Venture Capital Investment Selection Decision-making Base on Fuzzy Theory

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1 Avalable onlne at Physcs Proceda 5 (01 ) Internatonal Conference on Sold State Devces and Materals Scence Venture Captal Investent Selecton Decson-akng Base on Fuzzy heory Xubo hang School of Econocs and Manageent Wuhan Polytechnc Unversty, Wuhan, Chna Abstract Venture captal nvestent decson-akng s the ost portant ssue n venture captal nvestent selecton. here are hgher uncertanty and coplexty n venture captal nvestent decson-akng process. hs paper analyss these uncertan rsk n venture captal nvestent decson-akng base the prevous studes. Attrbuted the venture captal canddate frs select to fuzzy optal decson-akng. Buld a rsk-weght fuzzy optal return odel to avod the decson-akng rsk. Get the optal soluton set Publshed by Elsever Ltd. B.V. Selecton and/or peer-revew under under responsblty of of [nae Garry organzer] Lee Open access under CC BY-NC-ND lcense. Keywords- venture captal; nvestent selecton; fuzzy Venture captal nvestent s collectng excess captal fro those who have t and provdng t to those who requre t for developent of busness venture by venture captalsts (Barbara & Olle, 006). Wth the open of Chna Growth Enterprse Market n October 009, the growth of the Chnese venture captal ndustry has been spectacular over the last two years. Accordng to ChnaVenture s database CVSource, there are 791 venture captal nvestent cases and relate to USD.86bn only n the throw daylght deals durng 009 to 010 n Chna. here are hgher uncertanty and coplexty n venture captal fr selecton the portfolo frs decson-akng. For exaple, the portfolo frs CEO and/or top executves hold on growth strategy, the status of technology and arket, copettve poston, growth strategy and custoer anageent and so on. hese uncertan factors brng larger rsk to venture captal nvestent decson-akng. How to hold the venture captal nvestent decson to avod rsk s the ost portant stratage at the whole nvestent process. 1. Lterature revew Lossen (007) dvded the venture captal studes nto two types: focused on explan the nvest perforance and focused on dscuss how to choce, buld and anageent ther nvestent. As the frst type study, Cochrance (005) has been syste studed the venture captal nvestent perforance base on Publshed by Elsever B.V. Selecton and/or peer-revew under responsblty of Garry Lee Open access under CC BY-NC-ND lcense. do: /.phpro

2 170 Xubo hang / Physcs Proceda 5 ( 01 ) Dowones Ventureone database and Corporate New Issues and Mergers and Acquston database. He easures the ean, standard devaton, alpha, and beta of venture captal nvestents, usng a axu lkelhood estate that corrects for selecton bas. he second type studes nterested n how to choce, buld and anageent venture captal nvestent. L(008) takes a real optons perspectve towards venture captal stagng and vews the stagng decson as a choce between holdng the current opton to nvest and nvestng now to obtan the opton to nvest subsequently. It proposes that ths stagng decson depends on the factors that nfluence the value of these two optons, such as copetton and varous sources of uncertanty. he eprcal results suggest that arket uncertanty encourages venture captal frs to delay nvestng at each round of fnancng, whereas copetton, proect-specfc uncertanty and agency concerns propt venture captal frs to nvest sooner. L & Mahoney (009) analyss of 18,678 ntal nvestents durng provdes supportve evdence for the delay effect of arket uncertanty and the attenuatng effects of sales growth and copetton on the relatonshp between arket uncertanty and the tng of ntal fundng. It s evdent fro ther study and others (e.g., Cochrane, 005; Gopers et al., 008) that absent suffcent nforaton about prvate entrepreneural copanes, publc arket nforaton s hghly relevant to venture captalsts' nvestent decsons. Kung & Wen (007) evaluaton the fncal perforance of awan venture captal nvestent enterprses use grey relatonal analyss and grey decson-akng. they used the ablty of pay short-ter debt, cash-flow rato and cash renvestent rato, captal structure, proftablty, growth rate, operatng effcency on assets to classfy twenty tes of fnancal ratos as research varables through the Globalzaton Grey elatonal Analyss (GA), to fnd the sgnfcant fnancal rato varables and other fnancal ndcators affectng the fnancal perforance of venture captal enterprses n awan, analyze the sx varables of fr attrbutes and the dfferences between usng dfferent frs' attrbute varables and fnancal perforance of venture captal enterprses as the result. Lauterbach, Welpe & Fertg (007) found the experences of venture captal fr nvestent have a postve nfluence to reduce venture captal nvestent lose and not use to optu the nvestent return.. Venture captal decson-akng evaluaton factors Consderng the venture captal frs decson ther nvestent depend on the nvestent proects expect return and rsk, the prospectve return and rsk should be two sub obectve under the overall obectve of rsk adust return. In order to classfy the rsk each ndvdual aspect could have on the ablty to realze a venture captal nvestent s value, ths paper settng anageent, operaton, strategy, transacton and cost fve frst level evaluaton ndcators and Qualty of anageent and key staff etc. 18 sub-ndcators as the secondary evaluaton ndcators. he venture captal nvestent decson-akng ndcators syste can be expresson as able 1. he evaluaton ndcator of canddate fr s anageent ncluded n the four aspects. How about the portfolo frs CEO and/or top executves hold on growth strategy s the key factor of assessent qualty of anageent and key staff n the category of anageent. hs ncluded n the relatonshp between the portfolo fr and sales-force, the response to copettve oves and execute on defned ntatves. he plannng and accountablty and the copensaton of Key staff have a sgnfcant nfluence on the qualty of anageent. he nforaton anageent and report n anageent ndcator ncluded n Sales plans defned or easured, Product proftablty and the sales prcng. he evaluaton ndcator of canddate fr s operaton ncluded n the four aspects. At the status of technology and arket s certan the fr s proftablty depend on the ablty of fr s operaton anageent. hs requres detal operaton plannng and hgh qualty operaton anageent and effcency. he better operaton can output greater nvestent return wth lower cost. In the aspect of operaton assessent, the revenue/proftablty plan s content and pleentaton, expense anageent

3 Xubo hang / Physcs Proceda 5 (01 ) status, operatonal plans content and pleentaton and operaton process qualty and effcency are the sub-assessent ndcators. he strategy s the key of venture captal nvestent realze proft. In the aspect of strategy assessent, the arket trends, Copettve poston, Growth strategy and Custoer anageent are the sub-assessent ndcators. he growth strategy and custoer anageent have a sgnfcant nfluence n the assessent of strategy. he growth strategy enton the sale plannng s defned and easure anly. It affects the fr s developent speed and drecton. he custoer anageent assessent proved CM can or can not provde sgnfcant opportunty to cross-sell products. hs s basc of fr developent. he better custoer anageent can dscover the arket s need tely. he fr s value realzaton, add-on acqustons and ext s the anly rsk n aspect of transacton assessent. he venture captal nvestent value realzaton and ts te (the ext te) the venture captal nvestent s key. If the value realzaton can not be expect realzaton or the te s too long, the venture captal nvestent wll not be accepted by the nvestor. he accretve add-on acqustons and ext s the key factor to assessent the transacton. he accretve add-on acquston s the addtve te to venture captal fr. Lted strategc buyers s the anly gst of assessent ext. he venture captal nvestent cost s the fundaent of nvestent decson-akng. he nvestent cost can be assessent fro fnancal cost, nput-output rato and asset structure. he fnancal cost s very portant to venture captal nvestent to realzaton nvestent return especally n buyout venture captal nvestents as the requred a larger aount of oney than other knd venture captal. he fr s asset structure nfluence the venture captal nvestent s fnancal structure and further nvestent cost. he nput-output rato s the basc easure standard n nvestent cost assessent. able1. Venture Captal Investent Decson-Makng Evaluaton Factor Frst Assessent Indcator Manageent Operaton Strategy ransactons Cost Secondary Assessent Indcator Qualty of anageent and key staff Plannng and accountablty Copensaton Inforaton anageent and reportng evenue/ proftablty plan Expense anageent Operatonal plans Process qualty and effcency Market trends Copettve poston Growth strategy Custoer anageent Value realzaton Accretve add-on acqustons Ext (tng envsaged) Fnancng cost Input-output rato Asset structure

4 17 Xubo hang / Physcs Proceda 5 ( 01 ) Fuzzy optal decson-akng odel on venture captal nvestent.1 Probles descrbed he venture captal fr has been selected n canddate nvestent frs through the ntal screenng. S S1, S,, Sn s the canddate fr set. here are evaluaton ndcators n the evaluaton. U ( U1, U,, U ) s the alternatve canddate frs evaluaton ndcators set. 1~q ndcators are quanttatve evaluaton ndcators, the ( q 1)~ ndcators are qualtatve evaluaton ndcators. hese evaluaton ndcators are ore beneft the great type or ore beneft the saller type. he venture captal fr chooses one or ore canddate fr gve ther nvestent.. Set decson-akng ndcators evaluaton atrx Evaluate the alternatve canddate portfolo frs accordng to the evaluaton experts past experence use a scorng. Non-densonal quanttatve ndcators and deterne the relatve evaluaton value of qualtatve ndcators through dualty contrast sort. Get the all evaluaton ndcators relatve excellent atrx. r11 r1 r1 n rq 1 rq r qn ( r ) n r( q1)1 r( q1) r( q1) n r 1 r rn As has been entoned n selecton, ths paper use canddate frs anageent, operaton, strategy, transacton and cost as frst level evaluaton ndcators. 18 secondary evaluaton ndcators are used as descrpton n secton. We set the rsk-adusted returns as the overall evaluaton obectve buldng a venture captal decson-akng ndcators syste.. deterne ndcators weght he dfferent evaluators have dfferent ndcators evaluaton weght n the venture captal nvestents selecton. he tradtonal ethods usually adopt AHP or experts opnon survey ethod to get the weght set. hese ethods have stronger subectvty and weakness obectvty. In ths paper, we use entropy weght ethod to avod subectve udgents uncertanty. he ndcator s weght under obectve c s:, w 1 e n e K r ln r 1 w w 1 w, K 1 ln, 0e 1 n, 1,,,, 1,,, n..4 Deterne optal reference vector and worst reference vector Selecton each ndcator s optal value copose optal reference vector G n standardzaton. Selecton each ndcator s worst value copose worst reference vector B n standardzaton. Under the sub-obectve c ( c, V), the optal reference vector and worst reference vector respectvely s: G ( G1, G,, G ), G ax r, B ( B1, B,, B ), B n r, 1,,,, 1,,, n (1)

5 .5 Calculated dstance to the optal value and worse value Xubo hang / Physcs Proceda 5 (01 ) c Suppose s canddate fr subect degree relatve to optal value under obectve c, thus c c 1 s canddate fr subect degree relatve to worse value under obectve c. he dstance to optal value wth subect degree as weght s: 1 c DG [ w ( G r )] () 1 s dstance paraeter. he dstance to worse value wth subect degree as weght s: 1 1 c c B [ ( )] (1 ) [ ( )] 1 1 () D w r B w r B.6 Deterne optze rule and optal nvestent obectve fr Use weght dstance s square suaton to optal and worse value nu as optzaton rule buld optzaton obectve functon: ( ) ( ) ( ) n F ( ) ( D ) ( D ) G B ( ) ( ) ( ) ( ) ( ) ( ) 1 1 (4) ( ) [ w( G r )] (1 ) [ w( r B )] n F ( ) ( D ) ( D ) ( ) ( ) ( ) G B V ( V) ( V) V ( V) ( V) ( V) ( V) 1 1 (5) ( ) w( G r )] (1 ) [ w( r B )] Let obectve functon s frst dervatve equal to 0, thus ( ) df( ) 0 (6) d he soluton s: df 0 (7) d ( V ) ( ) V ( ) ( ) [ ( ) w( r B )] 1 ( ) ( ) ( ) ( ) [ ( ) w( G r )] [ ( ) w( r B )] 1 1 (8) Use V ( V) ( V) [ ( V) w( r B )] 1 ( V) ( V) ( V) ( V) [ ( V) w( G r )] [ ( V) w( r B )] 1 1 V as weght, get axu return subect degree V as fnal obectve value: (10) (9)

6 174 Xubo hang / Physcs Proceda 5 ( 01 ) Copared, the axu s the optal nvestent canddate fr. 4. Exaples A venture captal fr wants to gve nvestent to a prvate copany wth better prospects n arket. here are four canddate frs through the ntal screenng. he venture captal fr need decson an optal nvestent obect to acheve rsk-weght return axu obectve. he canddate frs are S 1, S, S, S 4. he venture captal nvestor would select one or two canddate to nvestent. 4.1 Deterne evaluaton atrx Suppose U ( U1, U, U, U4, U5) s the venture captal nvestor evaluatng canddate frs ndcators set. Where U 1, U, U, U 4 and U 5 ndcated canddate frs cost, anageent, operaton, Strategy and transacton. 18 sub-ndcators are used to evaluate these fve frst level ndcators. he experts gve each canddate s scale n each secondary level ndcator under return and rsk sub-obectve and get a frst level ndcator atrx: Deterne weght, V We use entropy weght ethod descrbed n 4. to deterne the each ndcator s weght under return and rsk sub-obectve: w (0.1,0.04,0.91,0.19), V w (0.9,0.01,0.71,0.14) Deterne optal reference vector and worse reference vector he optal reference vector about canddate fr s cost, anageent, operaton, strategy and transacton under the return sub-obectve s: G (1,1,1,1,1). he worse reference vector about canddate fr s cost, anageent, operaton, strategy and transacton under return sub-obectve s B (0.69,0.445,0.405,0.4). he optal reference vector about s about canddate fr s cost, anageent, operaton, strategy and transacton under the rsk sub-obectve s: G (1,1,1,1,1). he worse reference vector about canddate fr s cost, anageent, operaton, strategy and transacton under the ( V) rsk sub-obectve s: B (0.69,0.69,0.45,0.). 4. Deterne optal canddate fr Let dstance paraeter 1. Calculate canddate frs relatve optal subectve degree value due to forula (8) and (9): V (0.44,0.1,0.76,0.), (0.045,0.65,0.994,0.071). Calculate each canddate frs subectve optal value degree use forula (10): (0.00,0.075,0.75,0.0) he value of S s the bggest n all canddate frs. hs eans the S have bggest rsk adusted return. hus the venture captal nvestor should select S as nvestent obect. 5. Concluson Coprehensve evaluaton the alternatve canddate frs to avod the venture captal nvestent rsk and axze the nvestent return s the an obectve venture captal nvestent decson-akng. As the venture captal tself has non-transparent, non-lqud characterstcs, t faces any endogenetc and

7 Xubo hang / Physcs Proceda 5 (01 ) exogenous rsks n the operaton process. he venture captal nvestent decson-akng s the ost portant ssue to venture captal fr. here are any uncertan factors n venture captal decsonakng. hus the venture captal nvestents decson-akng have soe fuzzy characterstcs. hs paper analyss the possble rsk exsts n the venture captal nvestent decson-akng. Evaluaton the venture captal nvestent rsk exsts n the nvestent decson-akng process use fuzzy optal buld a rsk-weghted optal return odel to avod the rsk n the venture captal nvestent decson-akng. Get the optal nvestent selecton set. An exaple s used to deonstrate our fuzzy optal rsk avodng odel. Acknowledgent As the research result, the author thanks the fundng of Hube Provncal Departent of Educaton 010 Huantes and Socal Scences esearch Proects Fund 010y05 and Wuhan Polytechnc Unversty alents Introducton (Culture) esearch Start Fund 009S0. eferences [1] C.Y. Kung, K. L. Wen, Applyng Grey elatonal Analyss and Grey Decson-Makng to Evaluate the elatonshp Between Copany Attrbutes and Its Fnancal Perforance--A Case Study of Venture Captal Enterprses n awan, Decson Support Systes, 4, pp: 84 85, 007. [] D. Cung, D. Schdt, U. Walz, Legalty and Venture Captal Governance around the World, Journal of Busness Venturng, (008), do: /.busvent [] D. Leber, Proactve Portfolo Manageent: Manage Now to ealze eturns Later, he Journal of Prvate Equty, 1, pp: 7-8, 004. [4] H. Cochrane, he rsk and return of venture captal, Journal of Fnancal Econocs, 75, pp: 5, 005. [5] P. Gopers, A. Kovner, J. Lerner, D. Scharfsten, Venture Captal Investent Cycles: he Ipact of Publc Markets, Journal of Fnancal Econocs, 87, pp: 1, 008. [6] P. Gopers, J. Lerner, he Venture Captal evoluton, Journal of Econoc Perspectves, 15(), pp: , 001. [7]. Lauterbach, I. M. Welpe, J. Fertg, Perforance Dfferentaton: Cuttng Losses and Maxzng Profts of Prvate Equty and Venture Captal Investents, Fnancal Markets Portfolo Manageent, 1, pp: 45-67, 007. [8] U. Lossen, Portfolo Strateges of Prvate Equty Frs heory and Evdence, Wesbaden: GWV Fachverlage GbH, 007. [9] Y. L, Duraton Analyss of Venture Captal Stagng: A eal Optons Perspectve, Journal of Busness Venturng,, pp: , 008. [10] John H. Cochrane, he rsk and return of venture captal, Journal of Fnancal Econocs, 75, pp: 5, 005. [11] L, Y., Mahoney, J.., When are venture captal proects ntated? Journal of Busness Venturng (009), do: /.busvent