009 (TN)." Harvard Business School Teaching Note 812-094, November 2011. View Details
  17. VCPE Strategy Vignettes: 2012

    This compilation of five vignettes depicts common challenges confronting venture capital and leveraged buyout groups. They range from when to deviate from a strategy and how to manage an inept but well-connected executive to equity splits among founders and whether to invest more money in a promising but struggling company. The final vignette summarizes the Simmons Bedding bankruptcy saga.

    Keywords: Strategy;

    Citation:

    Lerner, Josh, Felda Hardymon, Matthew Rhodes-Kropf, Ann Leamon, and Lisa Strope. "VCPE Strategy Vignettes: 2012." Harvard Business School Compilation 812-073, November 2011. View Details
  18. Avid Radiopharmaceuticals and Lighthouse Capital Partners Spreadsheet Supplement (CW)

    Citation:

    Rhodes-Kropf, Matthew. "Avid Radiopharmaceuticals and Lighthouse Capital Partners Spreadsheet Supplement (CW)." Harvard Business School Spreadsheet Supplement 812-702, October 2011. View Details
  19. Avid Radiopharmaceuticals and Lighthouse Capital Partners (TN)

    Citation:

    Rhodes-Kropf, Matthew, and Ann Leamon. "Avid Radiopharmaceuticals and Lighthouse Capital Partners (TN)." Harvard Business School Teaching Note 812-066, October 2011. View Details
  20. Hardina Smythe and the Healthcare Investment Conundrum

    Hardina Smythe, a recent MBA graduate, has just joined a top-tier venture capital firm in the difficult environment of late 2010. Her first assignment is to evaluate three different deals and make recommendations to the partners. Each potential investment has strengths and drawbacks for both the firm and Hardina.

    Keywords: Venture Capital; Asset Management; Private Equity; Entrepreneurship; Investment; Health Care and Treatment; Innovation and Invention; Financial Services Industry;

    Citation:

    Rhodes-Kropf, Matthew, Ann Leamon, and Lisa Strope. "Hardina Smythe and the Healthcare Investment Conundrum." Harvard Business School Case 811-073, February 2011. (Revised June 2011.) View Details
  21. Investcorp and the Moneybookers Bid

    In January 2007, Hazem Ben-Gacem, managing director and co-head of Investcorp Technology Partners (ITP), needs to decide what to bid at an auction for Moneybookers Limited, one of the top three e-payment solution providers in Europe. However, approximately 70% of Moneybookers revenues were related to transactions from online gaming sites (down from 100% in 2002). Although the thesis was that e-commerce transactions would soon make up a much larger chunk of the company's revenues, high gaming revenue still raised some questions. Between now and when Ben-Gacem had first submitted a bid of 60 million for Moneybookers back in November 2006, the U.S. Congress had enacted the Unlawful Internet Gambling Enforcement Act putting pressure on e-payment firms with gambling exposure. How would investors in ITP view this transaction? Ben-Gacem also worried about whether Moneybookers could manage the growth of its business and the evolution of regulation around monetary transactions. Moneybookers had effectively become a type of bank with deposit accounts and capital adequacy requirements and all the reporting that went along with it. But could an internet startup maintain the compliance and accounting standards necessary to handle such scrutiny? Could it succeed-and if it did, what would it be worth?

    Keywords: Business Startups; Games, Gaming, and Gambling; Private Equity; Investment; Auctions; Bids and Bidding; Valuation; Europe; United States;

    Citation:

    Rhodes-Kropf, Matthew, and Carin-Isabel Knoop. "Investcorp and the Moneybookers Bid." Harvard Business School Case 811-013, February 2011. (Revised September 2013.) View Details
  22. Iris Running Crane: December 2009

    Iris Running Crane, an MBA candidate, must choose among three different job offers in private equity. One is with a top-tier megafund buyout operation; the second with a geographically focused mid-market fund; and the third with a one-time top-tier fund that is trying to reposition itself as a turnaround expert, starting with its own portfolio. Iris must consider the advantages and drawbacks of each position, and how each will help her achieve her personal goals.

    Keywords: Decision Choices and Conditions; Private Equity; Compensation and Benefits; Job Offer; Personal Development and Career; Financial Services Industry;

    Citation:

    Rhodes-Kropf, Matthew, Josh Lerner, and Ann Leamon. "Iris Running Crane: December 2009." Harvard Business School Case 810-073, December 2009. (Revised July 2013.) View Details
  23. VCPE Strategy Vignettes I

    These three vignettes present various issues around the strategy and management of venture capital and private equity firms. In one, the general partners must decide whether to invest in an intriguing opportunity that lies outside the firm's carefully developed investment strategy; in the second, a new associate must decide whether or not to keep a promising but under-performing investment in the portfolio and in the third, a minority investor in a Chinese company considers removing a politically connected but ineffective controller.

    Keywords: Venture Capital; Private Equity; Financial Strategy; Projects; Decision Choices and Conditions; Partners and Partnerships; Opportunities; Investment Portfolio; Business or Company Management; China;

    Citation:

    Lerner, Josh, G. Felda Hardymon, Matthew Rhodes-Kropf, Ann Leamon, and Lisa Strope. "VCPE Strategy Vignettes I." Harvard Business School Compilation 811-043, December 2010. View Details
  24. VCPE Strategy Vignettes II

    These three vignettes present various issues around the strategy and management of venture capital and private equity firms. In one, a senior partner must decide how to manage an over-extended colleague and how to reduce the risk of the firm's portfolio; the second examines the problem of dividing stock among founders and the last summarizes the experience of Simmons Bedding, a US company that declared bankruptcy after 25 years of rotating private equity ownership.

    Keywords: Venture Capital; Private Equity; Cost vs Benefits; Insolvency and Bankruptcy; Investment Portfolio; Ownership; Partners and Partnerships; Risk Management; Stocks; Problems and Challenges; United States;

    Citation:

    Lerner, Josh, G. Felda Hardymon, Matthew Rhodes-Kropf, Ann Leamon, and Lisa Strope. "VCPE Strategy Vignettes II." Harvard Business School Compilation 811-054, December 2010. View Details
  25. Grove Street Advisors: September 2009

    The investment committee of Grove Street Advisors, a pioneer in the provision of customized private equity funds-of-funds for pension fund clients, must decide how to respond to the market opportunities and challenges presented by the turmoil of 2008 and 2009. How can they shift their strategy to fill new market niches, or should they stay with their successful approach thus far, even though the market is getting crowded? The case also presents background about the roles of intermediaries in private equity.

    Keywords: Private Equity; Expansion; Investment Funds; Financial Services Industry;

    Citation:

    Rhodes-Kropf, Matthew, and Ann Leamon. "Grove Street Advisors: September 2009." Harvard Business School Case 810-064, October 2009. (Revised October 2010.) View Details
  26. Avid Radiopharmaceuticals and Lighthouse Capital Partners

    In fall 2008, a venture lender must decide whether to make a loan to Avid, a small but promising venture-backed life sciences firm. In reviewing her proposal, Cristy Barnes considers the company's characteristics and how they differ from a typical investment. At the same time, the CEO and the venture capitalist are exploring the true costs and benefits of taking the loan, particularly in the uncertain economic climate of the time.

    Keywords: Business Startups; Decision Choices and Conditions; Financial Crisis; Venture Capital; Private Equity; Financing and Loans; Investment; Financial Services Industry; Health Industry;

    Citation:

    Rhodes-Kropf, Matthew, and Ann Leamon. "Avid Radiopharmaceuticals and Lighthouse Capital Partners." Harvard Business School Case 810-054, September 2009. (Revised September 2010.) View Details
  27. Milliway Capital & Martin Smith: November 2008

    Martin Smith, a recent MBA graduate, has just joined a top-tier venture capital firm in the difficult environment of late 2008. One of his first assignments is to review three companies in a partner's portfolio and recommend strategies for managing them. In addition, the partner also has an opportunity to invest in a long-desired company at a good price. Each company presents different potential risks and rewards, both financial and reputational, for Milliway, the partner, and Martin.

    Keywords: Investment Portfolio; Financial Management; Private Equity; Business Strategy; Partners and Partnerships; Venture Capital; Business or Company Management;

    Citation:

    Hardymon, G. Felda, Matthew Rhodes-Kropf, and Ann Leamon. "Milliway Capital & Martin Smith: November 2008." Harvard Business School Case 810-088, December 2009. View Details
  28. Avid Radiopharmaceuticals: The Venture Debt Question

    The CEO of a promising biotech company must decide how to respond to the macro-economic slump of late 2008. He had planned to pursue an aggressive schedule, moving the firm's Alzheimer's and Parkinson's disease imaging compounds through clinical trials and into the market. This involved expanding the firm's facilities and headcount, and he planned to fund this by taking venture debt. Although clinical trial data is extremely encouraging, questions about raising his next venture round and the overall environment has made him question the wisdom of this plan. This case provides students an opportunity to explore the true cost of venture debt and when it is best used to achieve the goals of all parties—venture capitalists, entrepreneurs, and venture lenders.

    Keywords: Financial Crisis; Entrepreneurship; Borrowing and Debt; Venture Capital; Financial Management; Investment; Health Testing and Trials; Expansion; Biotechnology Industry; Pharmaceutical Industry;

    Citation:

    Rhodes-Kropf, Matthew, and Ann Leamon. "Avid Radiopharmaceuticals: The Venture Debt Question." Harvard Business School Case 809-086, February 2009. View Details

    Research Summary

  1. Research

    The founding and expansion of new firms is central to innovation and economic growth, but the determinants of a new idea’s success are difficult to ascertain. The decision to form a new firm and its ultimate outcome are impacted by ownership structure, financing options, governance, as well as the ability to later sell a project.  Each of these aspects is highly affected by the state of the financial market. My research examines the entire lifecycle of a firm—birth, governance, and sale—and the extent to which the current financial market environment affect the firm at each point in its life. Overall, my work contributes to an understanding of the conditions that help entrepreneurs build the firms that commercialize new innovations. These issues are not only important to entrepreneurs and managers, but also to their venture capital and private equity backers.

    Birth:  Conventional wisdom and much popular literature associate 'hot' startup environments with the financing of lower quality ideas, often denigrated as “money chasing deals.” My work shows that while startups funded in hot markets were more likely to fail completely, they were also more likely to be extremely successful, both in terms of the nature of their innovation as well as their financial valuation. These findings suggest venture capital investors are more willing to experiment with commercializing extremely novel technologies at times when financing risk is low, rather than just funding worse companies, and provides a different, more positive interpretation on the greater failure rates of VC-backed firms that are observed in certain times. The finding that venture capital firms seem to systematically change their investment patterns across the cycle, also led me to ask whether these investment choices and their success stemmed from individual partners’ human capital or from aspects of the VC firms where partners worked. Moreover, the distinction between partners and their firms relates to my research on how the principal-agent problem within a venture capital firm affects deal pricing. In all of this work, the use of unique venture capital data allowed progress on fundamental questions in economics on the birth of entrepreneurial companies. 

    Governance: Anecdotal evidence and recent theoretical work suggests that overvaluation during booms may cause 'bad' managerial behavior.  My work proposes that, if so, then any positive effects of better governance should be more important when firms become overvalued.   My work in this vein has documented that governance matters much more for overvalued firms and in overvalued industries.  In fact, the effects are so strong that the previously determined relationships between good governance and out-performance do not exist in correctly or undervalued firms.  In related work I examine how irrational shareholders may directly affect firm decisions such as the CEO fire/retain decision. I also explore how governance is affected by competition rather than valuation, and find results that help to reconcile two opposing literatures.  My work establishes variation in the effects of governance finding both costs and benefits of ‘better’ governance, as well as times when it seems to matter and not matter for firm outcomes.

    Sale: If firms become overvalued during booms, then logically these firms would like to use overvalued stock as an acquisition currency. But why would targets accept? My work provides an explanation for the longstanding puzzle relating to why equity valuation levels seem linked to acquisition activity.  My research also uncovers and explains a relationship between debt market mistakes and private equity activity. Furthermore, these papers develop novel measures of both equity and debt market overvaluation to find empirical support for the ideas. This empirical work finds similarities between targets and acquirers that led me to propose, in related research, an alternative to the classical view of merger activity that higher-quality firms purchased poorly run firms in order to redeploy their assets.  Building on the theory of the firm, I theorized why, and demonstrated that in the data, there is assortative matching between acquirers and targets that increased in boom times when the search for targets arguably became easier.

    Overall, my work shows how valuation levels impact when mergers occur, who buys whom, when private equity firms are active, what types of innovations venture capitalists fund, and even the benefits of better governance. Given the importance of innovative new companies and private equity investments in driving the process of creative destruction in the economy, understanding the links between investment cycles and the commercialization of new technologies is a central issue for academics, policy makers and practitioners.

      Awards & Honors

    1. Best paper, World Finance Conference: Won 2012 World Finance Conference Best Paper for "Investment Cycles and Startup Innovation" with Ramana Nanda.

    2. WHU (Otto Beisheim School of Management) Finance Award: Won the 2011 First Prize WHU (Otto Beisheim School of Management) Finance Award for the best paper presented at the 2012 Campus for Finance Research Conference for his paper with Marc Martos-Vila, “Waves of Financial Buyers vs. Strategic Buyers.”