National distances,international experience,and venture capital investment performance

This study examines how the performance of cross-border venture capital investments is affected by national institutional and cultural distances between the environments of venture capitalists (VCs) and investee ventures. We propose that institutional and cultural distances will decrease VCs' effectiveness in conducting venture capital activities and negatively affect investment performance in terms of exit success, and obtain supportive evidence while controlling for geographic distance. We further analyze how VCs can use their international experience to mitigate the negative consequences of national distances. We find that while broad international experience in diverse countries attenuates the deleterious effects of institutional distance in a significant way, it does not have a similar impact in attenuating the negative effects of cultural distance.     

Venture capitalists' decision criteria in new venture evaluation

What criteria do venture capitalists use to make venture investment decisions? The criteria venture capitalists use to make their venture investment decisions are of interest for several reasons. First, venture capitalists are conspicuously successful in their investment decisions. The success rate of venture capital-backed ventures is significantly higher than the success rate of new ventures generally (Dorsey 1979: Davis and Stetson 1984). A better understanding of the criteria used could lead to a better understanding of the reasons for this success.Second, a better understanding of the criteria for successful new ventures could lead to an improvement in the success rate of new ventures. Although there is no clear agreement on the precise rate, the failure rate among new ventures is generally viewed as significantly higher than the average failure rate (Dun and Bradstreet 1984; Van de Ven 1980; Shapero 1981).Finally, venture capitalists' investment criteria are of enormous import to entrepreneurs seeking venture funding. Such entrepreneurs require a significant infusion of capital in order to grow their businesses, and knowledge of the criteria sought by venture capitalists can aid entrepreneurs in gaining the necessary financing.This study attempts to uncover the criteria used by venture capitalists through semistructured interviews and verbal protocol analysis of venture capitalists' evaluations of actual venture proposals. Sixteen verbal protocols—in which the participants “think aloud” as they review business proposals— were made of venture capitalists' venture evaluation decisions.The findings of this study suggest that venture capitalists screen and assess business proposals very rapidly: the subjects in this study reached a GO/NO-GO decision in an average of less than six minutes on initial screening and less than 21 minutes on proposal assessment. In venture capitalists' initial proposal screening, key criteria identified include fit with the venture firm's lending guidelines and the long-term growth and profitability of the industry in which the proposed business will operate. In the second stage of proposal assessment, the source of the business proposal also played a major role in the venture capitalists' interest in the plan, with proposals previously reviewed by persons known and trusted by the venture capitalist receiving a high level of interest.In addition to the specific criteria identified and how they were used in reaching GO/NO-GO decisions, the findings of this study also were surprising for the lack of importance venture capitalists attached to the entrepreneur/entrepreneurial team and the strategy of the proposed venture during these early stages of the venture evaluation process.     

The role of venture capital in financing small business

Venture capital is a primary and unique source of funding for small firms because these firms (with sales and/or assets under $5 million) have very limited access to traditional capital markets. Venture capital is a substitute, but not a perfect substitute, for trade credit, bank credit, and other forms of financing for small firms. Small businesses are not likely to be successful in attracting venture capital unless the firms have the potential to provide extraordinary returns to the venture capitalist.This study provides an analysis of a survey of venture capital firms that participate in small business financing. The survey participants are venture capital firms that were 1986 members of the National Venture Capital Association (NVCA), the largest venture capital association in the United States.The average size of the venture capital firms responding to the survey is $92 million dollars in assets, with a range from $600 thousand to $500 million. Twenty-three percent of the respondents have total assets below $20 million, and 27% have assets above $100 million.The venture capitalists' investment (assets held) in small firms delineate the supply of venture capital to small firms. Sixty-three of the 92 venture capitalists' have more than 70% of their assets invested in small firms.The venture capitalists were asked how their investment plans might change with changes in the tax law that were projected in the spring of 1986. Fifty-four percent expected to increase their investments in small firms, and 38% did not expect to change these activities.Venture capitalists are very selective in allocating their resources. The average number of annual requests that a venture capitalist receives is 652, and the median number is 500: only 11.5 of the respondents receive more than 1,000 proposals per year.     

Institutional dimensions and conflict resolution strategy in international joint ventures: An empirical examination

This study examines the impact of the host‐country institutional structures on the choice of conflict resolution strategy in the international joint venture (IJV). Using the survey method and relying on multiple regression, we demonstrate that there is a statistically significant relationship between institutional pillars and the choice of conflict resolution strategy in the international joint venture in the context of Ghana. In particular, we demonstrate that legalistic and forcing conflict resolution strategies are influenced by the regulative institutional pillar, while compromising and problem‐solving conflict resolution strategies are impacted by normative and cognitive institutional pillars. The multigrouping analysis results show that the views and the choice of foreign partners on conflict resolution strategy differ from that of the local partners to the IJV. This study fills the gap by empirically testing the conflict resolution strategies of firms in relation to the role of regulative, normative, and cognitive institutional pillars of the host country.     

Syndicated investments by venture capital firms: A networking perspective

The networking of 464 venture capital firms is analyzed by examining their joint investments in a sample of 1501 portfolio companies for the period 1966–1982. Some of the factors that influence the amount of networking are the innovativeness, technology, stage, and industry of the portfolio company. Using the resource exchange model, we reason that the relative amount of networking is explained primarily by the degree of uncertainty associated with an investment rather than by the sum of money invested.Among the findings of our study about venture capitalists are the following:The top 61 venture capital firms that managed 57% of the pool of venture capital in 1982 had an extensive network. Three out of four portfolio companies had at least one of the top 61 venture capital firms as an investor. Those top 61 firms network among themselves and with other venture capital firms. Hence they have considerable influence.Sharing of information seems to be more important than spreading of financial risk as a reason for networking. There is no difference in the degree of co-investing of large venture capital firms—those with the deep pockets—and small firms. Furthermore, where there is more uncertainty, there is more co-investing, even though the average amount invested per portfolio company is less. That, we argue, is evidence that the primary reason for co-investing is sharing of knowledge rather than spreading of financial risk. Venture capital firms gain access to the network by having knowledge that other firms need.It is likely that there will be increasing specialization by venture capital firms. Knowledge is an important distinctive competence of venture capital firms. That knowledge includes information such as innovations, technology, and people in specific industry segments. Among the portfolios of the top 61 venture capital firms are ones with a concentration of low innovative companies, others with a concentration of high innovative technology companies, and others with a no particular concentration. As technology changes rapidly and grows more and more complex, we expect that venture capitalists will increasingly specialize according to type of companies in which they invest. Only the largest firms with many venture capitalists will be like “department stores,” which invest in all types of companies. The smaller firms with only a few venture capitalists will tend to be more like “boutiques” which invest in specific types of companies, or in specific geographical regions around the world.We think that the networking of venture capital firms has the following implications for entrepreneurs:Entrepreneurs should seek funds from venture firms that are known to invest in their type of product. It speeds the screening process. If the venture capital firm decides to invest, it can syndicate the investment through its network of similar firms. And after the investment has been made, the venture capital firms can bring substantial expertise to the entrepreneur's company.Entrepreneurs should not hawk their business plans indiscriminately. Through their networks, venture firms become aware of plans that have been rejected by other firms. A plan that gets turned down several times is unlikely to be funded. Thus it is better to approach venture capital firms selectively.The extensive network of the leading venture capital firms probably facilitates the setting of a “market rate” for the funds they invest. The going rate for venture capital is not posted daily. Nevertheless, details of the most recent deals are rapidly disseminated through venture capitalists' networks. Hence, that helps to set an industry-wide rate for the funds being sought by entrepreneurs.Lastly, we give the following advice to strategic planners:Venture capital firms share strategic information that is valuable to others outside their network. Since they often invest in companies with emerging products and services, venture capitalists gather valuable strategic information about future innovations and technological trends. Thus, strategic planners should tap into venture capitalists' networks, and thereby gain access to that information. It is sometimes information of the sort that can revolutionize an industry.     

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.     

Venture capitalists and serial entrepreneurs

Habitual entrepreneurship is receiving growing attention, much of which has focused on entrepreneurs who have started more than one venture. This paper examines the importance of habitual entrepreneurs to the venture capital industry, with particular emphasis on those who have exited from an initial investment in the venture capitalist's portfolio, termed serial entrepreneurs. As venture capital markets mature, increasing numbers of entrepreneurs are likely to exit from their initial enterprises, creating a pool of entrepreneurs with the potential for embarking on subsequent ventures. Venture capitalists making investments may invest both in entrepreneurs starting new ventures and those who purchase a venture through a management buy-out or buy-in. On this wider basis, the paper develops a classification of types of serial venture. A number of issues are raised for venture capitalists, notably the relative attractiveness of reinvesting in exited entrepreneurs and the policy they adopt in tracking and assessing such individuals.The paper addresses venture capitalists' perspectives on investing in serial entrepreneurs based on a representative sample of 55 UK venture capitalists (a response rate of 48.7%, and a follow-up survey of those who had more extensive experience of serial entrepreneurs (23 respondents). The results of the survey show that despite a strong preference for using an entrepreneur who had played a major role in a previous venture, the extent to which exiting entrepreneurs are funded from their own portfolio again is limited, though there is more extensive use of such individuals in a consultancy capacity. In screening entrepreneurs exiting from previous ventures for subsequent investments, venture capitalists scored attributes relating to commercial awareness, experience in a particular sector, and personal ambition of the entrepreneur most highly.Venture capitalists do make extensive use of serial entrepreneurs who have exited from other venture capitalists' portfolios, primarily to lead management buy-ins. Indications from the survey are that venture capitalists rarely assess entrepreneurs formally at the time of exit and that it is unusual to maintain formal links with entrepreneurs after they have exited. These apparent shortcomings suggest that perhaps investment opportunities are being missed. Those venture capitalists preferring serial entrepreneurs generally had a larger volume of funds under investment and were rather older than those venture capitalists who do not prefer to use serial entrepreneurs, reflecting the possibility that longer established venture capitalists have had more opportunity and experience in relation to second-time entrepreneurs.Investment appraisal factors were subject to a principal components analysis to identify underlying dimensions/relationships between them. With respect to the general investment appraisal factors, five factors were identified. Two factors were related to track record; one of these reflected ownership experience, while the other represented management experience. The third factor was related to personal attributes such as age, knowledge, and family background. The fourth factor represented links to the funding institution, and the final factor (a single variable factor) concerned financial commitment. The principal components analysis for screening factors on management buy-ins produced a single factor comprising all variables. These factors were then subject to a multivariate analysis of variance (MANOVA), with preference for use of a serial entrepreneur as the independent variable. The results suggest that there are significant differences between venture capitalists who prefer serial entrepreneurs and those who do not in respect to their business ownership experience, the length of their entrepreneurial careers, and the number of their previous ventures.The results of the study have implications for practitioners. First, the findings emphasize the importance of not considering previous venture experience in isolation but in the context of other key investment criteria. Second, the lack of strongly greater performance from serial, versus novice, entrepreneurs further emphasizes the care to be taken in assessing experienced entrepreneurs. Third, the relatively low degree of formal and rigorous post-exit assessment and monitoring by venture capitalists suggests that important opportunities to invest in experienced entrepreneurs may be missed.     

The Size of the Informal Venture Capital Market in the United Kingdom

Despite its undoubted importance to the financing of entrepreneurial ventures, there are few reliable measures of the size of the informal venture capital market. This paper reviews three methods used to generate such estimates – market-based approaches, firm-based approaches and the capture-recapture approach – and develops an alternative approach that is based on scaling up from the visible segment of this market represented by business angel networks. This methodology is applied to provide the first formal estimate of the size of the informal venture capital market in the United Kingdom. Informal venture capital investment is shown to broadly equate to the amount of institutional venture capital provided to start-up and early stage ventures. Reflecting the smaller average size of investments in the informal venture capital market, however, eight times as many businesses raise finance from business angels than from institutional venture capital funds.     

The interplay of need and opportunity in venture capital investment syndication

This study examines the syndication of investments novel to a VC firm as a function of the firm's need and opportunity to do so. We distinguish two types of uncertainty that firms face when considering novel investments: egocentric, pertaining to making the right decisions, and altercentric, pertaining to being evaluated as a potential partner on the investment. Whereas the former increases the firm's need to syndicate the investment, the latter reduces the firm's opportunity to do so, making it contingent upon the firm's status and reputation for attracting potential partners. Using data on first-round venture capital investments, we find that novel investments are more likely to be syndicated. Moreover, this relationship is stronger for firms with higher status and weaker for firms with higher reputation. These results highlight a relational aspect of uncertainty, inherent in a particular VC firm — investment dyad, and suggest that status and reputation play different roles in aligning the need and opportunity to syndicate novel investments.     

When are venture capital projects initiated?

This paper examines how public market information relates to the initiation of venture capital projects. Analysis of venture capital investments in the U.S. between 1980 and 2007 indicates that venture capitalists tend to defer new investment projects in target industries with substantial market volatility. This delay effect of market volatility is reduced if the target industry experiences high sales growth or if competition among venture capitalists is intense in the target industry. The paper provides further evidence to corroborate the view that venture capitalists rationally respond to market shifts in their investment decisions.     

Venture Capital Investment Duration

This paper examines cross‐country evidence on the duration of venture capital (VC) investment. We formulate a theory of VC investment duration based on the idea that venture capitalists exit when the expected marginal cost of maintaining the investment is greater than the expected marginal benefit, and thereby relate VC investment duration to entrepreneurial firm characteristics, investor characteristics, deal characteristics, and institutional and market conditions. VC investment duration data in Canada and the United States lend strong support to the theoretical predictions developed herein.     

Doing business in Vietnam

This article examines the opportunities and challenges of doing business in Vietnam. We focus on the seven‐year development process of the venture capital industry in Vietnam as an indicator of the long‐term process of creating and managing business investments there. Although there are many lucrative business opportunities in Vietnam, there are also significant challenges that must be carefully analyzed before making an investment. Challenges include finding quality investments, long payback periods, a lengthy and expensive process to develop a management team, and significant misunderstandings because of cultural differences between Western and Vietnamese investors. © 2001 John Wiley & Sons, Inc.     

制度学习、网络中心性和市场进入——跨国风险资本在华投资的实证研究

在我国风险投资市场不断繁荣而且跨国风险投资大量涌进的背景下,本文主要运用清科数据库2001年1月1日到201 0年1 2月31日的数据进行分析,研究发现跨国风险投资机构的网络中心性对"制度学习一市场进入"的关系具有中介作用。跨国风险投资机构不同的联合投资网络中心性对制度学习正向影响市场进入的影响作用不同,其中中介中心性的影响作用最大,表明跨国风险资本充当其他风险投资机构网络联结的中介具有重要的作用。在此基础上,本研究对跨国风险投资机构和本土风险投资机构的实践及联合投资网络的运作提出相应的建议,以期推动我国风险投资产业的有序发展。     

风险投资国际化影响因素研究综述

风险投资长期以来被视为是一项高度本土化的行为,但是近年来越来越多的风投机构开始走出国门进行远距离的跨境投资。这一现象引起了学者们的极大兴趣,许多学者开始致力于考察跨境风险投资的动因,即为什么本土化特征如此明显的风险资本开始热衷于进行跨越国境的远距离投资。尽管相关研究近几年才刚刚开始,但已迅速成为学术研究的热点。文章从国家环境因素、社会网络和风投机构主体因素三个层次,对风险投资国际化影响因素的最新文献进行了梳理和评述,并在此基础上对未来研究进行了展望。     

Unpacking Institutional Distance: Addressing Human Capital Development and Emerging‐Market Firms’ Ownership Strategy in an Advanced Economy

As latecomers to global business competition, emerging‐market multinational companies (EMNCs) utilize cross‐border mergers and acquisitions (M&As) to quickly acquire strategic assets, resulting in an improved competitive position. Advanced markets with well‐established firms and well‐developed market‐supporting institutions become particularly important destinations for EMNCs’ foreign operations. Institutional distance, which represents conflicting legitimacy requirements between the host and home institutional environments, is expected to be negatively associated with the foreign acquirer's ownership position. The current study examines a sample of EMNCs’ cross‐border M&As in the United States between 2005 and 2011 and reveals the unique nature of EMNCs’ ownership strategies. Taking both formal and informal institutions into consideration, our findings suggest that EMNCs originating in countries with lower levels of human capital development may have more urgency in seeking ownership control in advanced markets and are less influenced by the negative association of institutional distance in their ownership strategy. © 2016 Wiley Periodicals, Inc.     

Exploring country-level institutional arrangements on the rate and type of entrepreneurial activity

This study introduces a novel multidimensional measure of the entrepreneurial environment that reveals how differences in institutional arrangements influence both the rate and the type of entrepreneurial activity in a country. Drawing from institutional theory, the measure examines the regulatory, normative, and cognitive dimensions of entrepreneurial activity, and introduces a novel conducive dimension that measures a country's capability to support high-impact entrepreneurship. Our findings suggest that differences in institutional arrangements are associated with variance in both the rate and type of entrepreneurial activity across countries. For the formation of innovative, high-growth new ventures, the regulative environment matters very little. For high-impact entrepreneurship an institutional environment filled with new opportunities created by knowledge spillovers and the capital necessary for high-impact entrepreneurship matter most.     

Distributing Start‐Up Equity: A Theoretical Foundation for an Emerging Practice

We use agency theory to model equity division in venture capital financing with three complementary value‐creation factors—the entrepreneur's effort, the venture capitalist's advising/monitoring service, and the investment amount. While considering that investors often base their funding decisions on gut feeling, even as they employ rational decision‐making processes, we derive closed‐form expressions for optimal ownership sharing. Our findings provide theoretical explanation to support the recent call for practitioners to allocate ownership equity based on the relative potential contributions of the entrepreneur and the venture capitalist to generate value for the new investment prospect.     

Chinese venture investments in the United States, 2010–2017

This article contributes to the understanding of Chinese venture investors in the United States by comprehensively measuring the amount and type of venture investments coming to the United States from China. Venture activity is examined by focusing on the number of investments made by venture capital funds, both U.S.‐ and China‐based that include Chinese corporations undertaking corporate venture capital (CVC). Chinese participation in venture funding of United States emerging companies increased from 21 investments in 2010 to 407 in 2016 and 2017. Venture capital funds account for 78% of the investment activity, with Chinese CVC undertaking 22% of the investments. We contribute to the literature of CVC by providing definitions of three specific types of investing firms: corporate funds, strategic investors, and strategic partnerships. In addition, we provide data and examine the motivations of Chinese firms forming strategic partnerships with United States startups.     

Publicly traded venture capital funds: implications for institutional “fund of funds” investors

Institutional investors supply the bulk of the funds which are used by venture capital investment firms in financing emerging growth companies. These investors typically place their funds in a number of venture capital firms, thus achieving diversification across a range of investment philosophy, geography, management, industry, investment life cycle stage and type of security. Essentially, each institutional investor manages a “fund of funds,” attempting through the principles of portfolio theory to reduce the risk of participating in the venture capital business while retaining the up-side potential which was the original source of attraction to the business. Because most venture capital investment firms are privately held limited partnerships, it is very difficult to measure risk adjusted rates of return on these funds on a continuous basis.In this paper, we use the set of twelve publicly traded venture capital firms as a proxy to develop insight regarding the risk reduction effect of investment in a portfolio of venture capital funds, i.e., a fund of funds. Measurements of weekly total returns for the shares of these funds are compared with similar returns on a set of comparably sized “maximum capital gain” mutual funds and the daily return of the S&P 500 Index. A comparison of returns on an individual fund basis, as well as a correlation of daily returns of these individual funds, were made. In order to adjust for any systematic bias resulting from the “thin market” characteristic of the securities of the firms being observed, the Scholes-Williams beta estimation technique was used to reduce the effects of nonsynchronous trading.The results indicate that superior returns are realized on such portfolios when compared with portfolios of growth-oriented mutual funds and with the S&P 500 Index. This is the case whether the portfolios are equally weighted (i.e., “naive”) or constructed to be mean-variant efficient, ex ante, according to the capital asset pricing model. When compared individually, more of the venture funds dominated the S&P Market Index than did the mutual funds and by much larger margins. When combined in portfolios, the venture capital funds demonstrated very low beta coefficients and very low covariance of returns among portfolio components when compared with portfolios of mutual funds. To aid in interpreting these results, we analyzed the discounts and premia from net asset value on the funds involved and compared them to Thompson's findings regarding the contribution of such differences to abnormal returns. We found that observed excess returns greatly exceed the level which would be explained by these differences.The implications of these results for the practitioner are significant. They essentially tell us that, while investment in individual venture capital deals is considered to have high risk relative to potential return, combinations of deals (i.e., venture capital portfolios) were shown to produce superior risk adjusted returns in the market place. Further, these results show that further combining these portfolios into larger portfolios (i.e., “funds of funds”) provides even greater excess returns over the market index, thus plausibly explaining the “fund of funds” approach to venture capital investment taken by many institutional investors.While the funds studied are relatively small and are either small business investment companies or business development companies, they serve as a useful proxy for the organized venture capital industry, despite the fact that the bulk of the funds in the industry are institutionally funded, private, closely held limited partnerships which do not trade continuously in an open market. These results demonstrate to investors the magnitude of the differences in risk adjusted total return between publicly traded venture capital funds and growth oriented mutual funds on an individual fund basis. They also demonstrate to investors the power of the “fund of funds” approach to institutional involvement in the venture capital business. Because such an approach produces better risk adjusted investment results for the institutional investor, it seems to justify a greater flow of capital into the business from more risk averse institutional investment sources. This may mean greater access to institutional funds for those seeking to form new venture capital funds. For entrepreneurs seeking venture capital funds for their young companies, it may also mean a lower potential cost of capital for the financing of business venturing. From the viewpoint of public policy makers interested in facilitating the funding of business venturing, it may provide insight regarding regulatory issues surrounding taxation and the barriers and incentives which affect venture capital investment.     

The double impact of institutions: Institutional spillovers and entrepreneurial activity in the solar photovoltaic industry

We investigate whether and when institutional spillovers, i.e., institutional effects across national borders, drive domestic entrepreneurial activity. Drawing on data on venture capital (VC) investments in the solar photovoltaic industry, we provide evidence for institutional spillovers and demonstrate that they are moderated by the presence of domestic institutions and the institutional distance between domestic and foreign policy schemes. By showing that domestic institutions not only influence entrepreneurial activity directly, but also facilitate spillovers, our findings demonstrate a double impact of institutions. Overall, we contribute to the literatures on the drivers of VC investments, institutions and entrepreneurship, and environmental entrepreneurship.