Professional investors of non-publicly traded new or established
companies, e.g. Venture Capitalists (VC) or Private Equity (PE)
buying and selling companies, as well as non-professional investors,
Business Angels (BA), face a significant risk due to a typical information
asymmetry:
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The prospects
of privately held companies are exaggerated or overrated by
the management team. |
Critical success factors such as the market potential, go-to-market
know-how, efficiency of organisation, internal and external risks,
financing are not treated transparently enough or not even identified
by the management team. The high risks investors are willing to
accept must be awarded with high returns.
This practice destroys value in several ways. A number of business
plan and companies are getting in trouble because they can’t
find investors. Thereby not only jobs are getting lost, but most
probably many brilliant ideas get lost.
Investors, however, in particular Business Angels and companies
selling private equity assets do often trust other investors or
else provide capital without a deeper knowledge of the critical
success factors just because they are fascinated by the business
idea and the management team.
The risk for an investor to lose the whole investment volume is
around 20% - 90%. According to a survey by the Swiss Federal Institute
of Technology on the Swiss Business Angel market 2005, only 29%
of all investments deliver the expected returns.
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The low success
rates clearly show that investors should primarily be interested
in reducing the risk of the total or partial failure of their
investments. |
The other investor need is to improve the comparability of risk-return
profiles in order to optimise the investment set within their portfolio.
