When do venture capitalists collaborate? Evidence on the driving forces of venture capital syndication

Using a sample of 2,373 unique capital contributions from 437 venture capitalists (VCs) over subsequent rounds into 961 start-ups during the period 1995–2005 in Germany we disentangle the circumstances under which lead VCs engage in syndicate relationships with partner VCs. The results indicate that syndication is more pronounced when VCs face higher risks that need to be diversified and capital burdens are larger. Moreover, we document that industry investment experience lends legitimacy to lead VCs, allowing them to enter syndicate relationships to enhance their network positions. In general, greater industry experience is associated with more syndication. Lastly, the results show that lead VCs involve new/additional partners in subsequent financing rounds to leverage their idiosyncratic skills and knowledge to improve deal selection and/or provide a better quality of managerial advice.     

Why do contracts differ between venture capital types?

The main objective of the present paper is to investigate differences in the design of contracts between venture capitalists and their portfolio firms across venture capital (VC) types. By controlling for selection effects, we focus on contract design differences which reflect differences in corporate governance approaches across VC types. To address this issue, we use a unique, hand-collected German data set consisting of all contractual details of VC investments into 290 entrepreneurial firms in the period 1990–2004. By employing various matching procedures, we show that VC types differ in their corporate governance approach vis-à-vis their portfolio firms. It turns out that independent VCs, when compared to captive VCs, use significantly more contract mechanisms which induce active intervention.     

The capital gap for small technology companies: public venture capital to the rescue?

In this paper, we analyze effectiveness of public intervention for fostering private venture-capital market in Spain. We use a sample obtained from VentureXpert database, consisting of 755 investments made by 83 Spanish public and private venture capitalists that closed at least one fund between 1997 and 2008. We compare the investments undertaken by private and public investors before and after public venture capital programs were started. We found that Spanish venture-capital market has rapidly developed in the last 10 years and that this development coincides with the establishment of public policies for encouraging technology entrepreneurship. We also found that other factors, such as previous experience of investors and size, have also contributed to fostering more high-risk investments. These results may encourage governments in other countries to start or keep working to promote private venture-capital investments.     

Why do venture capital firms exist? theory and canadian evidence

This paper investigates the role of venture capitalists. We view their “raison d’être” as their ability to reduce the cost of informational asymmetries. Our theoretical framework focuses on two major forms of asymmetric information: “hidden information” (leading to adverse selection) and “hidden action” (leading to moral hazard). Our theoretical analysis suggests four empirical predictions.1. Venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors. This suggests strong industry effects in venture capital investments. Venture capitalists should be prominent in industries where informational concerns are important, such as biotechnology, computer software, etc., rather than in “routine” start-ups such as restaurants, retail outlets, etc. The latter are risky, in that returns show high variance, but they are relatively easy to monitor by conventional financial intermediaries.2. Within the class of projects where venture capitalists have an advantage, they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe. Thus, within a given industry where venture capitalists would be expected to focus, we would also expect venture capitalists to favor firms with some track records over pure start-ups. To clarify the distinction between point 1 and point 2, note that point 1 states that if we look across investors, we will see that venture capitalists will be more concentrated in areas characterized by significant informational asymmetry. Point 2 says that if we look across investment opportunities, venture capitalists will still favor those situations which provide better information (as will all other investors). Thus venture capitalists perceive informational asymmetries as costly, but they perceive them as less costly than do other investors.3. If informational asymmetries are important, then the ability of the venture capitalist to “exit” may be significantly affected. Ideally, venture capitalists will sell off their share in the venture after it “goes public” on a stock exchange. If, however, venture investments are made in situations where informational asymmetries are important, it may be difficult to sell shares in a public market where most investors are relatively uninformed. This concern invokes two natural reactions. One is that many “exits” would take place through sales to informed investors, such as to other firms in the same industry or to the venture’s own management or owners. A second reaction is that venture capitalists might try to acquire reputations for presenting good quality ventures in public offerings. Therefore, we might expect that the exits that occur in initial public offerings would be drawn from the better-performing ventures.4. Finally, informational asymmetries suggest that owner-managers will perform best when they have a large stake in the venture. Therefore, we can expect entrepreneurial firms in which venture capitalists own a large share to perform less well than other ventures. This is moral hazard problem, as higher values of a venture capitalist’s share reduce the incentives of the entrepreneur to provide effort. Nevertheless, it might still be best in a given situation for the venture capitalist to take on a high ownership share, since this might be the only way of getting sufficient financial capital into the firm. However, we would still expect a negative correlation between the venture capital ownership share and firm performance.Our empirical examination of Canadian venture capital shows that these predictions are consistent with the data. In particular, there are significant industry effects in the data, with venture capitalists having disproportionate representation in industries that are thought to have high levels of informational asymmetry. Secondly, venture capitalists favor later stage investment to start-up investment. Third, most exit is through “insider” sales, particularly management buyouts, acquisitions by third parties, rather than IPOs. However, IPOs have higher returns than other forms of exit. In addition, the data exhibit the negative relationship between the extent of venture capital ownership and firm performance predicted by our analysis.     

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.     

Does acquiring venture capital pay off for the funded firms? A meta-analysis on the relationship between venture capital investment and funded firm financial performance

Researchers and practitioners frequently propose that venture capital (VC) is an important resource to increase the performance of funded firms, especially in environments of uncertainty. In this paper we scrutinize these theoretical propositions, following an evidence-based research approach. We synthesize 76 empirical samples on 36,567 firms. We find a small positive performance effect of VC investment on funded firm performance; however, the effect vanishes if researchers control for industry selection effects. Furthermore, we find that the performance effect mainly relates to firm growth while profitability is unaffected. We also uncover that performance effects are reduced when the funded firms are very young or very mature. In addition, studies focusing on IPO events, which constitute the majority of studies, determine a substantially smaller performance effect. We discuss theoretical implications and offer suggestions for future research on VC.     

Sounds novel or familiar? Entrepreneurs' framing strategy in the venture capital market

This study offers a theoretical perspective from which to examine entrepreneurial ventures' linguistic strategies. Drawing on the framing perspective, we introduce two concepts—novelty frames and familiarity frames—and examine how the use of these linguistic frames may influence entrepreneurial ventures' ability to obtain funding from venture capitalists (VCs) in different industry contexts. Based on a sample of 2883 U.S. information technology (IT) ventures and 5849 investment events from 2003 to 2014, we show that novelty and familiarity frames individually and interactively shape the amount of funding. We also found that industry capital intensity enhances the positive effects of familiarity frames. These findings highlight the role of entrepreneurial ventures' linguistic frames in shaping their funding opportunities.     

Public versus private venture capital: seeding or crowding out? A pan-European analysis

This paper analyzes the relationship between public and private sources of venture capital in Europe and the development of the industry, controlling for characteristics of the legal systems, in 15 European countries over the period 1990–1996. Large public participation is correlated with smaller VC industries, but analyses do not support the view that public venture capitalists are acting to seed the industry or that are they crowd-out private funds. On the contrary, public involvement seems to cause greater amounts of money to be invested in the industry as a whole. We argue that the effects of public intervention, whatever the motives, are real and probably result from demonstrating/sanctioning the social merit of venture capital and from signaling an enduring commitment to it.     

Is it worth it? The rates of return from informal venture capital investments

Despite growing interest in venture capital, there is a paucity of information on the rate of return to these investments and the limited research that is available refers almost entirely to portfolio returns for venture capital funds. The investment returns to business angels have been virtually ignored. This paper provides the first attempt to analyse the returns to informal venture capital investment using data on 128 exited investments from a survey of 127 business angel investors in the UK. The paper finds that the distribution of returns is highly skewed, with 34% of exits at a total loss, 13% at a partial loss or break-even, but with 23% showing an IRR of 50% or above. Trade sales are the main way in which business angels harvest their investments. The median time to exit for successful investments was 4 years. Large investments, large deal sizes involving multiple coinvestors, and management buyouts (MBOs) were most likely to be high-performing investments.     

Is venture capital socially responsible? Exploring the imprinting effect of VC funding on CSR practices

We study how corporate social responsibility (CSR) is guided by ownership history, specifically whether a company receives venture capital (VC) funding or not. We argue that companies that receive VC funding are less likely to adopt CSR practices due to unique VC imprinting and that temporal and investment orientation moderate this relationship. We find that VC-backed companies have poorer CSR records, which do improve over time, but at a comparatively slower rate than non-VC-backed companies. However, when VC-backed companies receive funding from VC firms that have a responsible investment orientation and a broader stakeholder view, their CSR records are significantly better. This study contributes to our understanding of imprinting boundaries and related repercussions in stakeholder management strategies.     

How does governmental versus private venture capital backing affect a firm's efficiency? Evidence from Belgium

We investigate the implications of venture capital (VC) investor type (government or private) on the operating efficiency of a sample of 515 Belgian portfolio firms up to 3 years after the investment. We find that the government VC-backed firms display significant reductions in productivity. No significant differences in efficiency are found in firms backed by private VC compared with their non-VC-backed peers. Finally, significant reductions in efficiency exist in targets of government VC compared to their non-VC-backed peers.     

Do networks of financial intermediaries help reduce local bias? Evidence from cross-border venture capital exits

Contributing to the literature on local bias and financial networks, we examine how direct and indirect network ties of financial intermediaries mitigate the effects of distance and preference for local investments. In our analysis of cross-border venture capital exits, we find that proximity within networks facilitates cross-border transactions, which suggests that network distance is an important dimension of distance in addition to its geographical and cultural dimensions. The results also suggest that network distance affects the reach and quality of mediated information: indirect ties to partners' partners, with their broad reach, facilitate the identification of investment opportunities, whereas direct ties, which have certification effects, facilitate quality assessment.     

The potential of actuarial decision models: Can they improve the venture capital investment decision?

Venture capitalists (VCs) are considered experts in identifying high-potential new ventures—gazelles. VC-backed ventures survive at a much higher rate than those ventures backed by other sources Kunkel and Hofer 1991, Sandberg 1986, Timmons 1994. Thus, the VC decision process has received tremendous attention within the entrepreneurship literature. Nonetheless, VC-backed firms still fail at a surprisingly high rate (20%). Moreover, another 20% of the VC's portfolio fails to provide any return to the VC. Therefore, there is room for improvement in the VC investment process.The three staged investment process often begins with venture screening. First, VCs screen the hundreds of proposals they receive to assess which deserve further consideration. Those ventures that survive the initial stage are then subjected to extensive due diligence. Finally, the VC and entrepreneur negotiate terms of the investment. Considering the amount of time that due diligence and negotiation of terms may take, it is imperative that VCs minimize their efforts during screening so that only those ventures with the most potential proceed to the next stage. Yet, at the same time, the screening process should also be careful not to eliminate gazelles prematurely. VCs are in a quandary. How can they efficiently screen venture proposals without unduly rejecting high potential investments? The answer may be to use actuarial decision aides to assist in the screening process.Actuarial decision aides are models that decompose a decision into component parts (or cues) and recombine those cues to predict the potential outcome. For example, an actuarial model about the VC decision might decompose a venture proposal into decisions about the entrepreneurial team, the product, the market, etc. The sub-component decisions are than recombined to reach an overall assessment of the venture's potential. Such models have been developed in a number of decision domains (e.g., bank lending, psychological evaluations, etc.) and been found to be very robust. Specifically, these models often outperform the very experts that they are meant to mimic.The current study had 53 practicing VCs participate in a policy capturing experiment. The participants examined 50 ventures and judged each venture's success potential; would the venture ultimately succeed or fail. Likewise, identical information about each venture was input into two different types of actuarial models. One actuarial model—a bootstrap model—used information factors that VCs had identified as being most important to making a good investment decision. The second actuarial model was derived by Roure and Keeley (1990). The Roure and Keeley model best distinguished between success and failure in a study of 36 high-technology ventures. The bootstrap model outperformed all but one participating VC (he achieved the same accuracy rate as the bootstrap model). The Roure and Keely model, although less successful than the bootstrap model, outperformed over half of the participating VCs.The implications of this study are that properly developed actuarial models may be successful screening decision aides. The success of the actuarial models may be attributed to their consistency across different proposals and time. The models always weight the information cues the same. VCs, as are all human decision makers, may often be biased by differing salient information cues that cause them to misinterpret or ignore other important cues. For example, a VC may overlook product weaknesses if (s)he is familiar with the entrepreneur putting forth a particular proposal. Although the current study developed a generalized actuarial model, each VC firm could create screening models that fit it's particular decision criteria. The models could then be used by junior associates or lower level employees to perform an initial screen of received venture proposals thereby freeing senior associates' time.     

When are strategic orientations beneficial for collaborative service innovation?

Despite the importance of collaborative innovation, the existing literature tends to be somewhat vague in identifying when strategic orientations are beneficial for service innovation between a focal firm and its business partners. The purpose of this study is to examine the relative effects of four strategic orientations (market, service, interaction, and learning) on collaborative service innovation performance, while considering the contextual factor of service offerings (basic installed base, maintenance, operational, and professional). Results based on survey data from 362 paired B2B firms show that learning orientation has the strongest effect on collaborative service innovation performance, and is the most effective for basic installed base services and maintenance services. In contrast, interaction orientation best supports those firms with operational services, while market and service orientations are more effective for professional services. Managers are advised to consider alternative strategic orientations individually aligned with service offerings to achieve desired collaborative service innovation outcomes.     

Gain or pain? New evidence on mixed syndication between governmental and private venture capital firms in China

I investigate the performance of mixed syndication involving both governmental and private venture capital firms (GVCs and PVCs) in the context of China. Using the data on the investments in start-ups between 1995 and 2011, I find that start-ups backed by mixed syndication in their initial financing round are less likely to survive to the next round to obtain refinancing, compared to those backed by syndication solely among PVCs. I present evidence consistent with two possible explanations of the underperformance of firms backed by mixed syndication: a potentially lower criterion of selecting portfolio companies when led by PVCs and less complementary resources but higher coordination cost in mixed syndication. The empirical results continue to hold when using instrumental variables, propensity score matching analysis and the quasi-maximum likelihood estimation method for mitigating the potential selection bias and endogeneity problems.     

Assessing the impact of public venture capital programmes in the United Kingdom: Do regional characteristics matter?

This article analyses whether and how the impact of publicly backed venture capital (VC) funds varies across regions, depending on their level of innovation intensity and in comparison with private VC funds. Building on agency and human capital theories, the authors distinguish public VC funds into regional and governmental types, to assess potential differences in the performance of their portfolio companies. The analyses rely on a sample of 628 VC-backed companies in the United Kingdom during 1998–2007, and they confirm that regional characteristics matter for rigorous assessments of the effectiveness of public VC programmes.     

Do Consumers Discriminate Against Foreign Companies Even When They are Green?

The international business literature has long investigated the role of corporate environmentalism, or “going green,” in business. However, this research has been limited regarding the dynamics of a firm's eco-friendly image and consumers' intention to purchase the firm's products in light of the consumer's complex social viewpoint and how that eco-friendly image is perceived. This limitation is due in part to the complex nature of the eco-friendly image-purchase intention relationship, especially when taking into account the consumers' identification with the firm, as well as the role of consumer ethnocentrism. Through the use of an experimental survey, we found differences between countries and the role of the firm's eco-friendly image and consumer ethnocentrism. In particular, an eco-friendly image was positively related to identification with the firm in a German company sample. The findings also show that this identification mediates the effect of eco-friendly image on purchase intention. Consumer ethnocentrism significantly moderated the effect of this identification on purchase intention as well in the Chinese company sample. Implications for managers of multinational enterprises are discussed, as are avenues for future research.