Angels and non-angels: Are there differences?

The market for informal venture capital is an elusive and nearly invisible source of financing for entrepreneurial ventures. This market consists of a diverse set of high net worth individuals (business angels) who invest a portion of their assets in high-risk, high-return entrepreneurial ventures. The emerging consensus of the characteristics of the individual investor is that of a well-educated,middle-aged individual with considerable business experience and a substantial net worth. These informal investors appear to prefer investing in the early start-up stage of the venture and, if given a choice, prefer that their investments be located close to home. One consequence of this consensus is the tendency to assume that the traits of these business angels are as tightly clustered around the norm as are the traits of venture capital funds. They are not. In terms of their competence in the many areas of venture investing, these Individual investors range from the successful, cashed-out entrepreneur on the one hand to individuals with little or no experience with venture investing on the other. At the same time, little is known about the characteristics of high net worth individuals who never ventured where angels dare to tread, or about these non-angels' propensity to join the fold. Thus, this study seeks to fill the void by examining the characteristics of high net worth individuals regardless of their investment history or their interest in venture investing.An analysis of the data reveals three groups of high net worth Individuals: business angels with experience investing in entrepreneurial ventures, interested potential investors with no venture investment history but who express a desire to enter the venture investment market, and uninterested potential investors who under no circumstances would consider investing in entrepreneurial ventures as part of their investment strategy. Business angels and potential investors (both the interested and non-interested segment) share similar views about the economic significance of the entrepreneur and the difficulty in securing the equity capital for development of the venture. As the issues move from the general to the specific, divergence in investment attitudes takes place among the two groups, but this divergence is in terms of magnitude or intensity, rather than in contrasting or opposing views of the process. The potential investor tends to view investing in entrepreneurial ventures on a smaller scale than the active investor, especially in terms of the dollar amount committed to any one investment. While the business angel is more interested than the potential investor across all stages of financing, the interest for both groups increases as the type of financing progresses from the seed stage to expansion financing. In contrast, the potential investor is more likely to seek diversification as a motivation for venture investing than their angel counterparts.The potential investor pool is segmented into those potential investors who appear willing to take on the role of business angels and those individuals who have no desire to participate in the venture market. For the interested group to increase their interest in providing venture capital, these potential investors want assistance in monitoring the performance of the venture investment, followed by assistance in pricing and structuring. Both of these resources relate more to the technical aspects of venture investing and Indicate that these are the areas where the potential investor is least likely to have expertise. Other resources, such as finding and evaluating the investment opportunity, appear to represent less of a stimulus for the potential investor. In many respects, interested potential investors act like business angels across several dimensions. Both consider the later stages of the development of the venture as the preferred stage to invest. The business angel and interested potential investor prefer investments to be located relatively close to their primary residence and share similar views on the amount of the investment portfolio to allocate to venture investing. Where the interested potential investor and business angel clearly differ is on the scale of the commitment and the motivation for investing. The potential investor will commit a smaller dollar amount to any one venture, is more inclined to participate with other investors, and is more apt to see venture investing as a diversification strategy than is the seasoned business angel.     

International perspectives on the supply of informal venture capital

Despite major changes in the number and range of sources of finance for new and small ventures in the United Kingdom in recent years, there continues to be a shortage of risk capital for ventures actively seeking external equity finance. In the United States the informal venture capital market plays a major role in filling this equity gap, particularly in the early stages of venture development.However, there is little comparable information on the size of the informal venture capital pool in the United Kingdom or other European economies, despite recent recognition that the apparent underdevelopment of this market in the U.K. represents a major barrier to the development and growth of new ventures. This paper, therefore, presents the first analysis of the informal venture capital market in the U.K. and compares the characteristics and attitudes of U.K. informal investors with those in the U.S.The data reported in this paper have been obtained from a combination of postal survey and snowball sample techniques that generated useable information from 86 informal investors. Informal investors are playing an important role in venture financing in the U.K. in three ways: they make small scale investments in new and early stage ventures, where the equity gap is most significant; they are more permissive in their financing decisions than the formal venture capital industry in terms of having lower rejection rates, longer exit horizons, and lower target rates of return; and they invest locally and can thereby close the regional equity gap arising from the overconcentration of venture capital investment in the core South-East region in the U.K.In terms of demographics, U.K. informal investors share many of the characteristics of North American informal investors: they are predominantly male, with an entrepreneurial background, financially well-off without being super-rich, and identify investment opportunities from friends and business associates. There are a number of key differences, that may be attributable to differences in contextual factors such as personal tax regimes, regulatory environments, wealth distribution, and the structure of the formal venture capital and IPO markets. For example, U.K. informal investors are significantly older than those in the U.S. reflecting the influence of higher U.K. tax rates on the rate of capital and wealth accumulation.More generally, in comparison to U.S. investors, U.K. informal investors: have more investment opportunities brought to their attention; seriously consider more proposals but invest in no more opportunities; operate independently with syndication and joint investment relatively uncommon, reducing the average total investment per financing round available to ventures; fail to identify entrepreneurs themselves as a primary source of information on investment opportunities; have higher rate of return and capital gains expectations; are slightly less patient investors; and are rather less satisfied with the overall performance of their informal investment portfolios, reflecting intercountry and intertemporal variations in investment climate and conditions. It appears, therefore, that the general inefficiency of the informal capital market identified by Wetzel (1987) (which reflects the invisibility of informal investors, the fragmented nature of the market, and the imperfect channels of communication between investor and entrepreneur) is compounded in the U.K. case. The extent to which this reflects contextual differences on the one hand or simply a slower developmental process in the U.K. will only be common methodological basis. Based on the evidence presented in this paper, however, a key conclusion is that the information networks available to U.K. informal investors are less effective than those in North America, and in particular appear to contain lower quality information and a higher degree of redundant information. Specific forms of intervention in the market by, for example, stimulating the flow of information through the promotion of informal investment networking and brokerage services along the lines of U.S. and Canadian examples such as VCN and COIN therefore appear defensible.     

The informal venture capital market: Aspects of scale and market efficiency

Risk capital is a resource essential to the formation and growth of entrepreneurial ventures. In a society that is increasingly dependent upon innovation and entrepreneurship for its economic vitality, the performance of the venture capital markets is a matter of fundamental concern to entrepreneurs, venture investors and to public officials. This article deals with the informal venture capital market, the market in which entrepreneurs raise equity-type financing from private investors, (business angels). The informal venture capital market is virtually invisible and often misunderstood. It is composed of a diverse and diffuse population of individuals of means; many of whom have created their own successful ventures. There are no directories of individual venture investors and no public records of their investment transactions. Consequently, the informal venture capital market poses many unanswered questions.The author discusses two aspects of the informal venture capital market: questions of scale and market efficiency. The discussion draws upon existing research to extract and synthesize data that provide a reasonable basis for inferences about scale and efficiency.Private venture investors tend to be self-made individuals with substantial business and financial experience and with a net worth of $1 million or more. The author estimates that the number of private venture investors in the United States is at least 250,000, of whom about 100,000 are active in any given year. By providing seed capital for ventures that subsequently raise funds from professional venture investors or in the public equity markets and equity financing for privately-held firms that are growing faster than internal cash flow can support, private investors fill gaps in the institutional equity markets.The author estimates that private investors manage a portfolio of venture investments aggregating in the neighborhood of $50 billion, about twice the capital managed by professional venture investors. By participating in smaller transactions, private investors finance over five times as many entrepreneurs as professional venture investors; 20,000 or more firms per year compared to two or three thousand. The typical angel-backed venture raises about $250,000 from three or more private investors.Despite the apparent scale of the informal venture capital market, the author cites evidence that the market is relatively inefficient. It is a market characterized by limited information about investors and investment opportunities. Furthermore, many entrepreneurs and private investors are unfamiliar with the techniques of successful venture financing. The author's scale and efficiency inferences, coupled with evidence documenting gaps between private and social returns from innovation, prompt questions about public as well as private initiatives to enhance the efficiency of the informal venture capital market.The article concludes with a discussion of Venture Capital Network, Inc. (VCN), an experimental effort to enhance the efficiency of the informal venture capital market. VCN's procedures and performance are described, followed by a discussion of the lessons learned during the first two years of the experiment.     

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.     

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.     

Prediction and control under uncertainty: Outcomes in angel investing

Venture investing plays an important role in entrepreneurship not only because financial resources are important to new ventures, but also because early investors help shape the ventures' managerial and strategic destiny. In this study of 121 angel investors who had made 1038 new venture investments, we empirically investigate angel investors' differential use of predictive versus non-predictive control strategies. We show how the use of these strategies affects the outcomes of angel investors. Results show that angels who emphasize prediction make significantly larger venture investments, while those who emphasize non-predictive control experience a reduction in investment failures without a reduction in their number of successes.     

Closing the regional equity capital gap: The role of informal venture capital

There is evidence from a number of countries that small firms encounter a shortage of long-term investment finance, particularly at start-up and initial growth. Expansion of the institutional venture capital industry has done little to fill this equity gap on account of its preference for making large investments in established companies and management/leveraged buyouts. Moreover, the supply of venture capital exhibits a high level of spatial concentration. Initiatives by state/provincial and local governments, most notably in economically lagging regions, to increase the supply of risk capital for start-ups and early stage businesses have at best provided a very partial, and often costly, solution. A more appropriate approach to increasing the supply of start-up and early stage finance is to facilitate the more efficient operation of theinformal venture capital market. Informal investors, or business angels, are private investors who provide risk capital directly to new and growing businesses in which they have no family connection. Most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available. There is also considerable scope for expanding the population of business angels. The most cost-effective means of closing the equity gap is therefore for the public sector to underwrite the operating costs of business introduction services whose objective is to overcome the two main sources of inefficiency in the informal venture capital market, namely the invisibility of business angels and the high search costs of angels seeking investment opportunities and entrepreneurs seeking investors, by the provision of a channel of communication between informal investors and entrepreneurs seeking finance.     

Concentrating Too Hard? Foreign and Corporate Venture Capital Involvement in Syndicates

We investigate the relationship between investment of corporate venture capital (CVC) and foreign venture capital (FVC), and the concentration of investors involved in a financing round. As forms of venture capital distinct from independent venture capital, CVC and FVC can offer different value to new ventures. However, having FVC or CVC investors in the syndicate can also pose additional risks to other investors. We find that a corporate venture capital or a foreign venture capital affiliation is related to lower concentration of investors. Our results suggest that the investors evaluate not only the venture but also their syndicate partners in determining their relative share of round investment.     

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 venture capital firms differ

Four potential sources of differences between venture capital (VC) firms were examined—venture stage of interest, amount of assistance provided by the VC, VC firm size, and geographic region where located. Through a questionnaire, 149 venture capitalists provided data about their firms, about what they look for in evaluating an investment, and about how they work with a portfolio company following an investment.Firms were divided into four groups based on venture stage of interest. The earlier the investment stage, the greater the interest in potential investments built upon proprietary products, product uniqueness, and high growth markets. Late-stage investors were more interested in demonstrated market acceptance.There were no differences by stage regarding the desired qualities of management. However, after the investment was made, earlier stage investors attached more importance to spending their time evaluating and recruiting managers. Earlier stage investors sought ventures with higher potential returns—a 42% hurdle rate of return for the earliest stage investor versus 33% for the late-stage investor.Late-stage investors spent more time evaluating a potential investment. However, after the investment was made, there was little difference in the amount of time spent assisting the portfolio company. There were, however, differences in the significance that VCs attached to particular post-investment activities. Firms were split into three groups based upon the amount of time the VC spent with a portfolio company after an investment was made as lead investor. The most active group averaged over 35 hours per month per investment, and the least active group averaged less than seven hours.The difference in assistance provided was not strongly tied to differences in investment stage of interest. There were major differences in the importance the VCs attached to their post-investment activities. Not surprisingly, high involvement VCs viewed their activities as more important.Based upon the amount of capital they managed, firms were also split into three groups. Average fund size varied from 278 to 12 million dollars. The larger firms had more professionals and managed more money per professional. The large firms provided the least, and the medium-sized firms the most, assistance to portfolio companies. Large firms also made larger individual investments. Even though they invested over half their funds in late-stage investments whereas smaller firms focused on the earlier stages, the large firms were still a major source of early stage financing.There were no differences between geographic regions in the proportion of investments where the venture capital firm served as lead investor. There were, however, major regional differences in investment stages of interest. Also differences were observed between regions that were not a result of differing size and investment stage.     

非正式投资影响因素研究：基于浙江创业观察的实证分析

虽然非正式资本是创业企业早期阶段重要的融资来源,但是并不清楚像中国这样的转型经济国家中个体非正式投资倾向的影响因素。文章利用浙江创业观察（2016）调查数据,从个体创业特质和创业活动参与两个方面,分析个体是否进行非正式投资以及他们的非正式投资去向的影响因素。研究结果表明,认识企业家和商业机会感知是影响个体非正式投资倾向两个最重要的因素,创业活动参与的不同类型对于个体的非正式投资倾向存在替代或者互补效应。文章最后对于发展非正式资本提出相应的对策建议。     

Business Angel Networks and the Development of the Informal Venture Capital Market in the U.K.: Is There Still a Role for the Public Sector

Business angel networks (BANs) provide a channel of communication between private venture capital investors (business angels) and entrepreneurs seeking risk capital. Most operate locally on a not-for-profit basis with their costs underwritten by the public sector. However, the recent establishment of BANs by private sector organisations in the U.K. has led to a questioning of the government's continuing role in the financing of BANs. This paper demonstrates that there are significant differences between public sector and other not-for-profit BANs and private sector, commercially-oriented BANs in terms of the investments that they facilitate. Private sector BANs are primarily involved with larger, later stage deals whereas investments made through not-for-profit BANs are generally smaller, involve start-ups and other early stage businesses and are local. The emergence of private sector BANs has therefore not eliminated the need for public sector support for locally-oriented networks.     

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.     

Investment Patterns of Informal Investors in the Alberta Private Equity Market*

This study identifies three main types of informal investors in private equity markets: relationship investors, opportunity‐based investors, and angel investors. We find evidence that the first two investor types are a major total source of capital and they prefer to invest smaller amounts close to home and in the context of existing relationships. With respect to angel investors, we find evidence of stratification in their desired investment amount which is consistent with a model where their investments evolve though a life cycle of investing. We also find evidence that changes to capital market regulations that allow for lower investment amounts by this type of investor increase the amount of capital available for early‐stage firms.     

After the cash arrives: A comparative study of venture capital and private investor involvement in entrepreneurial firms

Equity investments in entrepreneurial firms continue to grow in number and dollar amount from both venture capital and private investment sources. Increasingly, these two sources of capital play an important role in the development of new and existing entrepreneurial ventures. Due to the sometimes hurried attempt to turn their dream into reality, entrepreneurs may fail to consider similarities and differences in the value-added benefits supplied by venture capital firms (VCs) and private investors (PIs).Accordingly, the purpose of this study was to determine how initial relationships are established and maintained between entrepreneurs and their primary investors. Specifically, we asked entrepreneurs to assess characteristics of the relationship with their primary investor. We then contrasted the results between entrepreneurial firms that had received venture capital funding versus private investor funding. Differences were examined along the following lines:

• 1.• Levels of investor involvement in entrepreneurial firms
• 2.• Reporting and operational controls placed on the firm
• 3.• Types of expertise sought by the entrepreneur

     

Limited attention and the role of the venture capitalist

This research analyzes the venture capitalist's incentives to maximize the profits of the entrepreneurs of ventures and the limited partners of a venture fund. Venture capital is a professionally managed pool of capital invested in equity-linked private ventures. Entrepreneurs turn to venture capitalists for financing because high-technology startup firms have low or negative cash flows, which prevent them from borrowing or issuing equity. In addition, venture capitalists are actively involved in management of the venture to assure its success. This solves the problem of startup firms that do not have the cash flows to hire management consultants.Venture capital contracts have three main characteristics: (1) staging the commitment of capital and preserving the option to abandon, (2) using compensation systems directly linked to value creation, and (3) preserving ways to force management to distribute investment proceeds. These characteristics address three fundamental problems: (1) sorting the venture capital among the entrepreneurial ventures, (2) providing incentives to motivate venture capitalists to maximize the value of the funded ventures, and (3) providing incentives to motivate entrepreneurs to maximize the value of the ventures. Venture capitalists fund only about a dozen projects a year out of a thousand evaluated. Each project may receive several rounds of financing. Payoffs to VCs can be very high or be a complete loss.The typical venture capital (VC) firm is organized as a limited partnership, with the venture capitalists serving as general partners and the investors as limited partners. General partner VCs act as agents for the limited partners in investing their funds. VCs invest their human capital by placing their reputation on the line. The goal is to begin to convert the investment into cash or marketable securities, which are distributed to the partners. VC management companies receive a management fee equal to a percentage (usually 2.5%) of the capital of each fund. They also receive a percentage (15–30%) of the profits of each fund, called carried interest. Periodic reports are made by the VC firm to the limited partners. Usually these are only costs of managing the fund, and so revenues are negative. Most contracts specify the percentage of time that the VC will devote to managing the fund.The analysis of this research deals with the incentives of the VC who has limited attention to be allocated between improving current ventures and evaluating new ventures for possible funding. The analysis shows that the VC, as agent for both the entrepreneur and the general partners, does not have the incentives required to maximize their profits. The VC allocates attention among ventures and venture funds less frequently than required to maximize the entrepreneurs' and limited partners' profits. However, the VC does maximize the total profits of all ventures. Because the VC considers the opportunity cost of attention, the VC's allocation of attention is efficient. The implication of this result is that, although the entrepreneurs and limited partners could be made better off with a different allocation of the VC's time, this would be an inefficient use of the VC's time.     

Venture capitalist governance and value added in four countries

The rapid internationalization of markets for venture capital is expanding the funding alternatives available to entrepreneurs. For venture capital firms, this trend spells intensified competition in markets already at or past saturation. At issue for both entrepreneurs and venture capital firms is how and when venture capitalists (VCs) can provide meaningful oversight and add value to their portfolio companies beyond the provision of capital. An important way VCs add value beyond the money they provide is through their close relationships with the managers of their portfolio companies. Whereas some VCs take a very hands-off approach to oversight, others become deeply involved in the development of their portfolio companies.Utilizing surveys of VCs in the United States and the three largest markets in Europe (the United Kingdom, the Netherlands, and France), we examined the determinants of interaction between VCs and CEOs, the roles VCs assume, and VCs' perceptions of how much value they add through these roles. We examined the strategic, interpersonal, and networking roles through which VCs are involved in their portfolio companies, and we analyzed how successful such efforts were. By so doing we were able to shed light on how and when VCs in four major markets expend their greatest effort to provide oversight and value-added assistance to their investment companies.Consistent with prior empirical work, we found that VCs saw strategic involvement as their most important role, i.e., providing financial and business advice and functioning as a sounding board. They rated their interpersonal roles (as mentor and confidant to CEOs) as next in value.Finally, they rated their networking roles (i.e., as contacts to other firms and professionals) as third most important. These ratings were consistent across all four markets. VCs in the United States and the United Kingdom were the most involved in their ventures, and they added the most value. VCs in France were the least involved and added the least value; VCs in France appeared to be least like others in terms of what factors drove their efforts. Our theoretical models explained a greater proportion of variance in governance and value added in the United States than elsewhere. Clear patterns of behavior emerged that reflect the manner in which different markets operate. Among the European markets, practices in the United Kingdom appear to be most like that in the United States.Determinants of Governance (Face-to-Face Interaction)We operationalized VC governance or monitoring of ventures as the amount of face-to-face interaction VCs had with venture CEOs. We found some evidence that VCs increase monitoring in response to agency risks, but the results were mixed. Lack of experience on the part of CEOs did not prompt significant additional monitoring as had been predicted. A more potent determinant was how long the VC-CEO pairs worked together; longer relationships mitigated agency concerns and reduced monitoring. Contrary to expectations, perceived business risk in the form of VCs' satisfaction with recent venture performance had little impact on face-to-face interaction. Monitoring was greatest in early stage ventures, indicating that VCs respond to high uncertainty by increased information exchange with CEOs. We measured two types of VC experience and found different patterns for the two. Generally speaking, VCs with greater experience in the venture capital industry required less interaction with CEOs, whereas VCs with greater experience in the portfolio company's industry interacted more frequently with CEOs than did VCs without such experience.Determinants of Value AddedWe argued that VCs would most add value to ventures when the venture lacked resources or faced perceived business risks, when the task environment was highly uncertain, and when VCs had great investing and operating experience. Contrary to expectations, VCs added most value to those ventures already performing well. As we had predicted, VCs did add relatively more value when uncertainty was high: e.g., for ventures in the earliest stages and for ventures pursuing innovation strategies. Finally, we found that VCs with operating experience in the venture's focal industry added significantly more value than those with less industry-specific experience. These results are consistent with anecdotal evidence that entrepreneurs have a strong preference for VCs with similar backgrounds as their own. We found no evidence that experience in the venture capital industry contributed significantly to value added. Together, these results suggest that investigations of the social as well as economic dimensions of venture building may prove a fruitful avenue for future study. Overall, the results showed that value-added is strongly related to the amount of face-to-face interaction between VC-CEO pairs and to the number of hours VCs put in on each individual venture.Implications for Venture CapitalistsThe competition for attractive investments is heating up as economies become more globalized. Thus, the pressure on venture capital firms to operate both efficiently and effectively is also likely to build. It is as yet unclear whether the recent trend toward later stage, safer investments will continue, and how those venture capital firms following this path can differentiate themselves from other sources of capital. Venture capital firms that are able to choose the appropriate bases for determining governance effort and the appropriate roles for delivering added value to their portfolio companies will be those most likely to survive.In the largest, most robust markets (i.e., the United States and the United Kingdom), more effort is expended by venture capitalists to deliver something of value beyond the money. This suggests that the tradeoff preferred by those succeeding is to be more rather than less involved in their investments. Our results indicate that VCs clearly economize on the time they devote to involvement in their portfolio companies. However, our results also indicate that they do this at the great peril of producing value insufficient to justify the cost of their product.Implications for EntrepreneursOur findings provide two important insights for entrepreneurs. First, they show that where and when they obtain venture capital is likely to have an impact on the extent and nature of effort delivered by their venture capital investors. It appears that on average entrepreneurs receiving venture capital in the United States and the United Kingdom will be more closely monitored and will receive more value-adding effort from their VCs than will those in France or the Netherlands. Needless to say, entrepreneurs should consider their preferences for level and type of involvement from their investors as they consider their choice of partners. In France, for example, VCs put great emphasis on their financial role in comparison with other roles, but they contribute much less than VCs elswhere via other strategic, interpersonal, and networking roles.The second key implication of our findings is that entrepreneurs may be able to gauge what roles VCs will see as most important, when VCs are more or less apt to become involved in their companies, and when they believe they can most add value. Such knowledge may help CEOs anticipate VC activity, be aware of the parameters of VCs' preferences, communicate their own preferences, and negotiate the timing and extent of interaction. For example, although our results indicate that geographic distance significantly limits face-to-face interaction, it appears to have less impact on the amount of value added.Implications for ResearchersMuch more can be learned about the relative efficiency and effectiveness of alternative governance arrangements. Little is known about how formal structures such as contract covenants and board control work in conjunction with informal oversight and interaction. Even less is known about how value is added and how it is best measured. Although this study took a step toward developing a model of the circumstances under which value is added, the theory and its operationalization await further development.     

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.     

Perceived risks and choices in entrepreneurs' new venture decisions

Though risk plays a central role in most entrepreneurial decision making, little empirical research has explicitly examined how the elements of risk, risk perceptions, and entrepreneurs' propensities to take risks influence choices among potentially risky entrepreneurial ventures. This experimental study asked a sample of entrepreneurs leading America's fastest growing firms to make choices among a series of hypothetical new ventures. The results indicate that such choices are influenced by the risks inherent in the new ventures, as evidenced by the pattern of outcomes anticipated in each venture, the entrepreneurs' differing perceptions of those risks, and differences in their personal propensities to take risks.The subjects in our sample of entrepreneurs tended not to choose ventures having a high degree of variability in their pattern of anticipated outcomes. This avoidance of outcome variability suggests that the sensitivity analyses commonly prescribed for examining new venture attractiveness may inhibit risk taking, and may deter potential investors from investing in their firms. New approaches to assessing and presenting new venture risk, other than the traditional best case/expected case/worst case approach, may be advisable, as well as sufficiently through market research to provide evidence of the degree to which market acceptance is likely for the venture's products or services.We also found an effect of differences in risk propensities among entrepreneurs on their new venture choices. This effect suggests not only that entrepreneurs should be wary of any biases they bring to their new venture decisions, but that prospective investors should consider the degree to which entrepreneurs in whom they choose to invest are well-matched to the investors' own risk-taking propensities.Finally, while our sample of entrepreneurs tended to shun high levels of variability in their new venture choices, they appeared willing to accept a considerable degree of hazard, or possible downside, in their new venture choices, presumably in pursuit of potentially significant gains. Entrepreneurs are advised to seek a clear understanding of the downside entailed in their proposed ventures, and develop strategies to mitigate the likelihood of adverse outcomes. Thus they will not jeopardize chances for near term success and attracting support of investors and others in later stages of the venture or in subsequent ventures.Our research did not attempt to examine how our subjects' choices would have played out in terms of performance, but the apparent biases which entrepreneurs' risk propensities bring to their assessment of proposed new ventures is a potentially important issue that merits further scrutiny. On one hand, such biases may lead to patterns of suboptimal decisions. On the other hand, our results suggest that investors should entrust their new venture investments to entrepreneurs whose risk propensities (and perhaps other personal characteristics) best match the needs of both the opportunity at hand and the investor's objectives. As many venture capitalists attest, the management of a proposed new venture should lie at the heart of their investment decision.