Venture Capitalist Involvement Research Articles

The short-run performance of JASDAQ companies and venture capital involvement before and after flotation

This study revealed that the level of venture capitalist involvement in the pre-flotation as well as the post-flotation period influenced the short-run performance of JASDAQ companies in Japan. We detected that JASDAQ companies differed in several ways from NASDAQ and EASDAQ companies. JASDAQ companies tended to be larger in size. Moreover, JASDAQ companies were older than NASDAQ or EASDAQ companies when they selected an initial public offering (IPO). In part, the IPO decision was influenced by the subsequent desire of owners to realize capital gains and exit via personal share sales. Further, we found that JASDAQ companies with high levels of venture capital investment reported inferior short-run performance with regard to share value.

The Level and Nature of Venture Capitalist Involvement in Their Portfolio Companies: A Study of Three European Countries

This research was funded in part by the Center for International Business Research, University of South Carolina.

When do venture capitalists add value?

Venture capitalists functioning as lead investors and the entrepreneur-CEOs of their portfolio companies responded to questionnaire surveys that asked them to rate the venture capitalists' involvement in the ventures. The perceived effectiveness of the investor's involvement weighted by its perceived importance was used as a proxy for the investor's value to the venture. The survey was administered in the early part of 1988. Eighty percent of venture capitalists and 85% of entrepreneurs surveyed responded; in all, 51 matched pairs of lead investor-CEO surveys were completed and returned. Over 50 hours of interviews were also conducted to help clarify information derived through the surveys. CEOs and venture capitalists rated the nature and intensity of their interaction as well as the performance of the venture over a one-year period. CEOs also provided data on strategy, level of innovation, environmental uncertainty, and their level of experience. Regression analyses indicated that a significant portion of variation in the value of venture capitalist involvement was explained by these factors. Specifically, the greater the innovation pursued by the venture, the more frequent the contact between the lead investor and the CEO, the more open the communication, and the less conflict of perspective in the venture capitalist-CEO pair, the greater was the value of the involvement. Neither the stage of the venture nor the CEO's experience had a significant impact on value added. The value of venture capitalists' involvement was also strongly positively correlated with venture performance. The implications for the venture capitalists include the following: (1) the value of involvement varies with circumstances; (2) the most effective venture capitalists are those who maintain frequent, open communications while minimizing conflict; (3) opportunities exist for adding value in all venture stages; and (4) both experienced and inexperienced CEOs can benefit. For entrepreneurs, three key findings are: (1) because venture capitalists can add value beyond the money supplied, choosing the right one at the outset is very important; (2) once in, it is important to keep communication channels open; and (3) high innovation ventures benefit most from venture capitalist involvement. The results are important because they provide insight into controllable circumstances that impact the value of venture capitalist involvement in their portfolio companies. Given the general economic conditions now facing entrepreneurs and the degree of cut-throat competition in the venture capital industry, such information may prove extremely useful to both as they plan strategies for the 1990s.

Venture capitalists' involvement in their investments: Extent and performance

Venture capitalists responded to a questionnaire that asked them to identify their degree of involvement in a number of activities for a funded venture as well as other characteristics of the venture, including its performance. The three-page questionnaire was distributed to a sample of 350 venture capitalists during December 1986 and February 1987. In all, 62 questionnaires (18%) were completed and returned. The results indicated that venture capitalists were involved most—compared to the entrepreneur—in the financial aspects of the venture. The activity that had the highest degree of involvement was serving as a sounding board to the entrepreneur. The lowest degree of involvement occurred in those activities concerning the ongoing operations. Factor analysis on involvement patterns in the venture activities identified four distinct areas of involvement: development and operations, management selection, personnel management, and financial participation. The venture capitalists indicated that if they could change their degree of involvement, overall they would have done so only slightly. It was evident, however, that they would have increased their involvement in those activities requiring a minimal time commitment, such as formulating business strategy or marketing plans, or serving as a sounding board to the entrepreneur. It was evident that they would have decreased their involvement in activities that required substantial time commitment, such as developing production or service techniques, selecting vendors and equipment, or soliciting customers or distributors. Perhaps the most important result was the identification of three distinct levels of involvement adopted by venture capitalists: 1) Laissez Faire involvement, in which the venture capitalists exhibited limited involvement; 2) Moderate involvement, in which venture capitalists exhibited moderate involvement; and 3) Close Tracker involvement, in which venture capitalists exhibited more involvement than the entrepreneur in a majority of the identified activities. Because tests regarding the venture firms, the products or services in relation to the market, and management team characteristics did not significantly explain why the three distinct types of venture capitalist involvement emerged, it appears that venture capitalists exhibited different involvement levels solely because they elected to do so. Tests also indicated that the difference in the performance level of the ventures among the three groups was statistically insignificant. Regression analyses indicated that for each of the three types of involvement, involvement in various activities had different correlations with performance. Among Laissez Faire involvement ventures, developing the professional support group had a positive correlation with venture performance. Among Moderate involvement ventures, monitoring operations had a positive correlation with venture performance while involvement at the strategic level and in searching for management candidates exhibited negative correlations. Finally, among Close Tracker involvement ventures, negotiating employment terms with management had a positive correlation with performance, while searching for management candidates exhibited a negative correlation. It is interesting that searching for management candidates in both the Moderate and Close Tracker ventures had a negative correlation with venture performance. These results are important because they show that depending on the involvement types selected by venture capitalists, different involvement strategies in the various activities should be more suitable. If venture capitalists recognize this they can adopt more appropriate strategies, which may lead to more successful ventures.