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Venture Capital in Germany and the U.S.: Differences and the Influence of Culture

©2009 Diplomarbeit 109 Seiten

Zusammenfassung

Inhaltsangabe:Introduction:
‘In today’s modern economy a country’s or region’s competitiveness lies in its capability to innovate. Whilst earlier old and established companies were reliable producers of innovation as well as jobs, that is changing. The big corporations are outsourcing and downsizing, and the new technologies are emerging from companies that did not exist 20 years ago’.
This quotation taken from the Handbook of Research on Venture Capital points out the increasing relevance of the Schumpeterian growth regime of today’s advanced economies which means that growth and wealth is unlikely to be maximized if most new business developments are carried out by old long-existing corporations. While in Europe only few global champions have been created in the past 50 years the United States economy seems to be capable of continuously creating great, leading-edge companies. Why is Europe lagging behind in enabling new ventures to become global champions? Why are successful high growth companies like Amazon, AMD, AOL, Apple, Cisco Systems, eBay, Genentech, Intel, Microsoft, Oracle, Sun Microsystems, Yahoo and recently Google all US based corporations and not of European or Japanese origin?
One reason is seen in the outstanding capability of the US economy to put innovative business ideas from individuals, universities and other research institutions into practice and thus create with the help of a well developed venture capital industry new global champions. A strong and sophisticated VC industry is widely recognised for providing a major contribution to turn innovation into (internationally) successful high-growth corporations and therewith foster economic growth.
Taking Germany as the largest economy in Europe this thesis will try to work out the main differences of the VC market in Germany - which is still considered as lagging behind - and its correspondent in the United States. While most of the previous comparative studies focus on single aspects of the VC market and the VC investment process this work will try to provide a brief but comprehensive empirical analysis of the entire venture capital investment process (from fundraising to exiting investments).
As business in general and the venture capital industry in particular is considered to be increasingly influenced by socio-economic and cultural factors this thesis draws special attention to differences related to the influence of culture on both VC markets. Hence it will be […]

Leseprobe

Inhaltsverzeichnis


Lars Abraham
Venture Capital in Germany and the U.S.: Differences and the Influence of Culture
ISBN: 978-3-8366-3755-8
Herstellung: Diplomica® Verlag GmbH, Hamburg, 2009
Zugl. Technische Universität Bergakademie Freiberg, Freiberg, Deutschland,
Diplom
arbeit, 2009
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II
Table of Contents
1. Introduction... 1
1.1. Initial Situation... 1
2. Venture Capital... 3
2.1. Disambiguation and Scope of the Thesis... 3
2.2. VC, Private Equity and the Growth and Finance Cycle of a Firm... 6
2.3. The Environment as Determining Factor... 13
2.4. The Venture Capital Investment Process... 15
3. An Introduction to Culture... 19
3.1. Relevance of Culture in Business... 19
3.2. Hofstede's Concept of Culture... 20
3.2.1. Criticism... 23
3.2.2. Power Distance... 25
3.2.3. Uncertainty Avoidance... 26
3.2.4. Individualism vs. Collectivism... 27
3.2.5. Masculinity vs. Feminism... 28
3.2.6. Long-Term Orientation... 29
3.2.7. Index Scores for Germany and the US... 30
3.3. Other Concepts of Culture... 31
4. Comparison of the US and German Venture Capital Market... 37
4.1. Previous Studies... 37
4.2. The Beginnings of Venture Capital... 38
4.3. The Venture Capital Markets Today... 40
4.3.1. Funding and Financing... 44
4.3.2. Selecting and Investing... 48
4.3.3. Developing and Adding Value... 53
4.3.4. Exiting and Performance... 56
4.3.5. Overall Aspects of the Venture Capital Markets... 60
4.3.6. Data Problems... 67
4.4. Early Stage Venture Capital and the Global Financial Crisis... 69
5. Venture Capital Demand, Entrepreneurship and Culture... 71
5.1. Entrepreneurship and Entrepreneurial Orientation... 71
5.2. Entrepreneurial Orientation and the Influence of Culture... 74
5.2.1. Selected Cultural Dimensions and Entrepreneurial Propensity... 75
5.2.2. National Culture and General Conditions of Entrepreneurship... 78
5.3. Is there an Archetype of an Entrepreneurial Culture?... 81

III
6. Concluding Remarks... ......... 86
References... 88
Data Appendix... 96

IV
List of Abbreviations
ARDC
American Research and Development Corporation
BA
Business Angel
BVK
Bundesverband Deutscher Kapitalbeteiligungsgesellschaften
- German Private Equity and Venture Capital Association e.V.
CAGR
Compound Annual Growth Rate
ERISA
Employee Retirement Income Security Act of 1974
ERP
European Recovery Programme
EVCA
European Private Equity & Venture Capital Association
GDP
Gross Domestic Product
GNP
Gross National Product
GEM
Global Entrepreneurship Monitor
IPO
Initial Public Offering
IRR
Internal Rate of Return
KfW
Kreditanstalt für Wiederaufbau
LBO
Leverage buyout
M&A
Mergers and Acquisitions
MBG
Mittelständische Beteiligungsgesellschaft
MBI
Management buy-in
MBO
Management buy-out
NASDAQ
National Association of Security Dealers Automated Quotation
NVCA
National Venture Capital Association
OECD
Organisation for Economic Co-operation and Development
PE
Private Equity
SBA
Small Business Administration
SBIC
Small Business Investment Company
SBIR
Small Business Innovation Research
tbg
Technologie-Beteiligungsgesellschaft mbH
US
United States of America
VC
Venture Capital
VCs
Venture Capitalists
WFG
Deutsche Wagnisfinanzierungsgesellschaft

V
List of Figures
Figure 1:
Equity financing within the growth and finance cycle [...]... 10
Figure 2:
Venture capital within the growth and finance cycle [...]... 12
Figure 3:
Underlying definition of venture capital... 13
Figure 4:
Environmental framework of the venture capital system... 14
Figure 5:
The venture capital process... 15
Figure 6:
Exchange relations between investor(s) [...]... 16
Figure 7:
Manifestations of culture at different levels of depth... 21
Figure 8:
Index scores of Hofstede's five dimensions [...]... 30
Figure 9:
US VC disbursements and proportionate early stage VC [...]... 41
Figure 10:
GER VC disbursements and proportionate early stage VC [...]... 42
Figure 11:
Absolute and relative size of the US and GER early stage [...]... 43
Figure 12:
Absolute and relative size of the US and GER early stage [...]... 43
Figure 13:
New venture capital funds raised relative to current GDP [...]... 45
Figure 14:
Early stage disbursements relative to current GDP, 1997-2007... 49
Figure 15:
Venture capital disbursements relative to funds raised [...]... 52
Figure 16:
German private equity and venture capital [...]... 53
Figure 17:
Venture capital divestments in the US, 1997-2007... 58
Figure 18:
Relationship between culture and entrepreneurship... 74

VI
List of Tables
Table 1:
Characteristics of institutional venture capital [...]... 5
Table 2:
Venture capital and a firm's financing choices... 11
Table 3:
CAGR of early stage VC disbursements in Germany [...]... 44
Table 4:
CAGR of new VC raised in Germany and the US... 46
Table 5:
Sources of new funds raised... 47
Table 6:
VC investments in Germany and the US by stage... 49
Table 7:
VC investments in Germany and the US by industry group... 51
Table 8:
VC professionals in the US and PE professionals in Germany... 55
Table 9:
Divestments in Germany (by number of companies exited) [...]... 56
Table 10:
Divestments in Germany (by volume), 2001 and 2006... 57
Table 11:
Performance of private equity funds in the US and Germany... 60
Table 12:
US multiples as indicators of underdevelopment [...]... 65
Table 13:
Archetype entrepreneurial culture and dimensions [...]... 82

1
1. Introduction
1.1. Initial Situation
"In today's modern economy a country's or region's competitiveness lies in its
capability to innovate. Whilst earlier old and established companies were reliable
producers of innovation as well as jobs, that is changing. The big corporations are
outsourcing and downsizing, and the new technologies are emerging from companies
that did not exist 20 years ago" (Landström, 2007a, p. ix).
This quotation taken from the Handbook of Research on Venture Capital (Landström
(Ed.), 2007) points out the increasing relevance of the Schumpeterian growth regime of
today's advanced economies which means that growth and wealth is unlikely to be
maximized if most new business developments are carried out by old long-existing
corporations (Philippon & Véron, 2008). While in Europe only few global champions
have been created in the past 50 years the United States economy seems to be
capable of continuously creating great, leading-edge companies (Véron, 2008). Why is
Europe lagging behind in enabling new ventures to become global champions? Why
are successful high growth companies like Amazon, AMD, AOL, Apple, Cisco Systems,
eBay, Genentech, Intel, Microsoft, Oracle, Sun Microsystems, Yahoo and recently
Google all US based corporations and not of European or Japanese origin?
One reason is seen in the outstanding capability of the US economy to put innovative
business ideas from individuals, universities and other research institutions into
practice and thus create with the help of a well developed venture capital industry new
global champions (Maula et al., 2005). A strong and sophisticated VC industry is widely
recognised for providing a major contribution to turn innovation into (internationally)
successful high-growth corporations and therewith foster economic growth (see Gaida,
2002; Kortum & Lerner, 2000; Romain & VanPottelsberghe, 2004b; Weitnauer, 2007).
Taking Germany as the largest economy in Europe this thesis will try to work out the
main differences of the VC market in Germany - which is still considered as lagging
behind (Bygrave & Quill, 2007; Pfirrmann et al., 1997) - and its correspondent in the
United States. While most of the previous comparative studies focus on single aspects
of the VC market and the VC investment process (Fetzer, 1991; Gaida, 2002; Jessen,
2002; Ortgiese, 2007) this work will try to provide a brief but comprehensive empirical
analysis of the entire venture capital investment process (from fundraising to exiting
investments).

2
As business in general and the venture capital industry in particular is considered to be
increasingly influenced by socio-economic and cultural factors (Gaida, 2002; Pfirrmann
et al., 1997) this thesis draws special attention to differences related to the influence of
culture on both VC markets. Hence it will be possible to improve understanding of
socio-economic and cultural aspects like different attitudes towards entrepreneurship
and the willingness to take risks.

3
2. Venture Capital
2.1. Disambiguation and Scope of the Thesis
The National Venture Capital Association (NVCA) of the U.S. defines venture capital as
"money provided by professionals who invest alongside management in young, rapidly
growing companies that have the potential to develop into significant economic
contributors" (NVCA, 2008). A venture capitalist can be described as: "The manager of
private equity fund who has responsibility for the management of the fund's investment
in a particular portfolio company. In the hands-on approach (the general model for
private equity investment), the venture capitalist brings in not only moneys as equity
capital (i.e. without security/charge on assets), but also extremely valuable domain
knowledge, business contacts, brand-equity, strategic advice, etc." (EVCA, 2008).
According to Landström (2007b) the venture capital market can be divided into three
different submarkets: informal venture capital, corporate venture capital and
institutional venture capital. Corporate and institutional venture capital compose the
overall formal venture capital market as complement to the informal venture capital
market (Landström, 2007b).
Informal Venture Capital
In the past this type of venture capital has been regarded as equivalent to business
angels, angel capital or as Ortgiese (2007) put it angel investors. A business angel
(BA) or angel investor can be defined as "a wealthy individual who invests in
entrepreneurial firms. Although angels perform many of the same functions as venture
capitalists, they invest their own capital rather than that of institutional and other
individual investors" (Lerner, 2000, p. 515). Landström (2007b) considers business
angel as a narrow definition of a greater informal venture capital market by including
other informal investors which in contrast to angel investors contribute relatively small
amounts of money and do not take an active role in the object of investment as well as
family and friends. By also including non-equity investments like loans and even gifts
Bygrave & Quill (2007) further enlarge the concept of informal venture capital or as
they name it informal investment.
To sum up informal venture capital or angel capital can be characterised as any kind of
investment where the sponsor ­ usually a private individual ­ invests directly in
unquoted high-risk, high-return, high-growth entrepreneurial ventures.

4
Corporate Venture Capital
This segment of the venture capital market comprises equity or equity-linked
investment activities where the investor is a captive intermediary of a non-financial
corporation (Landström, 2007b; Ortgiese, 2007; Schefczyk, 2006). Thus the sponsor of
the venture capital fund is an established corporation or a subsidiary of a corporation
(Landström, 2007b; Ortgiese, 2007). Another major factor is that corporate venture
capitalists besides monetary returns also pursue strategic goals like access to sales
and resourcing markets, windows on technology, additional R&D capacities, and a
more flexible organisation of business activities (Schefczyk, 2006).
Institutional Venture Capital
Due to a large number of different classifications and definitions in literature it is not
easy to find a generally accepted definition of institutional VC (Landström, 2007b;
Schefczyk, 2006).
According to Mason & Harrison (1999) "the institutional VC industry comprises full-time
professionals who raise finance from pension funds, insurance companies, banks and
other financial institutions to invest in entrepreneurial ventures. Institutional venture
capital firms take various forms: publicly traded companies, captive subsidiaries of
large banks and other financial institutions, and independent limited partnerships"
(p.16). In contrast to corporate venture capital firms institutional VC firm's solely reward
is a potential capital gain (Landström, 2007b).
While informal venture capital is invested directly by the fund sponsors institutional
venture capital is invested indirectly via professional intermediaries ­ the venture
capitalists.
Table 1 provides an overview of the main characteristics of the three identified
submarkets of venture capital:

5
Table 1:
Characteristics of institutional venture capital, informal venture capital and
corporate venture capital
Institutional venture
capital
Informal venture
capitalist / BA
Corporate venture
capital
Source of funds
Primarily institutional
investors who act as
limited partner
Investing their own
money
Investing corporate
funds
Legal form
Mainly limited
partnerships
Private individuals
Subsidiary of a large
company
Motive for investment
Equity growth
Equity growth
Intrinsic rewards
Strategic and
equity growth
Investment Experienced
investors
Experience varies
Experience within
industry / technology
Large
investment
capacity
Limited investment
capacity
Large investment
capacity
Extensive
due
diligence
Limited time for due
diligence
Extensive due
diligence
Monitoring
Formal control
Informal control
Corporate control
Source:
Based on De Clercq et al. (2006), Landström (2007b), Mason & Harrison (1999)
This thesis focuses on institutional venture capital provided by professional venture
capital firms.
As indicated above institutional VC can be found in different organisational forms,
usually depending on the source of funds and the ownership structure. On the basis of
Mason & Harrison (1999) one can identify three different organisational forms of
institutional venture capital firms
1
:
·
Independent limited partnerships, in which the general partner (the VC firm)
raises capital from the limited partners (usually institutional investors like
1
While Mason & Harrison (1999) consider captive venture capitalists as firms funded by banks
and other financial institutions, Landström (2007b) also includes those funded by non-financial
organization (so-called corporate VC). For a clear differentiation between institutional and
corporate VC (as indicated above) the author considers captive VC firms funded by non-
financial organisation (e.g. industrial firms) as corporate VC ­ which is not subject of this work.

6
pension funds, insurance companies and banks, but also wealthy private
investors).
·
Captive venture capital firms, which are captive subsidiaries mainly funded by
the internal resources of affiliated banks or other financial institutions.
·
Government venture capital organisations, which are financed and controlled by
government institutions.
2.2. VC, Private Equity and the Growth and Finance Cycle of a Firm
While in Europe the definition of institutional venture capital is usually considered
synonymous with private equity and hence also covers later stage investments such as
funding of management buy-outs and turnaround financing (Landström, 2007b), in the
US the term venture capital is narrower and defines venture capital as "a segment of
the private equity industry which focuses on investing in new companies with high
growth potential and accompanying high risk" (Thomson Financial, 2008, p. 63). In
German literature Schefczyk (2006) argues that it would be useful to apply a
conceptual model with private equity as superordinate concept and venture capital as a
sub-segment of an overall private equity market, but due to a lack of consensus within
VC research he employs the terms venture capital and private equity synonymous as it
is still common use. In contrast to Schefczyk (2006) Weitnauer (2007) and BVK
(2008a) apply a concept similar to the US considering private equity as generic term for
any kind of non-public (private) equity investment also including equity financing of
mature companies with less risk potential and usually higher investment volumes as
well as management buy-outs
(MBOs), management buy-ins (MBIs) and leverage
buyouts (LBOs)
2
.
According to BVK (2008a), EVCA (2008), NVCA (Thomson Financial, 2008) and
Weitnauer (2007) the author considers venture capital as a segment of an overall
private equity market which focuses on equity financing of new ventures with high
growth potential.
2
Leveraged buyout (LBO): The acquisition of a firm or business unit, typically in a mature
industry, with a considerable amount of debt. The debt is then repaid according to a strict
schedule that absorbs most of the firm's cash flow.
Management buy-out (MBO): A European term for an LBO initiated by an existing management
team, which then solicits the involvement of a private equity group.
Management buy-in (MBI): A European term for an LBO initiated by a private equity group with
no previous connection to the firm.
(according to Lerner, 2000, p. 518-519)

7
For further exemplification it seems to be useful to employ the concept of the growth
and finance cycle of a firm
3
as it is widely accepted and applied in business practise by
professional venture capitalists (Jessen, 2002; Ortgiese, 2007).
The Growth and Finance Cycle of a Firm
As a high-growth company's demand of equity is not constant over time ­ in quantity
and structure ­ different stages of a firm's development have been identified. Sahlman
(1990) determined five stages of a firm's growth life cycle: Seed Stage, Start-up Stage,
Early Stage, Expansion Stage and Later Stage. On the basis of the NVCA (Thomson
Financial, 2008) and Ortgiese (2007) each stage can be described as follows:
Seed Stage
In this initial stage a relatively small amount of capital is provided to an inventor
or entrepreneur to prove a concept and to qualify for start-up capital. This may
involve product development and market research as well as building a
management team and developing a business plan, if the initial steps are
successful. The company, even if already founded, is usually structured
informally and much of the commitment by the entrepreneurs is undertaken on
a part-time basis, while the founders hold down another job. To develop the
product or service, the founders often use their limited personal funds as well as
funds of friends and family. This is a pre-marketing stage.
Start-up Stage
This stage provides financing to companies completing development stage and
may include initial marketing efforts. Companies may be in the process of
organising or they may already be in business for one year or less, but have not
sold their products commercially. Usually such firms will have made market
studies, assembled the key management and a board of directors, developed a
business plan, and are ready to conduct business. As the limited funds
available to the entrepreneurs will be exhausted by this stage, outside funding is
necessary. Due to still high levels of uncertainty and business risks debt
3
An elaborate illustration of the growth and finance cycle can be found in Nathusius (2003, p.
88 et seqq.).

8
financing is usually not available and equity financing by VC companies or
business angels are often the only option of founders to obtain the funding for,
and successfully realise their projects.
Early Stage / Other Early Stage
Other early stage financing includes an increase in valuation, total size, and the
per share price for companies whose products are either in development or are
commercially available. The new venture may already generate revenues and
hence the risk of failure decreases. Usually the business is less than three
years old. Additional equity financing in a higher quantity is invested by venture
capitalists, if the management team has proven to be skilled, and the capability
of the product or service stands against competition. This includes the first
round of financing following a company's start-up phase typically by an
institutional venture capital fund. Seed and start-up financing tend to involve
angel investors more than institutional investors. The networking capabilities of
the venture capitalist are used more here than in more advanced stages.
Expansion Stage
This stage involves working capital for the initial expansion of a company that is
already producing and shipping and has growing accounts receivables and
inventories. It may or may not be showing a profit. Usually by now, the business
is more than three years old. Some of the uses of capital may include further
plant expansion, marketing, working capital, or development of an improved
product or service. Key executives may be added to the management team and
possible replacements can occur, if the existing new venture team is not
capable of handling the new challenges effectively. Additional institutional
investors are more likely to be involved along with initial investors from previous
rounds. The venture capitalist's role in this stage evolves from a supportive role
to a more strategic role.
Later Stage
Capital [usually at considerably higher volumes; note from the author] in this
stage is provided for companies that have reached a fairly stable growth rate;
that is, not growing as fast as the rates attained in the expansion stages. The

9
product or service is widely available and the company generates constant
revenue. Again, these companies may or may not be profitable, but are more
likely to be than in previous stages of development. Other financial
characteristics of these companies include positive cash flow. Furthermore, the
company's investment decisions tend to get somewhat closer to those of
established corporations.
The first three stages or often summarized as Early Stage Financing (Schefczyk, 2006;
Thomson Financial, 2008; Weitnauer, 2007). Therefore nowadays the third stage is
often termed Other Early Stage (Thomson Financial, 2008) or First Stage Financing
(Jessen, 2002). Other authors only distinguish between seed stage and start-up stage
within early stage financing (BVK, 2007; Schefczyk, 2006). Capital provided to finance
new ventures within their early stages of development can be characterised as classic
venture capital (Jessen, 2002) which is subject of this work. In a broader sense the
term venture capital also includes expansion stage financings (EVCA, 2008;
Weitnauer, 2007).
To also incorporate different financial structures this five-stage model of a firm's growth
life cycle has been enlarged (inter alia Schefczyk, 2006). Schefczyk (2006) identified
eight characteristic financial stages: Seed, Start-up, Expansion, Bridge, MBO/MBI,
LBO, Replacement Capital, and Turnaround
4
. Whereas Bridge Financing ­ as interim
capital provided to achieve an exit for the investors (through initial public offering (IPO)
or trade sale
5
) ­ can be incorporated within Sahlman's (1990) originally five-stage
model between expansion and later stage the others remain typical later stage private
equity activities which are usually not separated into different sub-stages (Jessen,
2002; Weitnauer, 2007).
Figure 1 tries to illustrate the identified stages of a firm's growth and finance cycle and
this work's underlying concept of VC as a submarket of an overall private equity
market.
4
Replacement Capital (also: Secondary Purchase): Purchase of existing shares in a company
from another private equity investment organisation or from another shareholder or
shareholders.
Turnaround (also: Rescue): Financing made available to an existing business which has
experienced trading difficulties, with a view to re-establishing prosperity.
(EVCA, 2008; Schefczyk, 2006)
5
Trade sale: The sale of company shares to industrial investors (EVCA, 2008).

10
Figure 1:
Equity financing within the growth and finance cycle of a new firm
Se ed
Start-u p
Expansion
Bridge
Later stage
-
MBO / MBI
- LBO
- Replacement
- Turnaround
other Private Equi ty**
Venture Capital
Clas sic V enture Capital
Publ ic Equi ty (after IPO)
Private Equity*
Public Equity
Going Public
Going Private
Note: *
PE
>
VC
>
classic VC (= early stage VC)
**All those later stage activities are usually undertaken by so-called PE investors whereas VC
investors focus on earlier stages
Source:
Based on Weitnauer (2007, p.9)
It is important to bear in mind that this model refers to an archetype of a new firm's
development and that in reality the identified stages are not free from overlapping and
often characterised as rather complex issues with smooth transitions (Jessen, 2002).
Especially some MBO/MBI, turnaround and replacement PE investments are likely to
occur at earlier typical VC stages as well (Schefczyk, 2006). Nevertheless ­ as already
mentioned above ­ this stage model proved to be beneficial to illustrate different capital
needs along the growth life cycle of a firm and is widely accepted in research and
business practise (Jessen, 2002; Ortgiese, 2007)
6
.
Venture Capital and other Sources of Corporate Finance
To understand the specific characteristics and contribution of VC it is useful to outline
the venture capital concept in its relation to other sources of capital. A firm can raise
capital from internal and external sources and combines equity with debt capital.
Jessen (2002) illustrates VC as a particular, temporary form of institutional equity
financing:
6
A detailed discussion about the stage model's applicability for new ventures can be found in
Hansen & Bird (1997).

11
Table 2:
Venture capital and a firm's financing choices
Sources of funds
Legal status
Internal financing
External financing
Equity financing
(liable equity)
Self-financing
Equity capital financing
e.g. Venture Capital
Debt financing
(creditor capital)
Provision financing
Credit financing
Source:
Jessen (2002, p.68)
As a new entrepreneurial venture is likely to generate no revenues it has to finance
itself from external sources at first. Credit financing is usually not available because of
an extraordinary high risk of failure and the fact that a seed or start-up stage company
can not offer any assets as physical securities (Schefczyk, 2006; Weitnauer, 2007).
Therefore new firms have to rely on what Bygrave & Quill (2007) call the 4 Fs: the
founders themselves, family members, friends and foolhardy investors (e.g. business
angels). These are typical sources of finance for new ventures in their seed stage and
sometimes early start-up stage (Ortgiese, 2007). As these financial resources are
limited and credit financing is still not accessible new ventures heading the start-up
stage often face the so-called equity gap (Schefczyk, 2006). This is where the venture
capital system comes into play. To address the high-risk high-return characteristics of
equity investing of new ventures in their early stages venture capital investments
exhibit certain attributes to reduce down side and increase upside potential. Hence
based on Jessen (2002) and Schefczyk (2006) one can figure out the following
characteristics of venture capital which clearly distinguish VC financing from other
forms of traditional equity financing:
·
Liable equity for a limited period of time (usually 5 to 10 years)
·
Investment in high-growth, innovative, early stage small and medium-sized
businesses (normally as minority stake)
·
Higher-than-average return on investment in the form of capital gain after exit
rather than regular (dividend) payments
·
Representation on the board and span of control beyond capital share and
intensive operational involvement (mentoring)
·
High likelihood of total loss based on single investment level

12
As a company grows and reaches expansion stage it will now be easier to receive debt
capital (Jessen, 2002; Weitnauer, 2007). Some ventures may also be capable of
entering the public equity market via IPO and thus broaden their equity base for further
expansion (Jessen, 2002). However typically early stage venture capitalists exit their
investments after bridge stage via IPO or trade sale (Weitnauer, 2007). Finally ­ after
continuing in being successful ­ a company may reach later stage and is now able to
access the full range of debt and equity financing like well established enterprises do
(Jessen, 2002). Based on Jessen (2002) figure 2 tries to incorporate different sources
of funds into the growth and finance cycle of a firm.
Figure 2:
Venture capital within the growth and finance cycle of a new firm
'equity gap'
Seed
Start- up
Expansion Bridge
Later stage
Ve nture Cap ital
own funds*
Public Equity
anticipation of
risk and profit
+
-
subsidies
Business Angel
other Pr ivate Equity
Debt Financing
risk
profit
* funds from founders, family and friends
Source:
Based on Jessen (2002, p.130); Schefczyk (2006, p. 26)
Again, as already mentioned above, also this stage model and the corresponding
financing resources are not free from overlapping and can merely be regarded as
typical for the financing of the growth progress of a new firm as the chosen source of
financing is largely dependent on the particular case (Bygrave & Quill, 2007).
Furthermore recently increased relevance of hybrid financial instruments like
mezzanine capital
7
also for early stage financing (AltAssets, 2003; Schefczyk, 2006)
remains unconsidered as it is not purpose of this work.
7
Mezzanine capital: a layer of financing that has intermediate priority (seniority) in the capital
structure of a company. For example, mezzanine debt has lower priority than senior debt but
usually has a higher interest rate and often includes warrants (Thomson Financial, 2008).

13
2.3. The Environment as Determining Factor
As Staehle (1999) considers all enterprises as open, socio-technical systems involved
in regular exchange processes with their natural and social environment an analysis of
an industry or market can not neglect environmental factors. According to Staehle
(1999) Jessen (2002) conceives venture capital as purposive, social institution in terms
of an open, goal-orientated and socially integrated system. This once more goes back
to the concept of institutional venture capital as financing provided by profoundly
institutionalised professional intermediaries (see also chapter 2.1.). Thus concluding
with regard to the above mentioned characteristics the following final definition of
venture capital can be applied for the purpose of this work:
Figure 3:
Underlying definition of venture capital
Ventu re Capital
=
·
A goal orientated social institution,
·
providing liable equity for a limited period of time
(5 to 10 years),
·
investing in high-growth, innovative, early stage small and
medium-sized businesses (typically as minority stake),
·
aiming at higher-than-average returns on investment in the form
of capital gain after exit rather than regular (dividend) payments,
·
including representation on the board and span of control
beyond capital share and intensive operational involvement
(mentoring),
·
facing a high likelihood of total loss based on single investment
level.
Source:
Based on Jessen (2002, p. 67)
To incorporate environmental conditions into the concept of an enterprise or industry
Staehle (1999) distinguishes between general and special environmental factors or as
Grant (2002) phrases it macro-environment and micro-environment. The general
environment is usually less influenceable by a single corporation or venture capitalist
and consists of economic, political and legal, social psychological, cultural, and
The term Mezzanine can be misleading as especially in the US it is also used synonymous with
bridge financing (see figure 1) to describe a pre-IPO round of financing (Lerner, 2000).

14
technological influencing factors (Staehle, 1999). Special environmental factors ­ also
referred to as task environment ­ are the resourcing market, the money and capital
market, the sales market, and the labour market (Staehle, 1999) and are characterised
by direct interaction with a higher degree of persuasibility (Jessen, 2002). Although the
separation between these two categories of environmental factors is beneficial for
structuring further analysis on environment related influences it is important to know
that these factors are overlapping and interfering each other both between and within
each category (Jessen, 2002).
To sum up the interrelation between the institutional venture capital system and the
environmental framework is illustrated in figure 4.
Figure 4:
Environmental framework of the venture capital system
Venture Capital
Sys tem
resourcing
market
labour
m arket
m oney and
c apital
market
sales
market
ec
on
om
ic
fa
ct
o
rs
political and legal factors
psy
cho
log
ica
l
cu
ltur
al
te
ch
no
lo
g
ica
l f
act
or
s
facto
rs
socia
l and
fa
ct
or
s
micro - environment
macro - environment
Source:
Based on Jessen (2002, p. 73) and Staehle (1999, p. 625)

15
At this point no in depth description of each environmental factor will be undertaken
with respect to the limited scope of this thesis
8
. As this work draws special attention to
cultural factors influencing the venture capital markets this environmental framework
will be reverted to in the coming chapters particularly with respect to the possible
effects of social psychological and cultural factors onto the task environment of classic
(early stage) venture capital.
2.4. The Venture Capital Investment Process
As indicated in chapter 2.1. institutional venture capitalists act as professional
intermediaries investing third party funds into new high-growth ventures. Therefore they
raise funds from its investors, provide cash to promising innovative new ventures,
receive equity and pass back the return to the investor after harvesting their
investments (Gompers & Lerner, 2004; Landström, 2007). Figure 5 gives an overview
of the general VC investment process.
Figure 5:
The venture capital process
INVESTOR
NEW VENTURE
C APITALIST
VENTU RE
Returns
Equity
Cash
Fundraising
Source:
Landström (2007, p. 6); Gompers & Lerner (2004, p.11)
To address the complexity of investing in innovative new ventures independent
institutional venture capitalists usually separate their activities into two different units: a
8
A detailed description of the general and special environmental factors can be found in:
Steinmann/Schreyögg (2002, p. 160-169).

16
management entity and an investment company (Schefczyk, 2006). This enables the
venture capitalist to better align to the management and mentoring needs of new
ventures and to invest in a larger range of promising portfolio companies
simultaneously and therewith reduce the risk of a total loss of funds (Schefczyk, 2006;
Fetzer, 1991). The following figure 6 illustrates the exchange relationships with
investors and portfolio companies usually applied by independent venture capital firms.
Figure 6:
Exchange relations between investor(s), VC firm and portfolio companies
Portfolio
companies
Management
entity
advice and
assistance
management
Investment
company
Investor(s)
capital
funds
contract
capital gain
payout
products
Venture capital firm
Source:
Schefczyk (2006, p. 14)
Fetzer (1991) identified four different phases of activities undertaken during the venture
capital process. According to Ortgiese (2007) they can be described as follows:
1. Fundraising
At the very beginning of its activities a venture capital company raises money from
investors and launches a fund which will then be closed for the investment period ­
typically ten years. Therefore according to figure 4 the venture capitalist accesses
the private and public money and capital market. Typical investors are pension
funds, insurance companies, banks, university endowments and family offices of

17
wealthy individuals. It is crucial to provide potential investors with a proven track
record of well performing portfolio companies to obtain further capital.
2. Selection
At this stage the venture capital firm accesses its sales market (see figure 4) and
this involves deal generation, screening, valuation and due diligence activities as
well as deal structuring. During deal generation established VC companies rely on
a broad network within the entrepreneurial community and are typically able to
afford a reactive approach while younger venture capitalists need to actively seek
for promising business ideas and entrepreneurial talent. After generating a
sufficient number of interesting business plans venture capitalists review them
usually according to three main criteria: viability and novelty of the innovative
project; integrity, record of accomplishments and leadership skills of the
entrepreneur/management team; and the potential of high returns as well as
possible exit strategies. Typically only 25% of business plans received are chosen
for further valuation and due diligence (Schefczyk, 2006). This investment valuation
process is aimed at achieving an agreement on the price for the deal. Due diligence
activities often include site visits and deeper analysis of additional documents
provided by the target company. To reach deal approval the venture capitalists has
to align the interests of the investor with those of the entrepreneurial venture. Thus
in order to achieve enough incentives for cooperative behaviour various
mechanisms are included in the terms of the deal. Usually these terms include
staging of investment into several rounds, covenants specifying the right to control,
rights to change the new venture's management if needed, buy back agreements,
and warrants to make acquisitions.
3. Monitoring and Adding Value
Out of 100 business plans received only one to three new ventures reach this
phase and are chosen to be funded and supported in their further development
(Fetzer, 1991; Pfirrmann et al., 1997; Schefczyk, 2006). Monitoring activities
include the implementation of regular formal (e.g. board meetings, workshops) as
well as informal (e.g. telephone calls, e-mails, informal meetings) reporting
mechanisms to limit the downside risk to the capital provided and to protect the
value of the new venture. The second aspect of active involvement is targeted at
maximising the upside potential through providing valuable advice, information and

Details

Seiten
Erscheinungsform
Originalausgabe
Erscheinungsjahr
2009
ISBN (eBook)
9783836637558
DOI
10.3239/9783836637558
Dateigröße
602 KB
Sprache
Englisch
Institution / Hochschule
Technische Universität Bergakademie Freiberg – Wirtschaftswissenschaften - Fakultät 6, Studiengang Betriebswirtschaftslehre
Erscheinungsdatum
2009 (Oktober)
Note
1,0
Schlagworte
entrepreneurship germany hofstede culture
Zurück

Titel: Venture Capital in Germany and the U.S.: Differences and the Influence of Culture
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