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Venture Capitalist's Investment Decision Making in the New Technology Based Firms in Japan

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In Japan, there has been a notable growth in the percentage of investment in new technology based firms by venture capitalists (here after abbreviated VCists). I analyze Japanese VCists investment decision making based on a questionnaire survey and attempt to seek answers for the following research questions: “How do Japanese VCists valuate their potential investments?” and, more specifically, “How do VCists who invest in new technology based firms valuate their potential investments”. The questionnaire survey reveals that a relatively high proportion of Japanese VCists place a special importance on the interview with entrepreneurs, and curriculum vitae of management in valuating the potential investments. At the same time, they use capitalized maintainable earning (P/E multiples) as the valuation method. However, it seems that VCists who allocate a higher proportion of their investment in the new technology based firms do not focus particularly on any source of information or valuation method even though there has been a rapid growth in an investment in the new technology based firms in the recent years.
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... The form of intervention has evolved from a supply-side approach using tax incentives targeted at high net worth individuals, through an intermediationary approach aimed at improving the availability of information using capacity building and only currently, back to supply-side approach with the use of government funding to leverage private investment (Mason, 2010). Even though, Japan has been the focal point of Venture Capital (VC) activity in Asia for most of the last three decades (Kirihata, 2008;Hasegawa, 2004;Ajagbe and Ismail, 2014), China has suddenly been observed to have received increased attention in recent years. This is likely because it has developed majority of the needed components required for a vibrant VC industry, including robust economic growth, a growing commitment to IP rights, and a strong entrepreneurial culture (Ahlstrom et al., 2007;Zhang et al., 2011). ...
... Bank Supported Venture Capital: The banks in China were very active and played prominent role during the development of new ventures in the early years (White et al., 2005). Whereas in Japan the background of VCFs were set up as affiliates of financial institutions such as insurance companies, securities companies and commercial banks (Kirihata, 2008;. They were the primary source of financing to high tech start-ups. ...
... Instead, they relied on a project's designation as a recipient of Torch Program support as policy guidance. The majority of banks financing, however, was available only at the expansion and later stages of a venture's development (Kirihata, 2008;, with local governments acting as guarantors. ...
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Technology entrepreneurship is a form of business leadership based on the process of recognizing high-potential, technology-intensive business opportunities, gathering resources such as talent and cash, and managing rapid growth using principled, real-time decision making skills. Technology based entrepreneurial firms account for a substantial number of essential inventions and innovations in successful countries. Such firms have become an integral part of the development of the global and regional economy. However, they are often characterized by the paradigms liability of newness and resource poverty, coupled with suffering from inadequate technical and marketing know-how, inexperience management, inability to discover initial financing and huge overheads. In view of this, startups in the technology sector encounter the problem of sourcing technical and financial resources and commercialization capabilities required to take their products to market. This study adopts a secondary approach to research methodology through the review of existing articles in this domain of investigation. Articles are sourced from conference and journal papers from reputable database, internet sources, brochures and newspapers. This study concludes that investment and financial decisions play an increasing vital role in economic growth and entrepreneurial new venture creation. Hence, investment and financial policies are part of the main operational resolutions in emerging nations to support investment by domestic firms, particularly technology entrepreneurial firms. Hence, policy makers in Nigeria and other developing countries could evolve ambitious policy framework aimed at developing the equity financing sector through venture capital, particularly for technology entrepreneurs. Also they could build substantial amount of skilled and experienced venture capitalists to identify high potential investments opportunities and be able to nurture and support them to an exit.
... O Venture Capital surgiu por volta da década de 1940 nos EUA, tendo iniciado as atividades, com investimentos de ex-executivos de empresas norte-americanas, que aplicavam recursos próprios e sua experiência profissional em empresas com alto potencial de crescimento (MEADE, 1977). No contexto Asiático, Latino-Americano e Europeu, a atividade iniciou entre as décadas de 1970de e 1980de (FELIX, 2005KIRIHATA, 2008). ...
... Para atingir este objetivo, realizou-se um estudo multicasos, com três dos principais fundos de Venture Capital brasileiros (FURTADO et al., 2008), utilizando como técnica de coleta de dados a aplicação de questionários estruturados, semi-estruturados e entrevistas. A abordagem do problema foi qualitativa e comparou os critérios utilizados pelos participantes, e aqueles reportados pela literatura internacional (MUZYKA et al., 1996;KINNUNEN, 2004;KIRIHATA, 2008). ...
... As finanças empreendedoras se diferenciam das finanças corporativas, no que diz respeito à assimetria informacional e aos problemas de agência, e nesse sentido as principais questões abordadas em pesquisas sobre VC/PE são: (i) alternativas de fontes de financiamento para as empresas alvo, (ii) a influência da governança e dos contratos na indústria de VC/PE, (iii) influência das políticas governamentais na indústria de VC/PE, (iv) o retorno obtido, dado o risco envolvido, nos investimentos em VC/PE, (v) o processo decisório dos gestores de Fundos de Venture Capital e Private Equity, (vi) os critérios utilizados para o processo de decisão (DENIS, 2004 (MUZYKA et al., 1996;KAPLAN;STROMBERG, 2000;FORLANI;MULLINS, 2000;MANIGART et al., 2002;SHEPHERD et al., 2003;ENS-LEY;CARR, 2006;DIMOV et al., 2007;KIRIHATA, 2008;KHANIN et al., 2008;MISHRA et al., 2009) ...
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O presente trabalho buscou verificar quais os critérios utilizados pelos fundos de Venture Capital/Private Equity na decisão de investimentos. Para tal, realizou um estudo multicaso junto a três gestores de Fundos de Investimentos. A coleta de dados foi realizada através de questionários e entrevistas (estruturados e semiestruturados) no período de setembro de 2010 a Dezembro de 2010. Observou-se que os gestores dos casos estudados utilizam os seguintes critérios como os de maior impacto no processo de avaliação: a equipe de gestão e suas competências, o produto-mercado e os critérios do fundo, critérios esses apontados por Muzyka et al. (1996). Sobre esse resultado, cumpre ressaltar dois aspectos: (i) a preocupação com a capacidade de gestão é considerado pelos gestores como o critério mais relevante, por maximizar as chances dos projetos serem implementados; e (ii) os critérios do fundo, diferentemente do encontrado na pesquisa de Muzyka et al. (1996), não são subsidiários, o que provavelmente decorre da especialização e/ou regionalização da carteira de investimentos, além de aspectos da regulação brasileira, que estabelece limites para as empresas-alvo.
... This can be attributed to the VC market's lack of knowledge and experience in selecting portfolio firms as well as providing value-adding support to NTBFs. Japanese VCs put emphasis on experience rather than on the financial theories during the portfolio firm selection process (Kirihata, 2008a(Kirihata, , 2008b. During the post-investment period, Japanese VCs lack the knowledge and skill to provide value-adding support to NTBFs. ...
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In concluding this study, we would like to make some remarks on the differences found in VEC’s and our studies. First of all, in the study by VEC, the number of cases choosing IPO as their exit gate was 265 out of 537 cases, or approximately 50%, which was extremely high. In comparison to that, the numbers in our study were lower at only 29% for VCFs and 25% for VCists. The two studies were carried out roughly one and a half year difference in time span. However, IPO atmosphere was fairly similar during these periods of time (between 2004 and the middle of 2006). The numbers of IPO were 175 cases in 2004, 158 cases in 2005, and 200 cases in 2006, showing no significant difference as well. It is, therefore, difficult to mark time as a crucial cause of this discrepancy. As a consequent, it can possibly be assumed that this large gap of IPO rates was caused by the difference in variety of samples used in the two studies. The companies we conducted this research with were relatively younger than those in VEC’s report. They seemed to still be in the stage of holding their shares, waiting and preparing for IPO. There were also some differences in the ratio of industry breakdown. Although IT field captured the largest share of samples in both reports, it was 28% in VEC’s but 38% in our study. In contrary, the ratio of bio-technology was 22% in VEC’s and 17% in ours. The reason is similar to the one above. It is because our respondents were relatively younger. VCFs with short career path are likely to select IT over bio-technology because of the amount of investment capital required (IT industry requires relatively smaller amount of money). Additionally, because bio-technological industry does not grow as fast as being expected, the gap is then filled by the traditional sector. This implies that our research reflected a more realistic side of the coin. In reality, there are actually not many investment opportunities in the field of bio-technology. IT field, on the other hand, is growing and increasing in both Nikkei and VEC. The total investment in IT increased to 77.3 billion yen, equivalent to 2.2 times the number in 2004. The amount of bio-technology, in contrary, declined for the first time in seven years at the rate of 7%, to the amount of 19.8 billion yen. This number could reflect the decline in the growth of ventures originated from universities, which is one of the driving forces of bio-technology. Even though there has nothing to do with the study by VEC, the problem of moral hazard should be touched upon. As being mentioned by Mr.Tetsuo Kadowaki and some others, this problem is known as a problem in the structure of Japanese VCFs . In this study, there were only 2-3 firms that were actually claimed by investors. Despite that, these companies revealed that it was only because of their already established internal standard on how to allocate investments. Considering this fact, it can possibly be stated that there is no particular problem in this respect at the surface. This analysis still yet needs to be revised using data from follow-up surveys. However, in a lot of cases at this point, it seems that the shareholders of VCFs and their main investors of funds reside in the same persons. If this holds true, it implies that VC has not yet been popularized among public. According to a study by VEC, a ratio of individual investors raised from nearly none to 77 out of 391 persons during one year before 2005. This number is equivalent to 14% of total investment amount at that time. This remarkable increase in the number of individual investor is sufficient to predict more apparent problems of moral hazard in the near future.
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This paper by the editors of Venture Capital has three objectives. First, it outlines the reasons why this is a particularly opportune time to launch a new journal on venture capital. Second, it sets out the aims of Venture Capital. Third, it provides an overview of venture capital research in order to 'map' the territory of the journal, describes its scope and highlights some aspects of venture capital where knowledge and understanding are limited.
Nihon no Bencha Kyapitaru (Venture capital in Japan)
  • Yasuyuki Hamada
Hamada, Yasuyuki (1998) Nihon no Bencha Kyapitaru (Venture capital in Japan), Nihon Keizai Shinbunsha (in Japanese).
Bencha Kyapitaru karamita Bencha Kigyo no Baryueshon(Venture capitalist's Valuation of firms)
  • Hasegawa Hirokazu
Hasegawa Hirokazu(2004)Bencha Kyapitaru karamita Bencha Kigyo no Baryueshon(Venture capitalist's Valuation of firms), Business Insight, pp.8-25 (in Japanese).
Kinyu-tyukai Kikan toshiteno Bencha Kyapitaru no Seiritsu to Tenkai(Emergence of Venture Capital as Financial Intermediary: Development of the Private Equity Market in the U.S)
  • Nishizawa Akio
Nishizawa Akio(1998)Kinyu-tyukai Kikan toshiteno Bencha Kyapitaru no Seiritsu to Tenkai(Emergence of Venture Capital as Financial Intermediary: Development of the Private Equity Market in the U.S), Annual report of the Economic Society, 60(2), pp.163-183 (in Japanese).