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Twelve Meditations on Venture Capital: Some Heretical Observations on the Dissonance Between Theory and Practice When Applied to Public/Private Collaborations on Entrepreneurial Finance Policy

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IntroductionAcademic Engagement—Or Why Don't They Ever Listen to Us?The Twelve MeditationsConclusion NotesAbout the Authors

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... In recent years, a number of government VC design theories have been published, based on global experiences (e.g., Cumming 2011Cumming , 2014Lerner 2002Lerner , 2009Lerner , 2010Lerner, Moore, and Shepherd 2005;Mulcahy 2013;Murray 2007;NAO 2009;Pierrakis 2010;Technopolis 2011). Policy interventions require careful consideration of potential pitfalls (Brander, Egan, and Hellmann 2008;Colombo, Cumming, and Vismara 2014;Lerner 2010;Murray and Lingelbach 2009) which might result from agency failures, poor management or policy-making. Whilst it was important to take into account different institutional environments (Florida and Kenney 1988), very few government VC schemes have been successful (Brander, Egan, and Hellmann 2008;Colombo, Cumming, and Vismara 2014;Lerner 2009). ...
... A key part of the private sector-led approach was the ability to leverage co-investment funding from the private sector, increasing fund size and engineering a private sector investment dynamic. Since the funds aimed to demonstrate to private investors that early stage growth potential businesses could yield attractive returns, commercial investment decisions were made by private VC fund managers to ensure that investment decisions utilise rigorous commercial criteria (Baldock and North 2015;Murray and Lingelbach 2009). All EU-financed VC programmes in the CEE countries shared a central element: each of them used matching funds to determine where public subsidies should go. ...
... Small early stage VC funds in less economically developed regions commonly do not survive beyond the exhaustion of the public subsidy and are rarely in receipt of genuine "matched" private financing. The very places that can use this funding least efficiently are often the places most likely to be in receipt of this form of financing (Murray and Lingelbach 2009). ...
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The venture capital (VC) sector in central and eastern Europe (CEE) is characterised by the dominance of public resources. This is mainly due to a new type of equity scheme introduced in the European Union’s 2007–2013 programming period. The paper examines how successful the CEE EU member states, with a relatively less developed VC industry, were in using government equity schemes based on market cooperation between public and private market actors. It provides a general overview of the VC programmes launched in the CEE region viewed through the lens of academic design theories. The paper concludes that government VC programmes in the region are characterised by short time frames, administrative requirements which restricted investors, small fund sizes preventing efficient operation and limited participation of institutional investors. Compared to developed countries agency problems were much more pronounced. The limited number of business angels and incubator organisations, the high number of underfinanced promising start-ups and the misuse of government connections meant that the use of predominantly hybrid funds’ forms of government VC programmes were more challenging in the CEE region compared to western Europe. However, the greatest risk of public equity schemes – the crowding out effect on private investors – is absent in the CEE region because of the lack of private investors.
... As such, US investors engaged in seed capital financing are multi-phase investors and, in their case, managing USD one billion in funds is not rare. In these large size funds, the full range of the activities decreases the high risk of the earliest phase (Murray and Lingelbach, 2009). ...
Technical Report
The entire venture capital sector of Central and Eastern Europe is characterised by the increased weight of state resources. The strengthening of public activities is mainly due to the new type of equity schemes introduced in the European Union’s 2007 to 2013 programming period, which allowed the countries in the region to use part of the Structural Funds to develop their venture capital sector. More than 60 venture capital funds undertook to invest more than EUR one billion by the end of 2015, by raising one third of the funds from private investors. The paper examines how successful the CEE EU Member States, with a relatively less developed venture capital industry, were in using government equity schemes based on market cooperation between the state and market actors. Since, due to the shortness of the time elapsed since launching these schemes, the success of the companies financed by such hybrid venture capital funds cannot be assessed, this paper primarily aims to analyse whether the region was able to utilise the past lessons from government equity schemes in countries with a more developed venture capital industry. Similarly to the equity programs applied in the West, the government venture capital programs in the region are also characterised by the short time frame, the mass of administrative requirements tying the hands of investors, the small fund size, which prevents efficient operation, and the limited participation of institutional investors amongst private investors. Compared to developed countries, the unjustified level of benefits to and non-transparent selection of private fund managers and the immaturity of the investment proposals constitute disadvantages in the region. However, the greatest risk of public equity schemes, i.e. the crowding out effect on private investors, is missing in the CEE region due to the lack of market investors.
... Moreover, the use of standard credit scoring techniques by banks tends to favour established trading businesses with collateral rather than higher risk enterprises with intangible assets (Stiglitz and Weiss 1981;Bank of England 1996Cressy 2002). For their part, venture capital (VC) investors may consider the transaction costs of investing small amounts in seed and early stage ventures to be prohibitively expensive and risky (Bruno and Tyebjee 1985;Trester 1998;Lockett, Murray, and Wright 2002) as they require a disproportionate amount of managerial input from VC fund managers relative to the size of the investment (Murray and Lingelbach 2009). Thus information asymmetry in the VC market arises not necessarily because the information is unavailable, but because it is too expensive to collect relative to the potential benefit from the investment. ...
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A review of recent literature on the corporate life cycle disclosed five common stages: birth, growth, maturity, revival, and decline. Theorists predicted that each stage would manifest integral complementarities among variables of environment ("situation"), strategy, structure and decision making methods; that organizational growth and increasing environmental complexity would cause each stage to exhibit certain significant differences from all other stages along these four classes of variables; and that organizations tend to move in a linear progression through the five stages, proceeding sequentially from birth to decline. These contentions were tested by this study. A sample of 161 periods of history from 36 firms were classified into the five life cycle stages using a few attributes deemed central to each. Analyses of variance were performed on 54 variables of strategy, structure, environment and decision making style. The results seemed to support the prevalence of complementarities among variables within each stage and the predicted inter-stage differences. They did not, however, show that organizations went through the stages in the same sequence.
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Development of a firm's core competencies is identified as the key for global leadership and competitiveness in the 1990s. NEC, Honda, and Canon are used as exemplars of firms that conceive of themselves in terms of core competencies. Core competencies are the organization's collective learning and ability to coordinate and integrate multiple production skills and technology streams; they are also about the organization of work and delivery of value in services and manufacturing. A firm must conceive of itself as a portfolios of competencies, instead of a portfolio of strategic business units (SBUs). The latter limit the ability of firms to exploit their technological capabilities; they are often dependent on external resources. The real source of advantage lies in management's ability to consolidate corporate-wide technologies and production skills into competencies, which will allow individual businesses to adapt to emerging opportunities. Cultivating core competencies does not mean outspending rivals on RD (2) they significantly contribute to the customer benefits of the end-product; and (3) they should be difficult for competitors to imitate. Cultivating core competencies also means benefiting from alliances and establishing competencies that are evolving in existing businesses. The tangible links between core competencies and end products are core products, which embody one or more core competencies. Companies must maximize their world manufacturing share in core products. Global leadership is won by core competence, core products, and end products; global brands are built by proliferating products out of core competencies. Firms must avoid the tyranny of the SBU, the costs of which are (1) under investment in developing core competencies and core products, (2) imprisoned resources, and (3) bounded innovation. Top management must add value to a firm by developing strategic architecture, which will avoid fragmenting core competencies, establish objectives for competence building, make resource allocation priorities transparent and consistent, ensure competencies are corporate resources, reward competence carriers (personnel who embody core competencies), and focus strategy at the corporate level. A firm must be conceived of as a hierarchy of core competences, core products, and market-focused business units. Obsession with competence building will mark the global winners of the 1990s. (TNM)
Article
International new ventures (INVs) represent a growing and important type of start-up. An INV is defined as a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries (Oviatt and McDougall 1994). Their increasing prevalence and important role in international competition indicates a need for greater understanding of these new ventures (Oviatt and McDougall 1994).Logitech, as described in a case study by Alahuhta (1990), is a vivid example of an INV. Its founders were from two different countries and had a global vision for the company from its inception. The venture, which produces peripheral devices for personal computers, established headquarters in both Switzerland and the U.S. Manufacturing and R&D were split between the U.S. and Switzerland, and then quickly spread to Taiwan and Ireland. The venture's first commercial contract was with a Japanese company.Using 24 case studies of INVs, we found that their formation process is not explained by existing theories from the field of international business. Specifically, neither monopolistic advantage theory, product cycle theory, stage theory of internationalization, oligopolistic reaction theory, nor internalization theory can explain the formation process of INVs. These theories fail because they assume that firms become international long after they have been formed, and they therefore highlight large, mature firms. They also focus too much on the firm level and largely ignore the individual and small group level of analysis (i.e., the entrepreneur and his or her network of business alliances).We propose that an explanation for the formation process of INVs must answer three questions: (1) who are the founders of INVs? (2) why do these entrepreneurs choose to compete internationally rather than just in their home countries? and (3) what form do their international business activities take?Who are the founders of INVs? We argue that founders of INVs are individuals who see opportunities from establishing ventures that operate across national borders. They are “alert” to the possibilities of combining resources from different national markets because of the competencies (networks, knowledge, and background) that they have developed from their earlier activities. Following the logic of the resource-based view of the firm, we argue that the possession of these competencies is not matched by other entrepreneurs. Only the entrepreneur possessing these competencies is able to combine a particular set of resources across national borders and form a given INV.Why do these entrepreneurs choose to compete internationally rather than just in their home countries? The founders of INVs recognize they must create international business competencies from the time of venture formation. Otherwise, the venture may become path-dependent on the development of domestic competencies and the entrepreneur will find it difficult to change strategic direction when international expansion eventually becomes necessary. As the founder of one INV explained, “The advantage of starting internationally is that you establish an international spirit from the very beginning” (Mamis 1989:38).What form do their international business activities take? Founders of INVs prefer to use hybrid structures (i.e., strategic alliances and networks) for their international activities as a way to overcome the usual poverty of resources at the time of start-up.This study has important implications for the practice of management. In financing decisions relating to INVs, venture capitalists and other venture financiers should look for entrepreneurs who have a global vision, international business competence, and an established international network. When entrepreneurs start INVs they should create hybrid structures to preserve scarce resources. Finally, given the path-dependence of competence development, founders of new ventures should consider whether establishing a domestic new venture with plans to later internationalize will be as successful a strategy as establishing a new venture that is international from inception.
Article
This paper provides a review of public policy measures implemented in EU countries to support New Technology-Based Firms (NTBFs) during the 1980s and early 1990s. It identifies five policy areas and provides a synthesis of the policy developments during this period and an assessment of their effectiveness. The policy areas examined are: Science Parks; the Supply of PhDs in Science and Technology, the relationships between NTBFs and Universities/Research Institutions; Direct Financial Support to NTBFs from National Governments; and the Impact of Technological Advisory Services on NTBFs. Although considered independently, these issues are clearly part of an interdependent `system' of policies and we conclude with an overview of the whole policy area, together with our personal recommendations for its improvement.
Article
This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982–2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government–private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show – in both a statistically and economically significant way – that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.
Article
We propose a more complete conceptual framework for analysis of SME credit availability issues. In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. We emphasize a causal chain from policy to financial structures, which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies plus relationship lending. We argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.
Article
Governments of most countries seek to encourage Small and Medium Sized Enterprise (SME) growth and the job creation that many believe is fostered by such growth. Substantive growth usually requires expansion capital. It is often perceived that compared with larger firms, SMEs face disproportionately less access to the debt capital they need for start-up, growth, and survival. Consequently, governments and trade associations have often intervened in credit markets by taking on the role of guarantor of loans that financial institutions advance to SMEs. For example, the Small Business Administration in the United States provides guarantees of loans made by banks to qualifying small firms. Similar schemes are in effect in, among other countries, Canada, Japan, the U.K., Korea, and Germany. Trade associations take on such roles in France, Spain, and other nations.Loans that support the expansion of small enterprises may convey significant benefits to the borrowing firms and, through job creation and retention, to the rest of society. However, to the extent that some borrowers are unable to meet the repayment obligations of their debt, guarantors also face material real costs of honoring their guarantee to the lenders. Loan guarantee programs are designed in a variety of ways. Often these programs do not appear to reflect guidance from economic theory or experience. This paper draws on empirical evidence to compare costs with benefits. In addition, it uses the results and economic theory to provide some guidance for the design of loan guarantee programs. Finally, the study shows that loan guarantee programs can be an effective means of supporting start-up, growth, and survival of new and risky enterprises. The work finds that substantial total and incremental job creation may be attributed to the Canadian loan guarantee program.The paper reviews previous attempts to conduct cost-benefit analyses of loan guarantee programs. It finds wide variation, internationally, in default rates. Published data suggests default rates vary from less than 5% (Germany) to more than 40% (U.K.). The empirical analysis reported here focuses on the Canadian implementation of loan guarantees, the Small Business Loans Act (SBLA). Findings include (1) loan guarantees granted under the terms of the SBLA provide an extremely efficient means of job creation, with very low estimated costs per job; (2) default rates are higher for newer firms, increase with the amount of funds borrowed, and vary widely by sector (borrowers in the retail and accommodation, and food and beverage sectors were significantly more likely to default than borrowers in other sectors); and (3) the widening eligibility to larger firms and to larger loans may not be well advised and is inconsistent with the goals of the program. Moreover, reducing the loan ceiling would arguably discourage fraudulent applications while servicing those SMEs most in need of early-stage capital.In addition, analysis of the lenders' motives suggests that default rates on the portfolio of guaranteed loans and, therefore, the costs of honoring guarantees, are particularly sensitive to the level of the guarantee. Small reductions in the level of the guarantee (for example, guaranteeing 80% of principal and accrued interest instead of 85%) could lead to substantial reductions in default rates.Debate persists in economic theory about whether or not government intervention in the credit market is warranted, in spite of the findings that loan guarantees seem to make positive contributions. Further analysis of these issues is advised.