Matthew Rhodes-Kropf
Associate Professor of Business Administration
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.
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Article
| Review of Financial Studies
| Forthcoming
The Price of Diversifiable Risk in Venture Capital and Private Equity
Michael Ewens, Charles Jones and Matthew Rhodes-Kropf
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;
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Article
| Management Science
| Forthcoming
Governance and CEO Turnover: Do Something or Do the Right Thing?
Ray Fisman, Rakesh Khurana, Matthew Rhodes-Kropf and Soojin Yim
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.
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Working Paper
| HBS Working Paper Series
| 2012
Investment Cycles and Startup Innovation
Ramana Nanda and Matthew Rhodes-Kropf
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;
Business Startups;
Venture Capital;
Initial Public Offering;
Investment;
Innovation and Invention;
Patents;
Risk and Uncertainty;
Citation: Nanda, Ramana, and Matthew Rhodes-Kropf. " Investment Cycles and Startup Innovation." Harvard Business School Working Paper, No. 12–032, December 2012. (Forthcoming, Journal of Financial Economics.)
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Article
| Journal of Finance
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Concentrating on Governance
Dalida Kadyrzhanova and Matthew Rhodes-Kropf
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.
Citation: Kadyrzhanova, Dalida, and Matthew Rhodes-Kropf. "Concentrating on Governance." Journal of Finance 66, no. 5 (October 2011): 1649–1685.
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Journal Article
| Journal of Finance
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The Market for Mergers and the Boundaries of the Firm
Matthew Rhodes-Kropf and David Robinson
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;
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Article
| Journal of Investment Management
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Do Funds-of-Funds Deserve Their Extra Fees?
Andrew Ang, Matthew Rhodes-Kropf and Rui Zhao
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;
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Article
| Alpha
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A New Measure for Measuring
Andrew Ang, Matthew Rhodes-Kropf and Rui Zhao
Keywords: Measurement and Metrics;
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Article
| Journal of Business
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Price Improvement in Dealership Markets
Matthew Rhodes-Kropf
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;
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Article
| Journal of Financial Economics
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Valuation Waves and Merger Activity: The Empirical Evidence
Matthew Rhodes-Kropf, David Robinson and S. Viswanathan
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;
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Article
| RAND Journal of Economics
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Financing Auction Bids
Matthew Rhodes-Kropf and S. Viswanathan
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.
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Article
| Journal of Finance
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Market Valuation and Merger Waves
Matthew Rhodes-Kropf and S. Viswanathan
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;
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Article
| Journal of Finance
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Corporate Reorganizations and Non-Cash Auctions
Matthew Rhodes-Kropf and S. Viswanathan
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;
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Working Paper
| HBS Working Paper Series
| 2013
Is a VC Partnership Greater Than the Sum of Its Partners?
Michael Ewens and Matthew Rhodes-Kropf
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 differences and exit style differences even among venture partners investing while employed 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.
Keywords: venture capital;
Investing;
Persistence;
Performance Persistence;
Theory of the Firm;
Venture Capital;
Organizations;
Human Capital;
Performance Evaluation;
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Working Paper
| HBS Working Paper Series
| 2012
Innovation and the Financial Guillotine
Ramana Nanda and Matthew Rhodes-Kropf
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;
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Working Paper
| HBS Working Paper Series
| 2012
Governing Misvalued Firms
Dalida Kadyrzhanova and Matthew Rhodes-Kropf
Equity overvaluation is thought to create the potential for manager misbehavior, while monitoring and corporate governance curb misbehavior. Thus, the effects of corporate governance should be greatest when firms become overvalued. We test this simple yet powerful idea. Using proxies of firm and industry price deviations from fundamentals and standard measures of corporate governance, we demonstrate that firm performance seems most impacted by governance when firm and industry deviations are high. Our findings suggest that misvaluation may modulate the fundamental governance relationship between shareholders and CEOs.
Citation: Kadyrzhanova, Dalida, and Matthew Rhodes-Kropf. " Governing Misvalued Firms." Harvard Business School Working Paper, No. 13–037, October 2012.
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Working Paper
| HBS Working Paper Series
| 2012
Financing Risk and Innovation
Ramana Nanda and Matthew Rhodes-Kropf
Technological revolutions and waves of creative destruction are associated with new ventures and the destruction of mature firms, but also with the failure of numerous startups, suggesting a time of increased experimentation in the economy. 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 increases in the forecasted probability of future funding by funding more innovative ideas. We propose that extremely novel technologies may need 'hot' finnancial 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 July 2012.)
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Working Paper
| HBS Working Paper Series
| 2012
Financial vs. Strategic Buyers
Marc Martos-Vila, Matthew Rhodes-Kropf and Jarrad Harford
Within the great oscillations of overall merger activity there is a shifting pattern of activity between strategic (operating firms) and financial (private equity) acquirers. What are the economic factors that drive either financial or strategic buyers to dominant positions in M&A activity? We introduce debt market misvaluation in M&A activity. Debt misvaluation might seem limited since both types of acquirer (and the target) can access misvalued debt markets. However, moral hazard and insurance effect differences between types of buyers interact with potential debt misvaluation debt, leading to a dominance of financial versus strategic buyers that depends on debt market conditions.
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. (Revise and Resubmit Journal of Finance.)
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Case
| HBS Case Collection
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2013
Brazos Partners and the Tri-Northern Exit
Matthew Rhodes-Kropf and Nathaniel Burbank
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 for 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;
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Teaching Note
| HBS Case Collection
|
2011
Iris Running Crane: December 2009 (TN)
Josh Lerner, Matthew Rhodes-Kropf and Ann Leamon
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Teaching Note
| HBS Case Collection
|
2011
Grove Street Advisors: September 2009 (TN)
Matthew Rhodes-Kropf and Ann Leamon
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Compilation
|
2011
VCPE Strategy Vignettes: 2012
Josh Lerner, Felda Hardymon, Matthew Rhodes-Kropf, Ann Leamon and Lisa Strope
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.
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Supplement
| HBS Case Collection
|
2011
Avid Radiopharmaceuticals and Lighthouse Capital Partners Spreadsheet Supplement (CW)
Matthew Rhodes-Kropf
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Teaching Note
| HBS Case Collection
|
2011
Avid Radiopharmaceuticals and Lighthouse Capital Partners (TN)
Matthew Rhodes-Kropf and Ann Leamon
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Case
| HBS Case Collection
|
2011
(Revised from original 2011 version)
Hardina Smythe and the Healthcare Investment Conundrum
Matthew Rhodes-Kropf, Ann Leamon and Lisa Strope
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.
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Case
| HBS Case Collection
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2013
(Revised from original 2011 version)
Investcorp and the Moneybookers Bid
Matthew Rhodes-Kropf and Carin-Isabel Knoop
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, March 2013. (Revised from original February 2011 version.)
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Case
| HBS Case Collection
|
2011
(Revised from original 2009 version)
Iris Running Crane: December 2009
Matthew Rhodes-Kropf, Josh Lerner and Ann Leamon
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, February 2011. (Revised from original December 2009 version.)
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Compilation
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2010
VCPE Strategy Vignettes I
Josh Lerner, G. Felda Hardymon, Matthew Rhodes-Kropf, Ann Leamon and Lisa Strope
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 an 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.
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Compilation
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2010
VCPE Strategy Vignettes II
Josh Lerner, G. Felda Hardymon, Matthew Rhodes-Kropf, Ann Leamon and Lisa Strope
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.
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Case
| HBS Case Collection
|
2010
(Revised from original 2009 version)
Grove Street Advisors: September 2009
Matthew Rhodes-Kropf and Ann Leamon
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;
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Case
| HBS Case Collection
|
2010
(Revised from original 2009 version)
Avid Radiopharmaceuticals and Lighthouse Capital Partners
Matthew Rhodes-Kropf and Ann Leamon
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;
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Case
| HBS Case Collection
|
2009
Milliway Capital & Martin Smith: November 2008
G. Felda Hardymon, Matthew Rhodes-Kropf and Ann Leamon
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;
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Case
| HBS Case Collection
|
2009
Avid Radiopharmaceuticals: The Venture Debt Question
Matthew Rhodes-Kropf and Ann Leamon
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;
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