Entrepreneurs/Management
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Founders
| Self, customers, employees, investors, venture capital firms
Economy:
act on an idea
| Capital appreciation
| Build a large, lasting company.
| Usually long term; it may be a life's ambition
| Reputation, time, money, idea
| Can choose who its investors are, can insist on a strategy
| Customers, employees, investors
| Success of enterprise drives reputation; reputation important to be able to attract future investors
| Exists, although mitigated by corporate structure, directors' and officers' insurance
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VC-installed management
| Investors, self, customers, employees; although loyalty may be stronger to the VC that installed them
Economy:
represent liquid labor markets—bringing their expertise to a company
| Options and salary
| May be regularly used by the VC to turn around struggling companies, so may have a bias toward VC. If VC-suggested strategy fails, VC is likely to help manager find another position.
| Shorter term than founder; once business is stabilized, or through IPO process, may move on to another venture the VC needs fixed
| Time, reputation
| Can try to influence strategy, but is not fully autonomous from VC
| VC
| Success of enterprise drives reputation; reputation not as important since VCs act as protectors, and will likely be in multiple companies during career
| Exists, although mitigated by corporate structure and directors' and officers' insurance
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Internal investor relations (CFO/CEO)
| Management, investors, analysts, press, underwriters, customers
Economy:
communicates with investors and customers
| Salary, maybe options
| Be as positive as possible.
| Shorter term— goal is to achieve free advertising through media and keep investors happy
| Credibility
| Information provided to investors, the press, analysts
| Press, analysts
| Known that investor relations is not objective so reputation largely unimportant
| Liability if fraudulent
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Accountants/auditors
| Management, investors, analysts, underwriters
Economy:
maintains quality of financial information for those analysts
| Fixed fee paid by the company; with some controversy, partners at certain of the accounting firms also became investors in their clients.
| Protective of reputation for objectivity while also maintaining relationships with the client company
| Long term
| Credibility
| Giving a qualified opinion would be very embarrassing to management and would create big problems in raising capital.
| Management, regulators
| Consistent objectivity; reputation is absolutely key to their business.
| Legal liability
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Lawyers
| All parties, regulators
Economy:
informs all parties of the requirements of the law and helps structure the relationships between key parties through contracting
| Their client pays on an hourly basis.
| To strongly advocate the position of their own client
| Shorter term, transaction oriented, although with longer term reputation a concern
| Time (better lawyers can choose which clients to take), reputation
| Advice regarding previous transactions allows each party to be more sophisticated in dealing with the other. Lawyers often introduce entrepreneurs to investors and vice versa.
| VC, management
| Skill at advocacy and specific knowledge of relevant transactions drives reputation; reputation is important to securing clients.
| NS*
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Public relations firms
| Management, press, investors, analysts, underwriters, customers
Economy:
communicates with investors and customers
| Fixed fee paid by the company
| Find creative ways to focus media attention on your company.
| Shorter term—goal is to achieve free advertising through media
| Reputation
| Manipulation of information received by the press, analysts, investors
| Press, management
| Creativity and effectiveness in getting free press drives reputation. This is important to gaining clients.
| NS*
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VC
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Venture investors
| (LPs and selves)—identify markets, entrepreneurs, products or services to develop companies; self—option on external R&D, access to information flow, advantaged opportunity to fully acquire, option control potential emergent competitors, capital appreciation; entrepreneurs—provide capital and maybe advice, contacts; I-banks—groom next generation of IPOs and M&A; corporate—groom next generation acquisitions
Economy:
screen and then provide risk capital and advice to unproven companies; allow established companies to exploit emerging technology; introduces companies to the public markets or acquirers.
| LPs—management fee (2–3% of committed capital and 20–30% of gains); whoever acquires the portfolio company (public if an IPO, corporate if an acquisition)
| | Short as possible to maximize IRR (how funds are benchmarked against others); dictated by market conditions, sector popularity; typically 3–5 years
| VC time, possibly capital (depending on investor type); access to good deals; capital, relationships with active VC
| Entrepreneur—capital structure (subordinating execs' equity with VC's preferred stock, valuation and milestone ratchets, vesting, veto rights over sales and major changes in business, buy-back clauses, PIK dividends, liquidation preference with valuation multiples), operating advice; I-banks—choose where to do their IPO/M&A business; influence projects pursued by company, help attract VC investment
| Deal sourcing—entrepreneur community, other VCs;
Capital—LPs, other VCs;
Liquidation— I-banks and corporate
| Returns over time key source of reputation; affects all key relationships, especially capital raising, also attracting entrepreneurs and investing with them on favorable terms; returns important to attract LPs, credibility with I-banks
| Nearly none. Sophisticated LPs and coinvesting VCs, companies responsible for own legal counsel, acquiring corporates are sophisticated, I-banks are sophisticated.
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Limited Partners (LPs) in VC funds
| Their larger portfolio, of which VC is probably a small part
Economy:
provide capital to those with expertise in identifying opportunities
| LPs receive their funds from various sources like pensions and often act as fiduciaries; LPs' objective is capital appreciation.
| Spread investments into various quality VC funds, which allows diversification and gives option to invest in their next fund
| Long term, the life of the fund into which they invest (7–10 years); they may receive distributions returning capital and appreciation as early as within a few years; typically are unable to sell their interests in VC funds
| Percentage of their overall portfolio allowed to be allocated to this risky, illiquid asset class; administrative burden could be a minor constraint.
| Threat not to reinvest in VC's next fund; once invested, legally an LP cannot take any role in influencing investment decisions lest he lose his LP status and thereby limited liability.
| VC, the most popular of which can choose to exclude LPs from oversubscribed funds
| Returns benchmarks for pension/ endowment administrator who makes the decision how to allocate among asset classes and which funds within asset classes
| Fiduciary responsibility to those who have given them the funds to invest
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Investment Banks
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Underwriters
| Entrepreneur/VC—raising capital on their behalf in the capital markets; money managers/public investors—with whom they place the equity
Economy:
introduces companies to the public capital markets
| Company pays a percentage of proceeds at time of offering.
| Make sure equity issued finds buyers on the day of the IPO; incentive to price stock as low as the company will accept without hurting underwriter's reputation; wants to hype (market) the deal, so they will not be required to support the price of the stock
| Day of IPO and short period after when they will support the price; reputational concerns might suggest a longer term interest in the stock's success.
| Reputation, sales force “bandwidth” to sell new equity to its institutional and other investors; receptivity of markets that can rapidly change and make an offering undoable
| Terms of offering (lockup periods restricting VC and entrepreneur's ability to sell stock for a period after the offering), sense of market appetite for types of companies; influences what VCs will invest in or advise their portfolio companies; ability to affect equity analyst's compensation
| VC, entrepreneurs, money managers, public reputation
| Balance between conflicting reputations to get the best price for the company, and selling to money managers and investors stock that will appreciate after the offering
| Various regulatory requirements, but generally offering documents are careful to minimize risks by maximizing disclosure
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Sell-side equity research
| Money manager/public investors—rely on equity research to evaluate public companies' business prospects; underwriters—help promote an IPO and then continue to cover it; entrepreneurs—a means to efficiently communicate their story to the wider public
Economy:
supposed to synthesize for investors the impact of changing industry and company conditions; has analytic expertise and access to best information
| Paid from other, profitgenerating parts of the bank, particularly the underwriters; sometimes based on the number of IPOs the analyst has helped market
| Balancing reputation with investors against underwriter and company pressure to be positive
| Follows companies long term, establishing a reputation
| Reputation, access to management for information, time
| Communicates to the public through the press, tries to persuade money managers and investors, companies try to please the analysts, can try to influence which companies the underwriters take public
| Management, money managers, the press, underwriters
| Reputation driven on ability to correctly predict stock price movements, also charisma; reputation is key to having influence over investors and being an asset to underwriters.
| New regulations around their relationship with management; recent class action lawsuits have failed to assign liability for wrong predictions.
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Mutual Funds
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Money managers (buy-side)
| Smaller investors; underwriters—place large blocks of IPO stock with them, who tend not to churn it as much as day traders
Economy:
supposed to synthesize for investors the impact of changing industry and company conditions; has analytic expertise and access to best information
| Percentage of money managed; their funds attract more money when they have performed better than the average within their risk category.
| Better relative performance; may lead to imitative investing to be sure to not significantly underperform peers; may also encourage riskier investing so long as staying within the loose boundaries of the “risk category”
| Quarterly reporting; ultimately, long-term performance is important, but also engage in short-term trading into and out of positions
| Reputation, access to information
| Decision to buy IPO stock, hold it, sell it
| Underwriters to get IPO stock, equity analysts to get insight and information, trust of smaller investors
| Returns over time; reputation is key to attracting capital to invest
| Very little; investors invest at their own risk
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External Factors
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The press
| Public/its shareholders; investors, analysts
Economy:
collects and distributes generally nonfinancial information about companies to interested parties; not necessarily experts
| Journalists are trying to build their own reputation; the media firm is trying to increase consumers of its media so as to increase the value of the firm.
| Attract consumers of its stories, could lead to a bias toward sensationalism. Pressure to produce a great volume of stories may also lead to going with “easy” stories—reporting on fads (what others are reporting) and being uncritical of PR and management spin.
| Very short term; the deadline for printing tomorrow's paper/magazine/television report
| Story ideas, expertise
| Can attract investor and customer attention to a company as well as publish stories on the successes and failures of all involved parties (investor gains, auditor mistakes, etc.)
| PR firms, analysts, sometimes management
| Depends on the media organization, but can be entertainment value of stories or depth of analysis. Importance of reputation also depends on the audience.
| None—strong constitutional protection
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Forecasting/ analysis firms (Gartner, Jupiter)
| Management, investors, underwriters, analysts; press
Economy:
gains access to the best available market data and uses sophisticated analytic techniques to make forecasts
| Paid semifixed fees for detailed reports on a subject
| Balance between reputation for accurate forecasts and a need to market their own research in sensationalistic ways
| Medium term; forecasts tend to change over time, and they are not necessarily held responsible for misforecasts, however, reputation will suffer if they are consistently wrong.
| Reputation
| Their predictions form the basis of business plans, investor decisions, analyst predictions, press accounts. These reports often are the starting point of investment fads.
| Management, press, investors, analysts
| Not necessarily held responsible for misforecasts, however, reputation will suffer if they are consistently wrong.
| None
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Regulators
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SEC
| The public; investors, analysts, underwriters who rely on the accuracy of financial information
Economy:
sets standards for the quality of financial information provided to the public and analysts
| Not for profit
| Accommodation between efficiency of markets and necessary regulation to created a trusted market environment
| Long term
| Time and financial resources
| Jail, fines, ability to ban individuals from financial services jobs
| Financial industry, politicians
| Reputation for fairness and practical accommodation of market efficiency and adequate protections for investors; has monopoly on its function with the United States (financial activity could migrate elsewhere)
| None
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Federal Reserve
| The public, everyone in the economy
Economy:
stimulates and restrains the economy as necessary to maintain orderly growth
| Not for profit
| Avoid damage to banking industry; avoid a recession, avoid inflation
| Long term
| Has all resources it needs
| Interest rates, money supply, bank capitalization requirements
| Financial industry, politicians
| Reputation for fairness and practical accommodation of market efficiency and adequate protections for investors, but has monopoly on its function with the United States (financial activity could migrate elsewhere)
| None
|
FASB
| Accountants, everyone who relies on the consistency of financial information
Economy:
sets standards for the quality of financial information provided to the public and analysts
| Industry support
| Provide transparency to financial reports
| Long term
| Time and personnel
| Sets GAAP rules
| Financial industry, accountant firms, companies
| Reputation for fairness and practical accommodation of market efficiency and adequate protections for investors, but has monopoly on its function with the United States and increasingly GAAP is used internationally
| None
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Class-action lawyers
| Investors, self; the SEC, whose enforcement is aided by lawyers' pursuit of wrongdoing
Economy:
bolsters regulators' enforcement of law and discourages law breaking by other players
| Paid a percentage of the awards won for clients
| Pursue the largest, most easily proven cases of law breaking by parties with deep financial resources
| Short term
| Time and personnel
| Lawsuits require a lot of resources to defend against and when lost can result in very large financial penalties and reputational damage.
| Relatively independent actors, not coordinating activities with other parties but opportunistically pursing “deep pockets”
| Frequently winning cases; credibility with the courts helps
| None
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The Public
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Pension/401(k) investors
| Employees, benefits administrators; funds are aggregated for and often invested by money managers, VC funds often have Pension Fund LPs
Economy:
Exploits economies of scale to allow small investors less expensive access to financial expertise; is a vessel through which private savings are cycled back into the economy.
| Percentage of funds under management and perhaps a bonus based upon performance
| Offer brand-name funds to plan participants, receive highest possible returns
| Long-term retirement
| Number of funds that can be offered and administered
| Where it chooses to invest its funds (which money managers it offers to its participants, into which VC firms it becomes an LP)
| Money managers, VC firms, management, employees
| Competent administration of a reasonable number of choices for 401(k) plans, good returns for a defined benefit pension plan
| ERISA obligations
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Stock-holding investors
| Self, consumers of press, provide liquidity to private investors (VCs)
Economy:
collectively provide capital and make judgments on the relative merits of companies
| Capital gains and dividends
| Depends on risk appetite of the investor; known for bouts of greed and fear
| Depends on the investor
| Capital, time and financial expertise
| Chooses which stocks and funds to purchase and sell
| Money managers, regulators, press
| N/A
| None
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Day traders
| Self, consumers of press, fee-charging exchanges, provide liquidity to private investors (VCs) and other market participants
Economy:
arbitrage, quick incorporation of market information into stock price
| Capital gains
| Anticipate momentum and quickly buy and sell
| Extremely short
| Capital
| Chooses which stock to buy and sell
| None
| N/A
| None
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NS = not significant
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