What Are the Different Types of Capital Market Risk?
The venture capital market is a concept corresponding to the general capital market, and it is a sub-market with greater risks in the capital market. The general capital market is a market where the government and more mature large and medium-sized enterprises raise long-term capital. It includes the securities market, private equity financing market, and project financing market in the usual sense, while the venture capital market is a new high-tech in the growth stage A market where technology companies conduct equity financing.
Venture capital market
- Submarket
- Divided by the degree of market openness and the development stages of the participating companies, the venture capital market includes three sub-markets, which are: informal private
Venture capital market resource allocation
- Capital is a special type of production factor. It has the unique function of organizing production. As an important factor market, the capital market can directly allocate capital in different enterprises and industries through fluctuations in the price of capital assets, thereby driving others. The realization of optimized allocation of production factors is the basic function of the capital market-the function of resource allocation.
- Docking of new technology industries with venture capital
- It takes costs to evaluate the operating conditions, managerial capabilities, and market prospects of venture companies. Individual savers cannot have enough time, nor the ability and means to collect and process a large amount of information about enterprises, managers and economic conditions, and they are unwilling to invest in activities that do not have reliable information. As a result, high information costs prevent capital from flowing to the most valuable places. Angel investors, venture capital intermediaries and the GEM market that have information advantages in selecting companies with development prospects will guide more efficient resource allocation. A fully functioning venture capital market stimulates technological innovation by identifying those companies that have the best opportunity for innovation and putting them into practice.
- Further, the function of the venture capital market in allocating resources is not limited to the optimal allocation of equity capital resources, but it also extends to the guide allocation of debt capital and other types of resources. In the venture capital market, angel investors and venture capital institutions have high professional reputations. While venture companies acquire scarce venture capital, they also acquire intangible reputational capital attached to capital. This reputational capital is a signal of the quality of venture capital. In the GEM market, the market value of venture companies is a strong signal to guide other resources to high-performance venture companies. In this way, the venture capital market provides signals to high-quality venture companies to obtain more resources, such as debt capital and human resources. Therefore, the venture capital market is the core market for the allocation of venture capital resources. It not only optimizes the allocation of venture capital through the risk pricing mechanism, but also drives other factor markets to realize the allocation of resources among venture companies.
Screening in venture capital markets
- Entrepreneurship is a productive resource alongside labor, natural resources, and capital. In different economic times, the dominant resource is different. In the era of agricultural economy, land and labor are the dominant resources; in the era of industrial economy, capital is the dominant resource; and in the era of knowledge economy, entrepreneurship and knowledge become the dominant resource.
- Entrepreneurs show many signs of their talents, such as personal wealth and past successful business experiences. Compared with managerial entrepreneurial talents, entrepreneurial entrepreneurial talents have characteristics that are difficult to identify beforehand, difficult to observe during the event, and difficult to directly measure after the event (Zhang Yongheng, 2000). Entrepreneurs with entrepreneurial entrepreneurial talents generally do not possess personal wealth sufficient to demonstrate their abilities; they are also mostly novices in the business world, and have a short history of running a business or even no experience in running a business. Therefore, in the traditional capital market, management entrepreneurs can be better screened, while entrepreneurial entrepreneurs lack the necessary signals to be easily screened.
- Investment philosophy
- In the professional manager market supported by the traditional capital market, there is only one kind of fixed-income employment contract, that is, it can only provide S-level income, and then only those willing to take risks in the market are 0 R * (corresponding to S (The risk of the level of returns) are entrepreneurs with managerial entrepreneurial talents, and those who are more willing to take risks than R * leave the market because they cannot meet their income expectations. The existence of the venture capital market provides these entrepreneurs with entrepreneurial entrepreneurial talents the opportunity to identify themselves. They choose to start their own business rather than manage other companies to achieve entrepreneurial entrepreneurial talents. S's expected return. In this way, both types of entrepreneurial talent have the signals they show and are distinguished.
Venture Capital Market Enterprise Test
- Whether a technology is scientifically effective needs to be tested, and whether a technology is economically effective needs to be tested by the market. Similarly, the feasibility of a business model cannot be separated from the test of practice. Yes, the latter needs to undergo a social experiment based on the enterprise. The success of an enterprise in social experiments means the success of core technology commercialization, the success of business models, and the success of business management. Therefore, through this social experiment, new technologies are promoted and applied, new business models, new The management model has been popularized and serves the economic growth together. Therefore, it is of great significance for a country's economic development to conduct a full and effective social experiment. When we focus on the issue of growth and structural change, we need to see a process of change rather than a cross-section. In this process, we will see a lot of change and something different. What they saw was the emergence of a large number of new and emerging enterprises, and what they saw as the process of "new synthesis" and "creative destruction" as described by Xiong Bit (Zhang Jun, 2001).
- At least two prerequisites are required for the social experiments of enterprises. One is the free entrepreneurship system, and the other is financial support for free entrepreneurship. The former is determined by a country's business system and entrepreneurial culture, while the latter is provided by a capital market with a venture capital market as its core. Given an established free entrepreneurship system, the existence of the venture capital market plays a key role in whether a company's social experiment can enter a virtuous circle. The role of the venture capital market in supporting corporate social experimentation is reflected in two aspects. One is to improve the availability of capital to stimulate the occurrence of social experimentation activities (the adequacy of social experimentation); the other is to identify risks of relational investors. Speed up the process of market selection and increase the accuracy of selection (effectiveness of social testing).
Venture capital market first listed
- IPO (Initial Public Offer) is an initial public listing. It refers to the process of transforming an original partnership or limited liability company into a publicly held company. The transformation of a sole proprietorship or partnership into a public company requires rearrangement of its internal and external interests, the need to restructure, transform, and integrate the company, as well as compliance with relevant laws and policies in the open market. This is a narrow pre- IPO. In a broad sense, Pre-IPO not only includes the preparatory work before the initial public listing mentioned above, but also emphasizes the guidance and transformation of corporate management, production, marketing, finance, and technology. In contrast, the purpose of the narrow Pre-IPO system is only to enable companies to issue shares smoothly, while the broad Pre-IPO system focuses on rebuilding the operating mechanism of the enterprise and building the internal and external environment for its future development. This process usually requires experience 3 to 5 years.
- Traditional capital markets can only provide a narrow Pre-IPO system, which is specifically operated by investment banks. The venture capital market provides companies with a broad Pre-IPO system, which is specifically operated by venture capitalists. If we look at the growth of enterprises and industries dynamically, from a global perspective, the process of creation, development, maturity, and decline of emerging companies and industries is actually a process of gradually transitioning venture companies to conventional companies, then we will It is not difficult to understand the role of Pre-IPO in the venture capital market, which provides financing and value-added services for venture companies. The emergence of the venture capital market has greatly advanced the time for enterprises to obtain external equity capital. At the beginning of the corporate life cycle, if there is sufficient growth potential, it is possible to obtain external equity capital. This financing with value-added services is accompanied by corporate experience. During the start-up period and expansion period, the investment bank takes over the narrow Pre-IPO. Through the above-mentioned "assembly line" for producing high-quality enterprises, the poor enterprises are eliminated, and the remaining enterprises gradually and steadily establish a good operating mechanism to accumulate Real business performance, become a qualified public company, rather than the company through temporary packaging to whitewash performance. This is of great significance to improving the overall quality of listed companies, reducing risks in the open market and even economic growth.
Venture capital markets expand markets
- The venture capital market is an emerging capital market derived from the traditional capital market. It and the traditional capital market together constitute the entire capital market. The capital market has undergone corresponding changes due to the generation of the venture capital market. This change is reflected in the effective boundary of the capital market. (EfficientFrontier) expansion, thereby increasing the utility of investors and satisfying investors with high risk-return preferences.
- The effective boundary theory of the capital market is the basic theory in modern portfolio theory. The effective boundary refers to the curve segment composed of all effective portfolios in the capital market, also known as the Markowitz boundary, which is part of the edge of a convex set. An effective combination refers to a combination of securities that meets both of the following conditions: first, for each level of risk, the maximum expected rate of return is provided; second, for each level of expected rate of return, the risk of the combination is the smallest, and the composition of n securities Effective boundary. The utility function of an investor's investment in the capital market can be expressed by indifference curves, each curve represents a set of portfolios with different risks and returns, and each point on a given indifference curve is risk A point of combination with expected returns. These points have the same level of utility for a given investor. For the same set of indifference curves, the farther away from the horizontal axis, the higher the investor's utility. The investor's optimal portfolio is at the point where the indifference curve is tangent to the effective boundary.
- The emergence of the venture capital market has provided the capital market with higher risk-return securities. When the n + 1th type of high-risk-return securities was added, the effective boundary of the capital market changed, and the level of utility obtained by investors It also changes. With the addition of the n + 1th security V provided by the venture capital market, the effective boundary of the capital market has expanded, and the expansion of the effective boundary has provided investors with more portfolio choices, which means that investors have changed their capital markets. Can achieve a higher level of utility. For investors with higher risk appetite, the original level of utility that could not be satisfied because its indifference curve family cannot be tangent to the effective boundary is also satisfied, which is reflected in its indifference curve and changed effective boundary With the cut point. It can be seen that the existence of the venture capital market has deepened the hierarchical structure of the capital market, enriched the financial varieties of the capital market, raised the level of utility of investors, and ultimately manifested in the improvement of the scope and depth of capital mobilized in the capital market.
Summary of venture capital market functions
- Among the above five functions of the venture capital market, the resource allocation function is its basic function, providing a screening mechanism for entrepreneurial talents, supporting corporate social experiments, providing a Pre-IPO system, and expanding the effective boundary of the capital market are derivative functions of the venture capital market. The derivative function depends on the basic function, which is the specific embodiment of the basic function in different aspects.