Redbox There Were Several Risks That Created

Redbox There were several risks that created issues for Redbox in securing venture capital financing. Venture capitalists typically invest with an eye towards taking companies public in order to earn their return on investment. Venture capitalists 'concentrate investments in early stage and high technology companies where informational asymmetries are highest" (Gompers, 1995). This means that venture capitalists must feel that they have a better understanding of the risks of a company than most other people.

So for them to be concerned about Redbox, there needed to be significant risks, usually ones that could make it difficult to take the firm public. The first significant issue is that of revenue. Redbox is in the DVD rental business. The problem is that the business is mature, has established players like Blockbuster, and is threatened by new technology such as Netflix. There is a concern, therefore, there that is insufficient growth opportunity in the business as presently constituted.

Without growth, there is no reason for a venture capitalist to invest, because they will not receive adequate return on their investment commensurate with the risk of investing in a start-up. This is especially a significant concern because the company needs to demonstrate that the technology is the most important asset and can be transferred to other businesses when DVDs become obsolete, a trend which is already under way (Stock, 2013). The second issue is the reliance on partners.

Redbox wants to place its machines where they will capture a substantial amount of walk-by traffic. The company is ideally seeking a partnership with a firm where the arrangement will be mutually beneficial. If RedBox had established deals in place with nationwide partners, it would be in a much better position to attract venture capital. Indeed, since venture capitalists seek to capture information asymmetry, the ideal would be to have a tentative deal that would be sealed by the arrival of the venture capitalist to provide the additional financing.

Thus, the venture capitalist would be directly contributing to the increasing of the company's value, and this would not be known to other buyers. If such a deal is not in place, and the venture capitalist does not think they can bring such a deal to the table, then there really isn't any information asymmetry that would form the basis of an attractive investment.

Further, there would be considerable long-term risk for RedBox as a business if it lacked critical distribution pathways, since the company is differentiated almost entirely by its distribution method. Those are the two main issues. RedBox was lacking in an innovative product. A company can succeed with just a distribution method, and the venture capitalist is not concerned if the company cannot survive long-term anyway. The venture capitalist just needs to get the company public and survive long enough for everybody to cash out.

So if RedBox is struggling now, that is fine, but there is no need for the company's venture capitalists to still remain invested at this point anyway. There are other issues that might prevent venture capitalists from coming in. For one, the valuation might be too high -- if there are no information asymmetries then the asking price will be fair.