VC Market Research Articles

Monitoring, mentoring and nurturing value in government venture capital entrepreneur development programmes

PurposeThis research explores the provision of monitoring, mentoring and nurturing in a government venture capital (GVC) entrepreneur development programme and how these activities might create value for high potential startups (HPSUs).Design/methodology/approachA qualitative in-depth case study pursued the research question – how does GVC entrepreneur development programme provision of non-financial monitoring, mentoring and nurturing create value for HPSU businesses? The paper uses quasi-random sampling of case entrepreneurs selected from publicly available lists of HPSUs and interviews with entrepreneurs, employees and co-founders, in tandem with reviewing HPSU documentation.FindingsFindings highlight monitoring, mentoring and nurturing create value for HPSU entrepreneurs, and that GVC entrepreneur development programmes offer greater value to HPSUs than GVC investment alone. Programme activities build capacity by skills acquisition, access to a variety of external experts in non-technical business functions plus national and international private VC networks.Research limitations/implicationsThis study provides evidence that robust monitoring, mentoring and nurturing activities of a GVC entrepreneur development programme creates entrepreneur readiness for private investor engagement.Practical implicationsThis research highlights the influence of monitoring, mentoring and nurturing activities on HPSU entrepreneurs embedded in a GVC entrepreneur development programme. HPSUs seem better prepared for investor interactions by considering “non-monetary needs” in their funding strategies.Originality/valueThe findings illustrate how a GVC entrepreneur development programme can positively impact GVC-entrepreneur influence and outcomes. In offering an in-depth case study of better practice, we extend prior literature on how GVCs can help bridge the equity gap by providing value adding non-financial supports, without creating a false VC market where GVCs crowd out private investors.

A Venture Perspective of Different Investor Effects in the Brazilian VC Market

A Venture Perspective of Different Investor Effects in the Brazilian VC Market

The effects of government venture capital: New evidence from China based on a two-sided matching structural model

This study develops a two-sided matching structural model to examine whether government venture capitals (GVCs) crowd out private venture capitals (PVCs) by comparing the pre-money economic valuation of observed and counterfactual investments. The structural model also allows us to study the impacts of GVCs on the post-investment performance of the funded companies. Using China's VC market data between 2000 and 2020, we find that GVC-funded companies are those neglected by PVCs, and the potential economic performance of GVC-funded companies is inferior to that of PVC-funded ones. It means that the data do not support the crowding out conjecture. Moreover, the evidence suggests that the potential innovativeness of GVC-funded companies is higher than that of PVC-funded companies, indicating that GVCs bridge the equity gap left by PVCs in innovative companies. Regarding the impacts on companies' post-investment performance, GVCs are not significantly different from PVCs in improving companies' economic performance, and they are better than PVCs in improving companies' innovative performance. We also explore the impacts of different types of GVCs, the impacts of the co-investment between GVCs and PVCs, and the impacts of GVCs on companies in different stages of development.

Competition and Specialization in the VC Market: A Non-monotonic Relationship

Competition and Specialization in the VC Market: A Non-monotonic Relationship

Venture capital as innovative source of financing equity capital after the financial crisis in Spain

The global financial crisis affected the supply of funds to finance equity capital, thus calling for innovative risk capital financing methods. The paper explores the sources of venture capital (VC henceforth) fundraising and determines the relationship between VC fundraising, stock market returns, and market capitalization in Spain. The study uses time-series data of VC fundraising and stock market variables from 1989 to 2020 in a vector error correction model analysis after performing cointegration. The paper reports short-run and long-run causal relations between VC fundraising, stock market returns, and market capitalization when VC fundraising and stock market returns are used as dependent variables. However, such relations do not exist when the model is dependent on market capitalization. Our results show that the VC market raises funds from diversified (geographical and institutional) sources. Our findings support the risk diversification theory of VC financing. The paper provides implications for using alternative innovative ways of financing equity risk capital to spur economic growth.

Herd Behavior in Venture Capital Market: Evidence from China

This paper aims to empirically analyze the herd behavior in the VC market in the context of China, including the existence, causes and consequences of herding among venture capitalists. For our empirical analysis, we first construct a herding measure and confirm the existence of herd behavior in the Chinese VC market. Then, we perform OLS/logit regression to examine the causes and consequences of herding among venture capitalists. Our results suggest that herd behavior in the venture capital market are driven by positive signals of essential information and a higher degree of information uncertainty. However, we find no evidence of the influence of feedback trading signals on herding among venture capitalists. Further analysis suggests that a better external information environment would help weaken the herding among venture capitalists, while their reputation concerns might amplify the herding effect. Finally, we examine the economic consequence of the herding and find that the herd behavior of venture capitalists would have an adverse effect on their exit performance. In addition to the enrichment and development of herding theory, our study also provides an essential theoretical frame and policy implications for the steady growth of the venture capital market in emerging economies.

What determines Venture Capital investment decisions? Evidence from the emerging VC market in Egypt

The decision of a venture capitalist to commit capital in a new risky business is a complex decision. Investors need to consider a number of important criteria simultaneously. Based on the postulates of signaling theory and the investment criteria outlined in the extant literature, we propose a theoretical framework to describe the relationship between a new venture’s characteristics and the funding decision. The proposed framework is tested using actual data of a unique sample of 200 new Egyptian technological startups. The startups were tracked from establishment until applying to a venture capitalist and a decision was made either to accept or to reject them. Logistic regression analysis reveals that venture capitalists prefer to invest in startups with mature products and an initial proof of financial performance. The entrepreneurs’ industry experience and the size of their social networks are important factors that affect the startup’s access to finance. Using decision tree analysis to map venture capitalists’ decisions, we show that the time of applying for funds is critical and serves as a gateway for further evaluation. Startups are more likely rejected for applying later into the VC fund than for lack of experience or unproved products. This suggests that the development of the Egyptian tech ecosystem may be hugely constrained by the limited availability of capital as well as the high aversion to risk on the behalf of venture capitalists.

The Effect of Venture Capital Networks and Institutions on Portfolio Companies’ Performance in Southeast Asia

Venture capital firms (VC) have encountered with uncertainty and risk of asymmetric information due to an investment in early-to-growth stage and technology-based start-ups. Venture capital syndication network helps reduce a broad gap of information asymmetry and agency problem in a venture capital investment. Although agency and asymmetric information theory help motivate the formation of networks in emerging venture capital markets, Institutional theory is more suitable in explaining this situation, as the practice of venture capital appears to be influenced from institutional changes. As network connections are found to be the success factor for venture capitalists under a lack of fully developed institutional environment in emerging market. Venture capital industry in Southeast Asia is nascent yet in demanding and fast growing. Southeast Asia (SEA) is one of the most significant and dynamic propellers of the world economy. To clarify the role of networks and institutions on VC-backed firms in SEA VC market, we then investigate the relationship between networks and institutions and their impact on portfolio company’s performance. We quantified VC networks with more tangibly and visibly quantitative approach by applying social network analysis. We further proposed a theoretical framework representing that different level of VC networking involved in different institution development offers different performance advantages of VC backed companies. Our study initiated an empirical evidence by quantifying VC networks and institutions among SEA countries and implementing time-series pooled regressions through the performance of VC-backed companies. The result reveals that VC network could compensate for less formal institution in providing a better performance of their portfolio companies. There is joint effect in terms of the substitution and support between institutional development and VC network centrality within Southeast Asian syndication networks on shaping portfolio companies’ profitability. Other interesting issues found in this study include success factors of ventures beside venture capital networks and the negative VC network effect in Singapore.

Two-Sided Asymmetric Information and Convertible Securities in Venture Financing

This paper presents a new explanation for the prevalence of convertible bond in venture capital finance. By modeling two-sided asymmetric information between entrepreneurs and venture capitalists, we prove that convertible bond can implement the optimal contract. The optimal conversion ratio increases when it's more difficult to attract a venture capitalist, and it also increases with the extent of adverse selection in the venture capitalist market. Our model also predicts that the optimal conversion ratio is negatively correlated with the competition in VC market and the level of VC's human capital.

Overcoming the Matthew Effect in Status Dominated Environments – a Configurational Analysis of Venture Capital Investments

Abstract Entering status dominated environments as new entrant is a difficult endeavor. Accumulated advantages go along with the tendency of incumbents to succeed, whereas entrants are likely to lose (Matthew effect). This study examines what combination of deal resources accumulated by venture capital partners lead to high deal performance in order to analyze if new entrants can nonetheless overcome the burden of being new, i. e. having a low status position and only weak ties with current actors in status dominated environments. Our configurational analysis of 333 venture capital investments reveals opportunities for entrants to succeed that go beyond joining forces with established actors. Our findings contribute to research on interorganizational network formation and the strategic actions new entrants on the VC market may take to be successful. Furthermore, the study sheds light on the effect of syndicated opposed to single venture capitalist deals and suggests that successful syndicates require a ce...

Determinants of the Venture Investment Size in Russian IT Companies


 
 
 This study investigates the key determinants of the size of investment in Russian IT companies during follow-on rounds starting from the second round. On a sample of 55 deals (2010–2016), which represents the most important deals on Russian market, the research finds out two key factors positively influencing the size of investments: investments in the first round and presence of experienced investor among shareholders. e investor was considered as experienced if she has had success on VC market or has a totally accepted reputation on the same market. Results are consistent with the prior literature including the preliminary results of the authors done on lesser datasets. Additionally, effects of belonging to a particular industry or the time period of investments were proved to be insignificant for Russian VC market for IT companies. New hypothesis proposed by the authors (about impact of the number of founders on the investment in sub-sequent rounds) as well as hypothesis about the impact of target market growth on the investment size are also rejected. The latter is surprising as the target market growth is considered among the most important criteria for the investment decision. The result may be explained by the bias of the dataset as most of the early stage company data is confidential, and the target market growth plays the most significant role at the beginning of investment process.
 
 

Government Sponsored Venture Capital: Blessing Or Curse?

Young companies with growth opportunities face serious problems when it comes to financing. The private venture capital (VC) market fails to provide sufficient funding for this segment. First, we present the main characteristics of start-up companies and market failures that can lead to government intervention. These failures include asymmetric information embodied in the business plan; high transaction costs of the investment process from the investment decision to the exit; and positive externalities in the economy, as the government prefers other goals than profit realization. Government participation is categorized as direct or indirect intervention. We present international studies showing that indirect government intervention can have both beneficial and negative effects on the vc market. Finally, the Hungarian government’s participation and intervention are evaluated on the domestic VC market.

Biotech venture capital investments in public equities and performance

This study examines a large sample of venture investments in public equities (VIPEs) in the biotechnology and pharmaceutical industry over the period 1995-2014. The results of the study are threefold. First, and contrary to widely held beliefs, there has been no significant increase in the number of VIPEs over time. In fact, both in terms of dollar amount as well as the number of VIPE transactions have actually went down post the record year in 2009. Second, this study documents that returns profiles from the public venture capital market share many similarities to the returns in the private VC market: few big winners, but overall a high loss rate. Approximately seven investments out of ten in public firms generate a loss. Third, the analysis of private investments in public equities shows that venture capitalists outperform other competitors, such as hedge funds and mutual funds. From a management perspective, venture investments in public equity provide several benefits including providing an additional source of potential funding, aligning the investment horizon of venture capitalists with other long-term investors, certifying the quality of the firm and contributing to the long-term success.

Benchmarking study on the venture capital market in the Czech Republic, Hungary and the Netherlands

The main aim of paper is seen at two levels: the first level to assess the situation on the venture capital market in the Czech Republic based on the results of a comparative study of selected countries of European Union is the area of venture capital financing. The second level is, then, to propose measures, whose implications could increase the effectiveness of venture capital to the business sector in the Czech Republic. The main purpose of the paper is to identify internally homogeneous groups of the EU states regarding the situation on the venture capital market in the European Union Member States. The aim of this article is supported by relevant statistical data for the period 2008-2013 to assess the legislative framework of venture capital market in the Czech Republic and other selected European countries. Based on the results of cluster analysis, EU countries were identified, Hungary and the Netherlands, in which legislative conditions with venture capital market were subsequently analyzed and the results were compared with the situation in the Czech Republic. The Netherlands as a representative of the countries with developed market risk capital, Hungary as a representative of CEE countries. The problem of undeveloped VC market in the Czech Republic is not in demand for venture capital, but in its supply. Pension funds and insurance companies cannot invest more than 5% in risky assets. In the Czech Republic, there are no tax incentives to attract investors and even government programs that could complement the missing investors and support the creation of venture capital funds. This low level of venture capital usage for the development of enterprises could also be seen in misunderstanding and ignorance of this form of financing, the inability of management to prepare a business plan and to attract a potential investor, fears of administrative burdens arising from an investor and finally questionable return on investment when, for example, public offering of shares, which achieves a high appreciation, is in the Czech Republic underused. Keywords: venture capital, benchmarking, cluster analysis, Ward’s method, CEE countries, EU countries, Czech Republic, Hungary, Netherlands. JEL Classification: G32, M21

The Rise of the Unicorns - How Media Affects Start-Up Valuations

Within the last years, start-ups have achieved extraordinary high valuation levels which have never been seen in such dimensions before. These high-valued start-ups with valuations above or equal to US$1bn are also called unicorns. Similarly, media coverage of start-ups has increased significantly. In this paper the impact of media coverage on global unicorn valuations between 1990 and October 2015 is empirically analyzed. In addition, the impact of technology advancements on the media and start-ups is discussed. The here presented results indicate that technology advancements increase media coverage for start-ups. Investors which are typically not primarily active in the VC market are most affected by increasing media coverage. Start-up and especially unicorn valuations are driven to a large extent by increasing media coverage before a funding round. These results add new insights on the driving factors of start-up valuations and are consistent across a variety of different regression models and robustness checks.

The Evolution of Initial Co-investment Syndications in an Emerging Venture Capital Market

Prior research highlights the importance of co-investments among foreign and domestic investors in an emerging VC market. Yet, the question of how domestic and foreign VC syndicate partners select each other for their initial co-investment remains an open one. The question is important because uncertainty in emerging markets exposes participants to risks associated with higher levels of agency, problems of adverse selection, and potential opportunism. Building on agency theory, we hypothesize and test the risk mitigating effects of economic and social signals on the choice of initial co-investment ties among domestic and foreign VCs in an emerging market. Our work has implications for international management research, the practice of international VC investing, and public policy that tries to stimulate venture driven ecosystems.

Evolutionary Interpretation of VC Policy in Israel, Germany, UK and Scotland

Despite many attempts to develop high-impact VC policies, most VC markets in Europe are still underdeveloped. Many of these policies were based on 'traditional' (Rosiello et al 2009) VC policy involve a mix of monetary incentives and institutional changes. In this paper, we present an alternative evolutionary VC policy, which is based on a dynamic analysis of emergence processes and on the co-evolution between VC and entrepreneurship, as well as on a dynamic and adaptive view of policy. The paper presents four case studies of VC development: Israel, UK, Scotland, and Germany. Evolutionary VC policies relies on few major factors: i) a strategic objective and a long-term commitment to enhancing VC market and high-tech cluster emergence and development, ii) a phased-policy portfolio including both direct and indirect VC policy components, and iii) a dynamic policy process, which is adaptive to the specific context.

Investment Patterns and Performance of Organizations Involved in the VC Market Evidence from the Israeli Venture Capital Market

This research is an exploratory study that analyzes various VC agents. It presents characteristics, investment patterns and performances of such agents in the Israeli VC market. Ten categories of investors were identified in the Israeli VC market, which are: domestic and Foreign VCs and CVCs, Investment Companies, Business Angels, Technological Incubators, Technology Transfer Offices, and R&D grants for startups.The theoretical part of the paper presents a review of the different types of VC agents in a comparative perspective. The picture it presents is of a diversified market with heterogonous agents. This picture is supported be the empirical part of the paper, which presents the investment patterns, risk profiles and success rates of those different types of VC agents. The empirical work of this paper is based on a population of 2,371 Israeli high tech firms, which were created during the years 1991-2000.The main findings are that foreign VC agents have superior performances to similar domestic VC agents, CVC has superior performances to LP VC funds, business angels has similar success rate as LP VC funds while significantly lower failure rate and that technological incubators have significantly inferior performances to all other VC agents.

Granice luki kapitałowej w Polsce

The paper seeks to identify the limits of the funding gap in relation to equity capital in Poland. The following thesis was proposed: companies operating in Poland have difficulty obtaining equity capital from VC funds and business angel investors in the 1 million PLN to 15 million PLN range. An analysis is done on 36 VC funds and business angel preferences in Poland, confirming that the thesis is true. Further aims of the article are to: 1) put definitions related to the financial gap in order, 2) analyse the VC market in Poland, particularly in terms of investment limits and stage business financing, 3) analyse the business angel market in Poland.

Impact of global financial crisis on Indian venture capital firms: an empirical evaluation

The global financial crisis emerged from the muddled financial system of the USA that exacerbated the global recession of 2008-09. The effects of the crisis have rippled all over the world's economies. This paper empirically probes the role of these crises on Indian VC firms. With the help of regression analysis, empirical evidence is provided to the prevailing theories that a financial crisis negatively affects the VC market. To carry out this analysis, the amount of investment is taken as a dependent variable; whereas the financial crisis, firm's age, syndication, and type of industry are considered as independent variables. It has been demonstrated through analytical results that there exists a statistically significant difference between two time frames: pre-crisis and post-crisis. The amount of investment decreased 12% owing to the effect of the financial crisis. Further, it has been exposed that a significant difference exists in terms of stage funding between the two time frames. This study examines the various prospects related to the statistical association of the financial crisis and the VC market.