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ISC Capital Management
Financial District Center.
Three First National Plaza, 14 fl
Chicago, Illinois 60602-4270
312-635-5371
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Confidentiality Agreement
ISC recognizes that certain confidential information relating to your business will be given to ISC in connection with our consulting services.
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Business Plan - An Outline
HIGH TECHNOLOGY INDUSTRY SPECIALTY
It is important to remember that this outline should be treated as a guide, and not as a rigid, all-encompassing
format: each business is unique, and its plan should reflect as such.
It is also important to understand that no reasonable investor will look at your plan as indelibly
etched in stone. As market conditions change, as company strategies evolve, as projections are
surpassed or not reached, the plan should be updated to reflect revised scenarios.
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Business-to-Business E-Commerce
The Effects of Business-to-Business E-Commerce on Transaction Costs
In this paper, we study the changes in transaction costs from the introduction of the Internet in
transactions between firms (i.e., business-to-business (B2B) e-commerce). We begin with a conceptual
framework to organize the changes in transaction costs that are likely to result when a transaction is
transferred from a physical marketplace to an Internet-based one. Following Milgrom and Roberts
(1992), we differentiate between the impact on coordination costs and motivation costs. We argue that it
is likely that B2B e-commerce reduces coordination costs and increases efficiency. We classify these
efficiencies into three broad categories – (1) process improvements; (2) marketplace benefits; and (3)
indirect improvements. At the same time, B2B e-commerce affects incentive costs. In particular, we
discuss the impact of the introduction of e-commerce on informational asymmetries. We implement this
framework by analyzing detailed internal data from one Internet-based firm to measure process
improvements, marketplace benefits, and motivation costs. We present less detailed data and analyses for
one other firm. Our results suggest that process improvements and marketplace benefits are potentially
large. We find little evidence that informational asymmetries are more important in the electronic
marketplace we study than the existing physical ones.
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Corporate Governance and Merger Activity
Corporate Governance and Merger Activity in the U.S.:
Making sense of the ‘80s and ‘90s
This paper describes and considers explanations for merger activity and changes in corporate governance in
the United States since 1980. The 1980s was a period of intense merger activity, distinguished by the
prevalence of leveraged buyouts (LBOs) and hostile takeovers. After a brief decline in the early 1990s,
substantial merger activity resumed in the second half of the decade, exceeding the 1980s levels by some
measures. The 1990s activity was distinguished by the relative absence of LBOs and hostility as well as the
prevalence of equity rather than debt as a means of financing transactions. We evaluate several potential
explanations for these patterns.
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A framework for analyzing B2B e-commerce
Most U.S. companies today are attempting to figure out how they should
approach business-to-business (B2B) e-commerce despite the stock market gyrations –
positive and negative – of B2B companies. By separating the physical and information
flows connected with each transaction, the Internet potentially will radically change the
ways in which corporations provide and trade goods and services with each other. It is
the prospect of such change that motivates companies to consider B2B.
In this paper, we introduce and describe a framework that we find helpful in
thinking about B2B. We then discuss the implications of our framework for B2B start-ups
and for companies considering their B2B strategies.
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How Do Venture Capitalists Choose Investments?
we consider how venture capitalists (VCs) choose or screen their investments by studying
the contemporaneous investment analyses produced by 10 venture capital firms for investments in 42
portfolio companies.
In this paper, we consider how venture capitalists (VCs) choose or screen their investments by studying
the contemporaneous investment analyses produced by 10 venture capital firms for investments in 42
portfolio companies. Consistent with most academic and anecdotal accounts, we find that it is common
for VCs to consider explicitly the attractiveness of the opportunity – the market size, the strategy, the
technology, customer adoption, and competition – the management team, and the deal terms. We also
provide evidence on how the venture capitalists expect to monitor those investments. In at least half of
the investments, the VC expects to play an important role in recruiting management. Finally, we
complement the investment analyses with information from the financial contracts for the investments
and consider the relation of the analyses with the contractual terms and with subsequent performance. In
both analyses, the evidence suggests that the VC’s initial appraisal of the management team is important.
Stronger management teams obtain more attractive contracts and are more likely to take their companies
public.
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B2B E-Commerce Hubs:
Towards a Taxonomy of Business Models
Towards a Taxonomy of Business Models
In our article, we defined eHubs as neutral Internet-based intermediaries that focus on specific
industry verticals or specific business processes, host electronic marketplaces, and use various market-making
mechanisms to mediate any-to-any transactions among businesses. We argued that eHubs create
value by aggregating buyers and sellers, creating marketplace liquidity, and reducing transaction costs.
We explained why we thought eHubs would proliferate and thrive.
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The Emerging Landscape of Business to Business E-Commerce
A quiet revolution is underway in business-to-business (B2B) e-commerce. Most of the attention
in B2B e-commerce has focused on individual firms like Cisco and Dell who eliminate
middlemen and sell directly to business customers. However, the real B2B e-commerce
revolution is taking place outside the boundaries of individual firms, and this revolution involves
the creation of new middlemen.
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How Costly is Financial (not Economic) Distress?
Evidence from Highly Leveraged Transactions that Became Distressed
This paper studies thirty-one highly leveraged transactions (HLTs) of the 1980s that subsequently become financially distressed. At the time of distress,
all sample firms have operating margins that are positive and in the majority of cases greater than the median for the industry. Therefore, we consider
these firms largely financially distressed, not economically distressed. The net effect of the HLT and financial distress is a slight increase in value -- from
pre-transaction to distress resolution, the sample firms experience a marginally positive change in (market- or industry-adjusted) value. This finding
strongly suggests that, overall, the HLTs of the late 1980s succeeded in creating value. We also present quantitative and qualitative estimates of the
(direct and indirect) costs of financial distress and their determinants. For the entire sample, we estimate the costs of financial distress as 10% to 20% of
firm value. Our most conservative or upper bound estimates do not exceed 23% of firm value. For a subset of firms that do not experience an adverse
economic shock, we estimate the costs of financial distress to be negligible. Consistent with some costs of financial distress, we find evidence of
unexpected cuts in capital expenditures, undesired asset sales, and costly managerial delay in restructuring. To the extent they occur, the costs of
financial distress that we identify are heavily concentrated in the period after the firms become distressed, but before they enter Chapter 11.
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Exploration of Value Creation and Destruction in Acquisitions
A Clinical Exploration of Value Creation and Destruction in Acquisitions:
Organizational Design, Incentives, and Internal Capital Markets
This paper presents clinically-based studies of two acquisitions that received very different stock
market reactions at announcement one positive and one negative. Despite the differing market reactions, we
find that, ultimately, neither acquisition created value overall. In exploring the reasons for the acquisition
outcomes, we rely primarily on interviews with managers and on internally generated performance data. We
compare the results of these analyses to those from analyses of post-acquisition operating and stock price
performance traditionally applied to large samples.
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The Evolution of U.S. Corporate Governance
We Are All Henry Kravis Now
This paper describes and explains changes in corporate governance in the United States since 1980. The
1980s was a period of unprecedented takeover activity. This activity was distinguished by the prevalence of
LBOs and raiders. The paper first considers why LBOs and raiders were prominent in the 1980s and, also,
what drove takeover activity in the 1980s. The paper then describes U.S. corporate governance today, and
argues why LBOs and raiders have not reappeared despite the recent resurgence of takeovers. A large part of
the explanation is that today’s shareholders, boards, and managers have applied the insights and strengths of
1980s LBOs. In that sense, we are all Henry Kravis now.
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Financial Contracting Theory Meets the Real World
An Empirical Analysis of Venture Capital Contracts
In this paper, we compare the characteristics of real world financial contracts to their
counterparts in financial contracting theory. We do so by conducting a detailed study of actual
contracts between venture capitalists (VCs) and entrepreneurs. VCs are the real world entities
who arguably most closely approximate the investors of theory.
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The Value-Maximizing Board
This paper compares board and director characteristics of reverse leveraged buyout (LBO) firms controlled
by LBO specialists to those of an industry- and size-matched comparison sample. We consider the boards of
the reverse LBOs to be value-maximizing because of the strong incentives the LBO specialists have to
structure those boards in a way that maximizes shareholder value. Relative to the comparison firms, we find
that the boards of the reverse LBOs are smaller, control larger equity stakes, and meet less frequently.
Relative to directors of the comparison firms, directors of the reverse LBOs are younger, have shorter
tenures, are less likely to be women, and are at least as likely to serve on other boards.
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