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This research particularly seeks to examine the risks involved in venture capital investment. The research includes finding the risk, identifying the risk, and managing the risk from the perspective of a venture capitalist with a significant amount of risk capital. The period of study is between 1938 and 2009. The correlation is tested among investors, venture capitalists and venture enterprises, and the results of the data analysis identify the main risks faced by venture capital providers.

Keywords: venture capital; investment risk; risk management

CHAPTER 1

INTRODCUTION

1.1 Research Objective
This dissertation seeks to investigate the sources of risk faced by venture capitalists when investing in firms, and to determine how those risks influence their attitude toward making such investments.

1.2 Background of the Research

The failure to provide funds for the traditional capital market has made venture capital a necessary method of innovation for such companies. “Venture capital is provided by companies whose main mission is to finance the founding and early growth of companies which do not yet have access to the public markets or to institutional lenders” (Gupta and Sapiens, 1992, p. 394).

Venture capital has proved to be a crucial ingredient of a costly process when a promising invention is converted into a successful innovation. Venture capital has played an important role in various industries, including semiconductors, multimedia, and bio-technology. Given the importance of venture capital to technological development, companies which invest equity may have a significant effect on the track of such development. However, venture capital is regularly under-utilized as a means of small finance.

Risk may be related to the technological result of the innovation process, the current situation of the environment in which the innovation will be embedded, or how environmental changes will impact the outlook of the innovation, and how those changes will be reflected. While some risks may be mitigated by means of research and development, learning, and interaction between producers and users, others persist as the process evolves. As a result of these risks, the development of innovation is a long process.

1.3 Literature Review

Investing venture capital is a truly uncertain activity (Zacharakis and Meyer, 2000), and the total risks stem from the scope of the sources. For example, according to Manigart et al (1997), some of the factors which make it difficult to evaluate a new venture include the lack of a company’s track record, risk involving the degree of novelty of a product, the eventual market, and the limited availability of public information due to the firm’s absence from the stock exchange. When risks cannot be mapped and assessed qualitatively, it is hard to predict their impact on the result of the investment, and financial implications are intrinsically difficult to quantify in advance (Gompers and Lerner, 2001a). For instance, Muzyka found that venture capital company managers make trade-offs regarding financial aspects and “softer” assets. They argue that venture capital companies

REFERENCES

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