Accounting for Risk: developing a new research agenda for risk appraisal in high-technology ventures

This work concerns the development of new methods of accounting for risk in high-technology ventures. The paper enquires into attitudes to risk and skills at risk management, in the relationship between high-technology firms and their venture capital backers. The basic prescription behind the proposed approach, building on work by the authors and co-workers [Reid (1996,1999), Reid, Terry and Smith (1997)], and other recent developments [e.g. Fiet (1995a,b)], is that as the venture capital industry matures, so should the techniques which high-technology firms and their venture capital backers use for risk management. If total risk is split up into innovation risk, business risk and agency risk, the main category of risk which hitherto the venture capitalist has sought to attenuate is agency risk. This has been addressed through improved management accounting systems, post-investment, and pre-commitment to the installation of such systems, pre-investment. However, success in this area has been incomplete, and attention to business and innovation risk has been severely limited. Lack of overall success in risk handling has, as a consequence, been a major cause of failure to provide adequate levels of outside finance for high-technology ventures, if appropriate yardstick comparison is made with US practise. This paper proposes a new research agenda, and a corresponding methodology, for investigating methods used for managing innovation, business and agency risks in investor-investee relations.