Drivers of Venture Capital Fundraising and the Financial Crisis

Seminar Paper, 2010

21 Pages, Grade: 1,3


Table of contents

List of figures

List of abbreviations

1.1 Definition of Venture Capital
1.2 Independent vs. captive venture capital firms
1.3 Supply and demand effects on VCF

2.1 IPO
2.2 Overall economic growth
2.3 Capital gains tax rates
2.4 Labor market conditions
2.5 Financial reporting requirements
2.6 Firm’s specific performance and reputation
2.7 Private pension funds
2.8 Governmental activities and support programs

3.1 Risk aversion
3.2 Decrease of valuation of venture capital-backed startups
3.3 Reduction of interest rates
3.4 New restrictions and laws



List of figures

Figure 1: Flows of venture capital in independent firms

Figure 2: Venture Capital Investments 2009

Figure 3: Survival of new establishments from Q2 1998

Figure 4: Number of funding rounds

List of abbreviations

illustration not visible in this excerpt


This paper gives an overview on the main determinants of venture capital fundraising (VCF) and the impact of the financial crisis on VCF. First you will find some background information on venture capital in general and the differences between the types of venture capital firms. Furthermore this paper will differentiate between supply and the demand effects of VCF. To the better understanding the differences between these categories will be explained in the following.

In the conclusion of this paper the drivers of VCF and the impact of the financial crisis on VCF will be summarized to give an overview about the results and to provide an answer to the research question:

What are the determinants VCF and what is the impact of the financial crisis on VCF?

1.1 Definition of Venture Capital

Venture capital is financial capital which is provided to early-stage companies with high potential but also high risks. Venture capital is therefore an important driver of radical innovations, being the major and often the only source of funding available for new technology-based firms. The connection between the primary source, such as pension funds or banks, and the startup is often provided by a specialized venture capital firm. These firms could be categorized as explained in the following part.

1.2 Independent vs. captive venture capital firms

The differentiation between captive and independent venture capital firms was introduced by Van Osnabrugge and his colleague Robinson in their paper “The influence of a venture capitalist’s source of funds ‘f1 The main difference between those two types is, that so called ‘Captive’ firms have been established by financial organizations like banks or pension funds for instance, and ‘independent’ venture capital firms are not associated with a parent organization.[1]

Even if the captives typically have a high operating autonomy, they are anyhow dependent and have to align their portfolio with the overall image, management and strategy of their parent organizations. On the other hand side, as they receive their funding resources from their parent organizations, these funds tend to be open-ended and reflect the overall investment strategy of their parent institution. Independent firms are not associated with a parent organization and raise capital from various outside sources. Fig 1 shows the different relations and flows of venture capital in independent firms. Independent firms are often formed and owned by ancient managers of established venture capital firms. They normally set up funds with predetermined size, investment strategy and a pre-specified liquidation date, “...usually 7-10 years from inception.”[2] As independent ones are remunerated by an annual management charge and by a part of the realized capital gain, they are highly interested in generating return for investors.[3] Compared to that, captive venture capital firms are more interested in a regular income stream from investments. That’s the reason why they are normally more interested in buyouts and buyins whereas independent firms focus more on the early-stage investments with high risks but also higher expected financial returns. Because of the less number of investments of independent venture capital firms compared to captive ones (“6.82 investments, on average compared to [...] 16.9 for the captive VC.”[4] ), independent venture capital firms claim to monitor their investments more and gains more contractual control than captives do.[5]

illustration not visible in this excerpt

Source: Bygrave and Shulman (1988)

Figure 1: Flows of venture capital in an independent firms.[6]

To summarize one can see that different ventures will be financed by different types of venture capital firms. For early start-ups with high potential and high risks an independent venture capital firm would probably be more interested in investing, than a captive one. On the other hand side captive venture capital firms would be the right investor for later stage investments with less risk and a regular income stream from investment.

1.3 Supply and demand effects on VCF

The differentiation between supply and demand of VCF was first mentioned by Poterba in 1989[7]. The supply could be understood as the willingness of investors to spend money in venture capitals, and the demand shall be understood as the desire of entrepreneurs to get financial resources from investors.

Comparable to other economic sectors, supply and demand for venture are linked. Gompers and Lerner (1999) found “...that demand-side factors appear to have [...]
an important impact on commitments to venture capital funds.”[8] This seems logic, since the greater amount of possible candidates gives more possibilities to compare and chose the favorable investment. This situation could be compared to a supermarket. If the shelves are filled with many products and one has the possibility to choose the product in favor, customers will certainly buy more products and spend more money than in a supermarket with empty shelves and just a few products.

But also the supply side has major impacts on VCF, since it determines the amount of money provided to early-stage companies with high potential market opportunities. The supply side could therefore be seen as important driver for innovation (e.g. technological innovations). With lower rates of venture capital supply, it becomes more difficult to become entrepreneur and potential good ideas and innovations get lost.

As both the supply and demand have impacts on the fundraising process, it is important not to concentrate measures and actions to trigger and reinforce only one side of VCF.


In the following part, a set of determinants of VCF will be presented and analyzed. There are so many possible determinants that it would not be possible to present all in this paper. This chapter should just give a quick overview on some of the most important drivers affecting VCF.

One of the most important drivers of VCF is the economic growth. Higher economic growth is supposed to lead to higher venture capital demand and supply. Capital gains tax rates, labor market conditions, governmental support activities and financial reporting requirements are responsible for the large differences in VCF between different countries. These regional differences are encore reinforced by the differences in the pension scheme between the countries and the resulting differences in the total amount of capital invested.


[1] Van Osnabrugge/Robinson (2001), pp.25-39

[2] See Osnabrugge/Robinson (2001), p.27

[3] See Wright/Robbie (1996), p.156

[4] Osnabrugge/Robinson (2001), p.35

[5] See Osnabrugge/Robinson (2001), p.35

[6] Taken from Osnabrugge/Robinson (2001), p.26

[7] See Poterba (1989), pp.47-67

[8] Gompers/Lerner (1999), pp.2f.

Excerpt out of 21 pages


Drivers of Venture Capital Fundraising and the Financial Crisis
Technical University of Munich
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Venture Capital, Fundraising, Financial Crisis, Finanzkrise, VC, Risikokapital, supply effect, demand effect, VCF, Finanzmittelbeschaffung
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Nicolas Klein (Author), 2010, Drivers of Venture Capital Fundraising and the Financial Crisis, Munich, GRIN Verlag,


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