Independent Venture Capital (IVC) has been paramount in the emergence of the information technology industry in both the United States and Europe. There are relatively few large global information technology companies in Europe. A widening gap is observable in the success rate of IVC backed start-ups between the U.S. and Europe in the information technology industry. This difference could be attributable to the differences in the venture capital financing of start-ups in the U.S., UK, Germany and France. This book deals with "Differences in Venture Capital Financing of U.S., UK, German and French Information Technology Start-ups". The comparative analysis is conducted on a microeconomic level (managerial venture capital research), i.e. on the venture capital firm level.
The differences are analyzed for the whole venture capital investment cycle: contact phase, initial screening phase, due diligence phase, deal structuring and negotiation phase, management phase — value adding services, and exit phase. The research framework model examines the following differences in the venture capital investment cycle: average size of investment in the seed stage, average size of investment in the start-up stage, aver-age size of investment in the growth stage, percentage of start-ups in pre-revenue phase at time of investment, percentage of start-ups not managed by founders but experienced managers, percentage of investment in start-ups with me-too products, percentage of mar-ket analysis due diligence done informal, typical liquidation preference multiple, percent-age syndicated exits that are outperformers, number of tranches per investment round, number of board seats per partner and the cash multiple X that defines an outperformer. The empirical research work is based on an extensive scientific online questionnaire with VCs in the U.S., UK, Germany and France. Before the online questionnaire was drafted, a preliminary face-to-face expert interview was conducted with 24 VCs in Silicon Valley, London, Paris, Hamburg, Berlin and Munich. The primary data collected in the questionnaire served as basis for quantitative parametric and non-parametric statistical analysis.
The book is bespokenly written for decision makers in the venture capital industry in the U.S, UK, Germany and France; all entrepreneurs and professionals who want to under-stand the economics and mechanics of venture capital term sheet clauses; venture capital industry professionals; VC associations
Table of Contents
1. Introduction
1.1. Topic
1.2. Research Objectives
1.3. Research Design
1.4. Structure
2. e-Business in Business Administration Theory
2.1. Definitions, Characteristics and Concept of e-Business
2.1.1. Definitions of the Term e-Business
2.1.2. Contrasting e-Business and e-Commerce
2.1.3. Applications in e-Business
2.2. Market and Transaction Categories in e-Business
2.2.1. Consumer as Value Generator: C2C, C2B, C2G
2.2.1.1. Consumer-to-Consumer (C2C)
2.2.1.2. Consumer-to-Business (C2B)
2.2.1.3. Consumer-to-Government (C2G)
2.2.2. Business as Value Generator: B2C, B2B, B2G
2.2.2.1. Business-to-Consumer (B2C)
2.2.2.2. Business-to-Business (B2B)
2.2.2.3. Business-to-Government (B2G)
2.2.3. Government as Value Generator: G2C, G2B, G2G
2.3. e-Business Model
2.4. e-Business and Entrepreneurship Theories
2.4.1. Creative Destruction Theory
2.4.2. Entrepreneurial Discovery and Competitive Market Process
3. Venture Capital Financing of Start-ups in Business Administration Theory
3.1. Equity Financing: Venture Capital Financing
3.1.1. Institutional Venture Capital Financing
3.2. Independent Venture Capital Financing (IVC)
3.2.1. Definitions and Characteristics of Independent Venture Capital Financing
3.2.2. Stages in the Financing Life Cycle of a Start-up
3.2.3. Structure of Independent Venture Capital Firms
3.2.4. Role of Independent Venture Capital Firms in Start-ups
3.2.5. Theoretical Foundation for Explanation of the Behavior of Venture Capital Firms
3.2.5.1. Agency Theory Model: Asymmetric Information, Moral Hazard and Adverse Selection
3.2.5.2. Mitigation of Agency Risks
3.2.6. Typical Venture Capital Investment Process: VC Investment Cycle
3.2.6.1. Contact Phase
3.2.6.2. Initial Screening Phase
3.2.6.3. Due Diligence Phase
3.2.6.3.1. Investment Criteria: Management Team, Market, Product, Potential Exit Channel
3.2.6.3.1.1. Evaluation of Management Team
3.2.6.3.1.2. Evaluation of Business Model: Product or Service
3.2.6.3.1.3. Evaluation of Market: Market Analysis
3.2.6.3.1.4. Evaluation of Potential Exit Channel
3.2.6.3.2. Financial Due Diligence: Valuation of Start-ups
3.2.6.3.2.1. Dilution
3.2.6.3.2.2. Pre-Money and Post-Money Valuation
3.2.6.3.2.3. Virtual Valuation
3.2.6.3.2.4. Multiples: Comparable Companies and Comparable Transactions Method
3.2.6.3.2.5. Discounted Cash Flow Method (DCF)
3.2.6.4. Deal Structuring and Negotiation Phase
3.2.6.4.1. Deal Negotiation
3.2.6.4.2. Structuring a Venture Capital Deal
3.2.6.5. Management Phase — Value Adding Services
3.2.6.6. Exit Phase
3.2.6.7. Venture Capital Investment Syndication
3.2.6.8. Staged Financing of Start-ups
4. Macroeconomic Environment of the Venture Capital Industry in the U.S., UK, Germany and France
5. Previous Empirical Research: Differences in Venture Capital Financing of U.S., UK, German and French Start-ups
5.5.1. Venture Capital Financing — U.S. and Europe
5.5.2. Venture Capital Financing — Europe
6. Research Framework Model and Hypotheses Development
6.1. Average Size of Investment
6.2. Venture Capital Investment Risk Strategy
6.3. Management Team Due Diligence
6.4. Product–Service Due Diligence
6.5. Market Analysis Due Diligence
6.6. Investment Committee
6.7. Deal Structuring
6.8. Investment Syndication
6.9. Milestone Financing
6.10. Management Phase — Value Adding Services
6.11. Exit Phase
7. Empirical Research Design
7.1. Research Method
7.2. Data Sample Collection Method
8. Quantitative Inferential Statistical Significance Tests
8.1. Parametric Inferential Statistical Significance Tests
8.1.1. HA: Average Size of Investment — Seed Stage
8.1.2. HB: Average Size of Investment — Start-up Stage
8.1.3. HC: Average Size of Investment — Growth Stage
8.2. Non-Parametric Inferential Statistical Significance Tests
8.2.1. HD: % of Start-ups in Pre-revenue Phase
8.2.2. HE: % Start-ups not Managed by Founders
8.2.3. HF: % of Investment in Start-ups with Me-too Products
8.2.4. HG: % of Market Analysis Due Diligence done Informal
8.2.5. HH: Size of Investment Committee
8.2.6. HI: Typical Liquidation Preference Multiple (LPM)
8.2.7. HJ: % Syndicated Exits that are Outperformers
8.2.8. HK: Number of Tranches per Investment Round
8.2.9. HL: Number of Board Seats per Partner/Investment Professional
8.2.10. HM: Cash Multiple X that Defines an Outperformer
9. Comparison of Key Findings of the Dissertation with Results of the Expert Interviews and Previous Comparative Research Studies
9.1. HA: Average Size of Investment — Seed Stage
9.2. HB: Average Size of Investment — Start-up Stage
9.3. HC: Average Size of Investment — Growth Stage
9.4. HD: % of Start-ups in Pre-revenue Phase
9.5. HE: % Start-ups not Managed by Founders
9.6. HF: % of Investment in Start-ups with Me-too Products
9.7. HG: % of Market Analysis Due Diligence done Informal
9.8. HH: Size of Investment Committee
9.9. HI: Typical Liquidation Preference Multiple (LPM)
9.10. HJ: % Syndicated Exits that are Outperformers
9.11. HK: Number of Tranches per Investment Round
9.12. HL: Number of Board Seats per Partner /Investment Professional
9.13. HM: Cash Multiple X that Defines an Outperformer
9.14. Other Research Findings from the Online Questionnaire
10. Implications for Future Research on Differences in Venture Capital Financing of U.S., UK, German and French Start-ups
Research Goals and Themes
The primary research objective is to conduct a comparative analysis of the differences in venture capital financing of information technology start-ups across four specific clusters: the U.S., UK, Germany, and France. The study focuses on identifying and analyzing disparities in investment processes on the venture capital firm level, covering the entire investment cycle from the initial contact to the final exit phase.
- Analysis of the entire venture capital investment cycle (contact, screening, due diligence, deal negotiation, management, and exit).
- Comparative examination of the U.S., UK, German, and French venture capital markets as homogeneous clusters.
- Identification of differences in investment strategies, risk assessment, and deal structuring practices among the studied countries.
- Assessment of the role of macroeconomic factors in shaping venture capital behavior at the microeconomic firm level.
- Testing of 78 hypotheses regarding financing practices to determine statistical significance using parametric and non-parametric methods.
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3.2.6.3. Due Diligence Phase
A VC makes a detailed review and analysis of an investment opportunity before an investment is made in a start-up in a process called due diligence. In an empirical research, Muyzka, Birley, and Leleux find that most VCs prefer an investment opportunity which offers a good management team and reasonable product and market characteristics. VCs make their decision whether to fund a project based on the perceived strength of an idea, capabilities, skills and past record of the founders. Due diligence assesses and compares the risk-return profile of an investment opportunity with the risk-return investment criteria of a VC to see if they fit. It is the process that VCs use to decipher 'good' investment opportunities from 'bad ones'.
As elaborated earlier, management risk comprises execution and agency risk; market risk entails competition risk, new entrant risk, market growth risk and market size risk; product risk encompasses product development risk, proprietary risk and technology obsolescence risk. Due diligence can be defined as a rigorous assessment and evaluation of the embedded factors that affect the likelihood of failure or success of a start-up. VCs invest an inordinate amount of time to go through the due diligence process and rely heavily on personal contacts to market experts and industry specialists for validation of a business model. Three main forms of due diligence are conducted in assessing the promise of an investment opportunity: business, financial and legal due diligence. This research study does not examine legal due diligence. Although one approach does not fit all, there are common threads that VCs use in business due diligence of start-ups. The key investment criteria that VCs consider in business due diligence are management team, product, market and potential exit channel. For each criterion, VCs ask themselves a set of questions regarding the viability of the business model.
Summary of Chapters
1. Introduction: Presents the topic of venture capital in information technology, identifying a research gap regarding differences in financing practices between the U.S. and Europe on a microeconomic level.
2. e-Business in Business Administration Theory: Defines e-Business, categorizes market and transaction types, and links the concept to entrepreneurial theories like creative destruction.
3. Venture Capital Financing of Start-ups in Business Administration Theory: Details the forms of venture capital, the financing life cycle of start-ups, agency theory models, and the comprehensive investment cycle.
4. Macroeconomic Environment of the Venture Capital Industry in the U.S., UK, Germany and France: Reviews the fundamental macroeconomic factors that shape the industry in the four focal countries.
5. Previous Empirical Research: Differences in Venture Capital Financing of U.S., UK, German and French Start-ups: Summarizes prior research studies that have addressed venture capital differences in these regions.
6. Research Framework Model and Hypotheses Development: Establishes the 12-element research framework used to analyze the venture capital cycle and develops the 78 research hypotheses.
7. Empirical Research Design: Describes the methodology for data collection, including expert interviews and the implementation of the online questionnaire.
8. Quantitative Inferential Statistical Significance Tests: Explains the statistical tests (parametric and non-parametric) used to validate the hypotheses based on the gathered data.
9. Comparison of Key Findings of the Dissertation with Results of the Expert Interviews and Previous Comparative Research Studies: Evaluates the empirical survey results in light of the prior expert interviews and existing academic literature.
10. Implications for Future Research on Differences in Venture Capital Financing of U.S., UK, German and French Start-ups: Discusses limitations and provides recommendations for future academic research.
Keywords
Venture Capital, Start-ups, Information Technology, Investment Process, Due Diligence, Agency Theory, Deal Structuring, Syndication, Milestone Financing, Exit Strategies, Entrepreneurial Team, Market Analysis, Investment Committee, Risk Management, Quantitative Analysis.
Frequently Asked Questions
What is the core subject of this doctoral dissertation?
The dissertation provides a comparative empirical analysis of venture capital financing for information technology start-ups, specifically focusing on the differences between the United States, United Kingdom, Germany, and France.
What are the primary themes covered in the work?
The work covers theoretical foundations of e-Business and venture capital, the venture capital investment cycle, macroeconomic environments, and a quantitative empirical study based on a survey of venture capital firms.
What is the primary objective or research question?
The goal is to portray and statistically test differences in the approach of independent venture capital firms across the four target countries throughout the entire investment process, from initial contact to final exit.
Which scientific methodologies are applied?
The research uses a multi-stage approach, combining a theoretical literature review, qualitative preliminary face-to-face expert interviews in major hubs, and a large-scale quantitative scientific online survey tested with parametric and non-parametric statistical methods.
What key aspects are analyzed in the main body?
The main body analyzes twelve core elements of the investment cycle, including investment size, risk strategy, due diligence procedures (management, product, market), investment committee dynamics, deal structuring, syndication, milestone financing, and exit performance.
Which keywords characterize this research?
Key terms include Venture Capital, Start-ups, Information Technology, Due Diligence, Agency Theory, Deal Structuring, Investment Syndication, and Exit Strategies.
How do U.S. and European venture capital investment committees differ?
The research shows that U.S. investment committees tend to be more democratically structured, with a higher propensity for rejecting deals upon a tied vote, whereas European models often exhibit patriarchal or veto-heavy structures.
How does the author analyze the risk-aversion of different venture capital markets?
Risk aversion is analyzed through the percentage of investments in pre-revenue start-ups and the preference for "me-too" products, concluding that German and French venture capitalists are significantly more risk-averse than their U.S. counterparts.
- Quote paper
- Michael Jurgen Garbade (Author), 2011, Venture Capital Financing of U.S., UK, German and French IT Start-ups, Munich, GRIN Verlag, https://www.grin.com/document/170334
