1 / 4100%
The sources of venture capital
Name
MSPM 6102 - Practices in Project Management
Walden University
2022
The sources of venture capital
According to Gale, (1999) using a newly constructed data set, we compare sources of
funds and investment activities of venture capital (VC) funds in Germany, Israel, Japan
and the UK.
Sources of venture capital funds differ significantly across countries, e.g. banks are
particularly important in Germany, corporations in Israel, insurance companies in Japan,
and pension funds in the UK. Venture capital investment patterns also differ across
countries in terms of the stage, sector of financed companies and geographical focus of
investments. We find that these differences in investment patterns are related to the
variations in funding sources - for example, bank and pension fund backed venture
capital firms invest in later stage activities than individual and corporate backed funds –
and we examine various theories concerning the relation between finance and activities.
Venture capital has different sources from which they start their business. For instance
for the case of companies started by a single entrepreneur or a small group of
entrepreneurs, its founders frequently work for no pay, a situation that is referred to as
“sweat equity.
According to Gilson (1998), the initial cash needed is likely to be provided by the
founders, but may be supplemented by money from friends and family members who
have a variety of reasons to want to be a part of what the founders are doing. This type of
funding is sometimes referred to as “seed capital.” The founders may also seek bank
financing, but if the bank is willing to extend credit it will probably be based on their
personal assets or borrowing capacity. Banks rarely lend to companies that do not have a
track record of revenues and profits.
According to Botazzi, (2001), venture capitalists generally expect to see that the founders
have put in a combination of sweat equity and personal cash, and they prefer to see that
they have raised some money from friends and family. After exhausting these sources,
entrepreneurs may think it is time to approach venture capitals to raise the funds they
need to grow their business. In fact, although venture capital did invest smaller amounts
in the 1970s and 1980s, they are now much larger funds and tend only to invest when
companies need multiple millions. As this transition was taking place, angel investors
began to fill the gap between friends and family and venture capital.
Venture capital investment patterns also differ across countries in terms of the stage,
sector of financed companies and geographical focus of investments. We find that these
differences in investment patterns are related to the variations in funding sources - for
example, bank and pension fund backed venture capital firms invest in later stage
activities than individual and corporate backed funds and we examine various theories
concerning the relation between finance and activities. We also report that the relations
differ across countries; for example, bank backed venture capital firms in Germany and
Japan are as involved in early stage finance as other funds in these countries, whereas
they tend to invest in relatively late stage finance in Israel and the UK. We consider the
implication of this for the influence of financial systems on relations between finance and
activities.
References
Allen, F. and D. Gale (1999), “Diversity of Opinion and Financing of New
Technologies,” Journal of Financial Intermediation, Vol. 8, pp. 68-89.
Allen and Gale (2000), Comparing Financial Systems (MIT Press, Cambridge,
Asian Venture Capital Journal (2002), “The 2002 Guide to Venture Capital in Asia,”
(available on the Internet at asiaventure.com).
Bascha, A. and U. Walz (2001), “Financing Practices in the German Venture Capital
Industry: An Empirical Assessment,” unpublished manuscript, University of
Tubingen.
Black, S. and R. Gilson (1998), “Venture Capital and the Structure of Capital
Markets: Banks versus Stock Markets,” Journal of Financial Economies, Vol. 47, pp.
243-277.
BVK (2000), Venture Capital in Europa 1999 (German Venture Capital Association,
Berlin).
Blass, A. and Y. Yafeh (2001), “Vagabond Shoes Longing to Stray: Why Foreign
Firms List in the US,” Journal of Banking and Finance, Vol. 25, pp. 555-572.
Botazzi, L. and M. Da Rin, M. (2001), “Venture Capital in Europe: Euro.nm and the
Financing of European Innovative Firms,” forthcoming, Economic Policy.
Carlin, W. and C. Mayer (1999), “Finance, Investment and Growth,” CEPR
Discussion Paper No. 2223.
Cornelli, F. and O. Yosha (1997),
Students also viewed