1st semester, 2004/2005 11 february 2005 Strategic Management Business Studies Universiteit van Amsterdam Table of contents 1 Introduction 1 2 The nature of venture capital 2 2.1 Definition of venture capital 2 2.2 (Ad)venturers of the past 2 2.3 How venture capital works 3 2.4 For innovation a vehicle is needed 4 2.5 Venture capital helps create vehicles for innovation 4 2.6 Realization of financial returns 5 3 Screening and evaluation process 6 3.1 Strategies and objectives of venture capitalists 6 3.2 Screening and decision making process 6 3.3 Decision to invest 8 3.4 Deal structuring 9 4 The development of venture capital in Western Europe 10 4.1 General 10 4.2 Environmental factors influencing innovation 11 5 Interview 17 6 Conclusion 20 Bibliography 21 1 Introduction The phenomenon that is now called venture capital developed after World War II in the United States. Many returning soldiers were unwilling to take back their old jobs and started out on their own. Moreover the war had produced many technological innovations and ideas that could be put to civilian use. Facilities and machines used in the war production had become unnecessary and were often available at bargain prices. The post war economy expanded fast and offered many business opportunities. It was in this environment that many new enterprises started and needed capital.
The first European venture capitalists appeared in the 60’s following the U.S.A. example. In the 80’s the venture capital industry in Europe had reached a level comparable to this industry in the United States during the 50’s (Bygrave, and Timmons, 1992).
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... high, average individuals do not have the capital to invest in ventures. Venture capital funds can come in three main ways. ... help the company through difficult times. Sources of Capital Sources of venture capital include wealthy individual investors, investment banks, and other ... the project. During the war, there were many new technologies developed as well as other innovations from MIT. About half ...
The purpose of this paper is to explain why the venture capital industry in Western Europe has developed so many years later than in the United States. In chapter two the nature of venture capital will be discussed. The definition and the history of venture capital will be given and how venture capital works will be discussed.
For a better understanding of venture capital, in chapter three, the screening and evaluation process to analyse investment possibilities and to take investment decisions will be discussed. In chapter four, the factors influencing the development of venture capital and the causes of the later development of the industry in Western Europe will be explained. Also a brief summary is given of venture capital today in Western Europe based on an interview with a venture capitalist. In chapter five an interview with a venture capitalist about the changes in venture capital in the Netherlands is given. Finally, in chapter six a summary of the paper will be given. 2 The nature of venture capital 2.1 Definition of venture capital Dictionaries describe ‘venture’ as an undertaking that is dangerous, daring, and of uncertain outcome.
At a venture means at stake. ‘Capital’ is defined as material wealth, money or property, used or available for use in the production of more wealth. ‘Venture capital’ therefore means a daring undertaking of uncertain outcome in which capital is put at stake for use in the production of more wealth. 2.2 (Ad)venturers of the past Daring investment have always existed. The ancient Greek noblemen contributed their privately financed battalions to King Agamemnon’s force to destroy Troy, according to Homerus not so much motivated by nationalistic zeal as by the promise of great financial reward through war loot (Homerus, and Carel Vosmaer, 1886).
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Case study 1 Better Fitness, Inc. (BFI), manufactures exercise equipment at its plant in Freeport, Long Island. It recently designed two universal weight machines for the home exercise market. Both machines use BFI-patented technology that provides the user with an extremely wide range of motion capability for each type of exercise performed. Until now, such capabilities have been available only ...
Wealthy Dutch merchants formed partnerships in the seventeenth century to equip ships to trade and sometimes fight for the spices of the East Indies.
Only one out of three ships returned but then the payoff was 10 to 15 times in two or three years (http://mediatheek.thinkquest.nl).
These examples have one thing in common. The early (ad)venturers entrusted their money to men they trusted and above all considered knowledgeable and able to create success. The inventor of the term ‘venture capital’ is unknown. However it is generally agreed that the modern venture capital era really began in 1946, when General Georges F. Doriot and others organized American Research & Development (AR&D) in Boston, the first public corporation specializing in investing in early stage companies.
Doriot has been an important person in early venture capital (http://vcexperts.com).
He not only brought AR&D to success but also introduced a lot of today’s successful venture capitalists to the business through the courses he taught at Harvard Business School. Doriot says, “Seek out creative men with the vision of things to be done. Help breathe life into new ideas, processes and products with capital and with sensitive appreciation for creative drive, with management and manpower, with loyalty to the idea and his initiator, the creative man” (http://vcexperts.com).
Venture capital has been and is an industry of investors with the imagination, judgement and nerve to engage in adventures sharing their hopes and expectations for creating economic value and financial success with explorers, innovators and entrepreneurs who have the drive to develop new undertakings. This is the essence of venture capital.
2.3 How Venture Capital works Venture capital is about innovation. Innovation is the process of bringing invention into use (Schon, 1967).
In different words it is the process of the creation of an invention or idea, its development and finally its introduction in the market place. The invention or idea An invention can be the result of scientific research but an idea often originates spontaneously in the mind of an entrepreneur, an inventor, a businessman or just a thinker. Some ideas are more likely to originate in certain environments. Technological inventions generally originate in universities and big laboratories. Commercial ideas are more individual and more likely to arise in an entrepreneurial environment with exposure to the marketplace. Development All ideas and inventions, commercial or technological, have in common that after their creation they must be developed systematically.
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Human capital refers to the stock of productive skills and technical knowledge embodied in labor. Many early economic theories refer to it simply as labor, one of three factors of production, and consider it to be a fungible resource – homogeneous and easily interchangeable. Other conceptions of labor dispense with these assumptions. Today’s Globalization and competition among companies made ...
This is the point where most ideas get stuck and die. An idea must be tested and developed. For instance a prototype must be built and/or a market test must be done to determine the feasibility of the idea or invention. As result of the development it should be clear whether the invention or idea can be expected to fulfil a need in the marketplace. Introduction in the marketplace The introduction in the marketplace is the real test of the idea or invention. Experience learns that things tend to turn out different in practice than in development. This paper is not about marketing, but it is clear that the qualities and imagination of the innovator are essential to adapt and fine tune the product to the marketplace 2.4 For innovation a vehicle is needed Inventions and ideas created outside existing organizations need an organisation and finances for development and market introduction.
In theory existing companies could provide this. But generally the innovator has no idea how to find suitable existing companies or how to present his ideas and get financial and other support. Moreover, many companies have an aversion to adopt ideas from outside: the not-invented-here syndrome. Banks are not in the position to supply funds or assistance, because they base decisions on credit standing, reputation, earnings record and assets, things an innovator normally does not have. As a consequence, innovative ideas, wander around unable to find an organisation that can serve as a vehicle for innovation. 2.5 Venture capital helps create vehicles for innovation Venture capitalists are aware of the demand for innovative pro ….
