Venture Capital Sector Research Articles

Health Datapalooza 2012

The goal of the Health Datapalooza 2012 is liberate data. IT IS A great time to be an innovator at the intersection of data and healthcare according to the panelists at the 2012 Health Data Initiative Forum—aka the Health Datapalooza—which was held in Washington DC at the Convention Center on June 5–6, 2012. The Health Data Initiative, originally launched in 2010 by the Institute of Medicine and the U.S. Department of Health and Human Services, is a public–private collaboration that encourages innovators to utilize health data to develop applications that raise awareness of health and health system performance and spark community action to improve health. The 2012 Forum is the third annual event and is the largest one yet. The goal of the Health Datapalooza is to showcase the best and brightest new applications using data from government and other sources. Innovators presented their technologies to the audience, describing how it uses health data and makes a meaningful impact on health. This year the attendees included over 1600 leaders from the White House, federal agencies, investment and venture capital sectors, academia, social service organizations, public health communities, information technology firms, business and health care delivery systems who came together to make data actionable. Over 100 applications and Web sites, all powered by open data were presented. Here are some of the best new applications featured at the forums, in breakout sessions, or in the exhibit hall. Although some of the sites require users to register, most are free and easy to use. Symcat (http://symcat.com/) is an application designed by two Johns Hopkins Medical School classmates to help cyberchondriacs—or people who search the Internet about worrisome symptoms (most of us) understand what conditions might be causing those symptoms and provide immediate, customized information for those searchers. It is

Stimulating Innovation through Government Investment in Venture Funds

Innovation and R&D are important to economic growth. One argued way to encourage innovation is through government support for venture funds. This might be especially important in countries that lack a developed venture capital (VC) sector. However, some papers have suggested that this government backing might ‘crowd out’ purely private sector funds and might undermine innovation creation. Thus, I examine the use of a scheme in Australia (the Innovation Investment Fund (IIF) scheme). I focus on Australia because unlike many low innovation countries, it has strong legal foundations, enabling a cleaner look at the impact of government backing. I argue that Australia’s scheme is well structured. I then show that while Australia has relatively low levels of VC and innovation compared with other countries, Australia’s VC activity scaled by GDP has increased following the inception of the IIF scheme, particularly increasing after 2001. The policy implication is that properly structured government support for VC funds can stimulate innovation and VC activity.

Stimulating Venture Activity Through Government Investment in Venture Funds

Innovation and R&D are important to economic growth. One argued way to encourage innovation is through government support for venture funds. This might be especially important in countries that lack a developed venture capital (VC) sector. However, some papers have suggested that this government backing might ‘crowd out’ purely private sector funds and might undermine innovation creation. Thus, I examine the use of a scheme in Australia (the Innovation Investment Fund (IIF) scheme). I focus on Australia because unlike many low innovation countries, it has strong legal foundations, enabling a cleaner look at the impact of government backing. I argue that Australia’s scheme is well structured. I then show that while Australia has relatively low levels of VC and innovation compared with other countries, its VC activity scaled by GDP has grown following the inception of the IIF scheme, particularly increasing after 2001. The policy implication is that properly structured government support for VC funds can stimulate innovation and VC activity.

Venture Capital in Chile

A landmark study of the venture capital sector in Chile after a dozen years of successes, partial successes, and frustrating near-misses. Based on field interviews with entrepreneurs and venture capitalists. Detailed interviews and raw data available from the authors.

Venture Capital Sector in Pakistan: Ratio Analysis Approach for Financial Performance Assessment

The purpose of study is to rank the venture capital companies operating in Pakistan during the period of 2006-2009 on the base of their financial performance. Ratio analysis technique was used to rank the venture capital companies using profitability / efficiency ratios and total assets as proxies of financial performance. This study concludes that TRG Pakistan Limited is at first in ranking on the bases of return on assets (ROA), return on equity (ROE), and total assets, and at second on the base of earnings per share (EPS). AMZ Ventures Limited is at first on the base of earnings per share (EPS), at second in ranking on the bases of return on assets (ROA), return on equity (ROE), and total assets. TMT Ventures Limited is third on the bases of all ratios, and total assets. This is the first attempt that was made with an objective to facilitate the students, investors and management of company with useful information regarding financial performance of all venture capital companies operating in Pakistan.

Innovation in venture capital backed clean‐technology firms in the UK

AbstractThe venture capital sector may not be supportive of radical new clean‐technology innovation: a potential concern for the UK's vision of achieving a low carbon economy.

INSTITUTIONAL BEACONS AS PATHS TO COGNITIVE LEGITIMACY: YALE, IPOS, AND THE RISE OF VENTURE CAPITAL.

Entrepreneurial activity within a sector often depends on its cognitive legitimacy, or a shared perception of its appropriateness. Building on cognitive psychology, we suggest institutional beacons as a path by which this type of legitimacy can arise. We test and find support for our theory in a study of the venture capital sector, and explore the influence of successful single venture capital investments and the Yale endowment.

Promoting Innovation: The Law of Publicly Traded Corporations

Improving economic welfare requires that societys scarce savings be allocated among proposed real investment projects in a way that appreciates the prospects of promising new innovations. Corporate and securities law help structure important elements of this process of allocation. This article sketches out an approach based upon a seemingly paradoxical analogy of a market economys overall finance process to the way a hierarchical organization gathers and processes relevant bits of information dispersed among many individuals in order to make decisions. It thereby takes advantage of important thinking in communications and organizational theory about how to make organizations sensitive to the potentialities of new information and ideas.The analysis suggests that established firms should pay out a relatively high portion of their cash flows. There should be a substantial venture capital sector and an active market for IPOs. Primary and secondary market prices should be relatively accurate. Incumbent managers of established firms should be judged in part by the medium term share price performance of their firms and poor performers should be under threat of replacement.A comparison of four moments in economic historythe United States in the 1970s and 1980s, Japan since 1995, continental Europe since the 1995, and the United States since the 1995supports these conclusions. The United States since 1995, relative to the other three moments in economic history, has had the least capital deepening and the fastest rate of growth in productivity per hour worked. It has also had, relative to the other three moments, a finance system most closely resembling what is called for here.Achieving such a system requires rigorous, effectively enforced securities disclosure and anti-fraud laws. Corporate law must leave poorly performing incumbent management vulnerable to removal by hostile tender offer, or shareholder or independent board vote. Share price based compensation must be legally practical. And there must be serious constraints on non-pro-rata distribution among shareholders of the wealth created by the firm.

Development Bank, Law and Innovation Financing in a New Brazilian Economy

This paper examines new ways of direct state intervention in Brazil's financial environment, which has a prevailing development bank (state-owned financial institution) – BNDES (National Economic and Social Development Bank). The main purpose of the article is to describe the new role and legal tools developed by BNDES to finance innovation and start up companies. The analysis shows that not only the financing of innovation has become paramount within the BNDES agenda, but also that this activity has been associated with a new rationale for intervention. Instead of taking the place of the financial market, BNDES tries to leverage the financial sector, mainly its venture capital sector. Particularly, it will examine four kinds of legal tools, which have been developed by BNDES since the beginning of the nineties to spur innovative companies. The legal tools are: (i) equity participations; (ii) credit contracts; (iii) indirect participation in private venture capital funds; and (iv) contract based on non-reimbursable resources. These legal tools not only represent a new contractual paradigm within BNDES financial operations, but also indicate a new way of public intervention. The paper claims that in financing a Brazilian knowledge based economy, BNDES has abandoned its top-down intervention strategy, adopting an iterative and dynamic kind of governance.

Inadvertent Systemic Risk in Financial Networks: Venture Capital and Institutional Funds

High-profile financial disasters have been linked to risks being less diversified than expected. Some of these involve financial agents acting on behalf of source-investors. Such a financial-agent network can be found in the venture capital sector. It has been understood that the institutional funds that invest in Venture Capital firms (“VCs”) can diversify their financial portfolio risk by investing in several VCs. But the adverse scenario remains that an institutional fund invests in more than one VC, which chooses, via syndication, to invest in the same venture. This creates less diversification than expected. The result is inadvertent systemic risk for the institutional fund. A random sampling model is developed to explore this network scenario; encompassing both the source and destination of VCs' funds. The study uses a data set of 20 UK-based VCs and 73 institutional funds, making a total of 218 investments in VCs, in the period 1993–2003. The findings reject the view that institutional funds investing in multiple VCs tend to do so such that risk is minimised via diversification; the observed pattern of relationships is worse-than-random. Risk in investment networks can be materially higher than any standard portfolio analysis would show.

The impact of institutional sources of capital upon the minority-oriented venture capital industry

Venture capital (VC) funds specializing in investing equity capital in minority-owned businesses have grown rapidly over the past decade, fueled by the willingness of major institutional investors to support this traditionally neglected niche. We investigate impacts of public pension funds upon the minority VC sector. These funds, providing over half of all capital invested in minority VCs, selectively invest, seeking to fund only those VCs likely to generate high returns. Although they attempt to pick the winners, our findings indicate that they have failed to do so. The influence of public pension funds upon the minority VCs is nonetheless real, skewing investing away from traditional practices and toward those of the venture capital mainstream. In the process, minority VCs funded by pension fund money invest in high-tech fields more than other minority-oriented VC funds do. Further, they are less likely to fund minority-owned small firms, focusing increasingly upon firms owned by nonminority Whites. Neither of these trends has resulted in increased returns. Rather, diverting minority-oriented VCs away from their traditional mission of investing in minority firms operating in a broad range of industries has resulted in lower returns over the years studied.

Capitalizing on Innovation: The Case of Japan

Japan’s industrial landscape is characterized by hierarchical forms of industry organization, which are increasingly inadequate in modern sectors, where innovation relies on platforms and horizontal ecosystems of firms producing complementary products. Using three case studies - software, animation and mobile telephony -, we illustrate two key sources of inefficiencies that this mismatch can create, all the while recognizing that hierarchical ecosystems have played a major role in Japan’s success in manufacturing-driven industries (e.g. Toyota in automobiles and Nintendo with videogames). First, hierarchical industry organizations can “lock out” certain types of innovation indefinitely by perpetuating established business practices. For example, the strong hardware and manufacturing bias and hierarchical structures of Japan’s computer and electronics firms is largely responsible for the virtual non-existence of a standalone software sector. Second, even when the vertical hierarchies produce highly innovative sectors in the domestic market, the exclusively domestic orientation of the “hierarchical industry leaders” can entail large missed opportunities for other members of the ecosystem, who are unable to fully exploit their potential in global markets. For example, Japan’s advanced mobile telecommunications systems (services as well as handsets) suffer from a “Galapagos effect”: like the unique fauna of these remote islands they are only found in the Japanese archipelago. Similarly, while Japanese anime is renowned worldwide for its creativity, there is no global Japanese anime content producer comparable to Disney or Pixar. Instead, anime producers are locked into a highly fragmented domestic market, dominated by content distributors (TV stations and DVD companies) and advertising agencies.We argue that Japan has to adopt legislation in several areas in order to address these inefficiencies and capitalize on its innovation: strengthening antitrust and intellectual property rights enforcement; improving the legal infrastructure (e.g. producing more corporate lawyers); lowering barriers to entry for foreign investment and facilitating the development of the venture capital sector.

Employment Contribution of Private Equity and Venture Capital in Europe

Over the past ten years, private equity and venture capital have played an increasingly important role in the European economy. In parallel to the increase in investments, contribution of the private equity and venture capital industry to employment in Europe has grown. Against this background, the European Ventura Capital and Private Equity Association has commissioned the Center for Entrepreneurial and Financial Studies (CEFS) at the Technische Universitat Munchen to undertake a research study on the contribution of the private equity and venture capital sector to European employment. 201 private equity and venture capital-backed companies participated in the pan-European survey. The study has found that private equity and venture-backed companies employed between 4.8 and 6.4 million people in Europe in 2004. European private equity and venture capital-financed companies created 1 million jobs between 2000 and 2004. 420,000 new jobs were created in buy-out financed companies and 630,000 new jobs in venture-backed companies within this period. Employment grew in buyout-financed companies by 2.4% and in venture-backed companies by 30.5% on average per year between 1997 and 2004.

The search for equity capital? Implications for women entrepreneurs

It is believed that women are more likely to use personal savings and other types of internal funding for business growth in preference to external financing options. The nature of, reasons for, and implications of this lesser reliance of women on external finance is an important key to understanding women's entrepreneurial activity and growth strategies. This paper examines this topic, exploring New Zealand's private equity capital market from a composite perspective investigating both supply and demand side issues. A mainly qualitative approach is used to gather data from the formal venture capital and informal equity sectors and women entrepreneurs.

Shock and Change in the German Venture Capital Market, 1995-2005

Mark Huberty, Johns Hopkins School for Advanced International Studies, The Johns Hopkins University The development of the high-technology startup sector in Germany is critical for the adjustment of the German economy to growing international competition in traditional industrial sectors. The article explores whether changes to the German venture capital financing sector in the period 1995-2005 indicate an improved development path for high-technology startup firms. Based on the volumes and structure of venture capital investments during this period, I conclude that the venture capital sector has undergone substantial change in favor of financing and supporting high-technology startup firms. However, small firm behavior suggests that even with a changed venture capital sector, the overall regulatory structure of the German economy will result in lower rates of firm success than otherwise would be expected from a resurgent venture capital market. The policy implication is that, without additional regulatory reform favoring small, high-technology enterprises, the transformation of German industry will continue to be constrained.

Venture capital in Spain: evolution, characterisation and economic impact analysis

Venture capital in Spain has a short history, but its evolution and current trends show enormous potential. This paper characterises the Spanish venture capital sector and provides data on the economic impact of venture-backed companies. First, it summarises its history from 1972 to date. Second, it provides some key figures on supply and demand for venture capital. Finally, it presents an estimation of the economic impact of venture-backed companies using an unbiased sample of the top three regions in terms of venture capital activity. The figures are then compared to a control group of similar companies financed from alternative sources. The results are very encouraging, with implications for future regional development policies.

Strategic and investment behaviour in the German and Israeli venture capital industries: a comparison with the USA

Venture capital, the financing concept that has more than a 30-year formal history in some western countries such as the USA, still remains relatively unknown in many countries. The USA and some other countries have a more mature venture capital sector dominated by investments in high technology. However, this is not the case in most other countries. Surprisingly, this is the case in countries with a strong and highly developed economy such as Germany, as well as in smaller countries with a booming high technology sector such as Israel. In both countries, little empirical work has been done to gain insights on how the venture capital industry works. By using the same research methodology as in prior US studies, this paper identifies different investment behaviours of German and Israeli venture capitalists prior to the investment decision and as well as their involvement in the strategy of the portfolio firm.

Do venture capitalists really invest in good industries? Risk-return perceptions and path dependence in the emerging European energy VC market

Venture Capital (VC) plays an important role in the commercialisation of innovation. Sectors like information and communication technologies and biotech account for two-thirds of all VC investments. Little attention has been paid to understanding how the venture capital market extends to new industries. Based on a survey of European energy technology VCs, we discuss the factors determining the emergence of a new market sector for VC investments. While there are sizeable investment opportunities, only 2–5% of all venture capital is invested in energy. Three factors can help explain differences between energy and other more popular VC sectors: the perceived risk (market adoption risk, exit risk, technology risk, people risk, and regulatory risk) of investments in energy technologies; the perceived returns in energy VC investments; in an evolutionary perspective, the maturity of energy as a VC investment sector.

Energy Venture Capital Sector Sees Renewed Interest

As venture capitalists show renewed interest in start-ups, the energy sector is attracting particular notice. Concerns about U.S. reliance on oil imports and problems such as the recent blackout appear to have sparked new interest in energy ideas. In the fourth quarter of 2003, a half-dozen emerging technology companies in the energy sector received over $37 million in funding for projects in areas including hardware and software tools for managing and optimizing power consumption, solar power technologies, oil and natural gas exploration technologies, and wind power technologies. One cloud that currently hangs over the energy venture capital sector is the recent failure by Congress to pass sweeping energy legislation, which would have included tax credits to encourage the use of wind and solar power, government funded deployment and testing of photovoltaics, a requirement for states to establish “net metering” rules, and encouragement of universally available “time-of-use” metering for all customer classes. Despite the uncertainty of a comprehensive energy bill and a recent tendency of utilities to limit or close their own venture capital units, venture and growth capital investing in the energy technology sector continues to be one of the more attractive segments of private equity investing.

Venture capital start-up co-evolution and the emergence & development of Israel's new high tech cluster

This paper provides an account of the emergence and development of a Venture Capital Industry in Israel, and the role it played in the recent successful growth of Israel's high tech cluster. The paper focuses on Israel's Venture Capital Industry, its emergence and operation during the 90s, in which period the number of VC Funds increased from 2 to over 100. The context is the transformation of Israel's high tech industry from the Defense-dominated Electronics industry of the 70s/80s to the ‘Silicon Valley’ model of the 90s characterized by large numbers of SU companies. During this period the share of high tech in manufacturing industry; and ICT's share in the Business Sector increased considerably attaining one of the highest levels worldwide. Given the importance of Venture Capital an analysis of the waves of new SU companies should be done jointly with an analysis of the emergence and development of Venture Capital (and vice-versa). The approach adopted is Evolutionary & Systemic rather than a focus on ‘the operation’ of a mature Venture Capital industry, which has been more frequent in the VC literature. We focus on the Dynamics of Venture Capital particularly of the emergence and of subsequent development of the industry. We link these with core Evolutionary concepts such as variation, selection and reproduction (Nelson 1995). The paper discusses the co-evolutionary and dynamic process involving the business sector, technology policies, venture-capitalists, individuals & Startup companies, and foreign linkages. We attempt to show that VC emergence is part & parcel of the reconfiguration of a pre-existing Electronics Industry one involving large amounts of SU and new and powerful links with global capital markets. The main conclusions and policy lessons of the paper are that specific technology policies targeted to the Venture Capital sector can be effective only to the extent that favorable background conditions exist or are created. The main groups of factors, events or sub-processes influencing the emergence process which started in 1993, and subsequent development, are: (1) favorable background conditions; (2) features of the immediate pre-emergence period (1989–92); (3) Targeted Policies which directly triggered VC Emergence (1993–98); (4) Strong VC-SU co-evolution; (5) Global Capital Market Links.