Well-considered choice for a certain type of venture capital determines the success of the investment

The venture capital (or: VC) industry is often very heterogeneous in Europe, where independent, private investors operate alongside government, corporate or bank-related investors. Local players invest alongside international investors. Entrepreneurs often assume that the source of money is not important, but the different types of venture capital each have their own specific impact on the businesses they invest in, each with their specific advantages and disadvantages. Entrepreneurs therefore have to make well-considered choices.

This is apparent from the VICO study, a research project into venture capital in Europe, in which Vlerick Business School together with 8 European partners has over a period of 10 years monitored around 800 European enterprises that have acquired venture capital. The results of the research have important implications for entrepreneurs and for policymakers.

Companies that have access to independent VC investors grow faster in terms of turnover and employment, especially when local and international VC investors form an investment syndicate. Companies that are financed by both independent and public VC on the other hand are more innovative: they apply for more patents. If we want to stimulate the future growth of entrepreneurship in Europe, we must in particular encourage more cross-border venture capital initiatives.

Professor Sophie Manigart, Vlerick Business School

Companies that Receive Venture Capital Perform Significantly Better

The research shows that financing via VC has a very positive effect on growth, productivity, the innovative nature and investment strength of the recipient company: companies that receive venture capital perform significantly better than companies without venture capital. They grow more strongly, are more innovative and are subsequently able to obtain larger amounts of finance (also debt finance from banks) compared with companies who receive no VC. This effect is not only due to selection (only the best companies obtain VC), and also not only to the extra finance (obviously VC financed companies grow more as they have more money), but also to the active role that VC investors play in the companies in which they invest. During the crisis years (2008-2010) VC financed companies even succeeded in growing slightly in terms of turnover and recruiting more staff (where similar non-VC financed companies saw a fall in their turnover and number of staff).

Growth of VC backed companies compared to non-VC backed companies (in per cent):

Growth Sales Employee Growth
Young company Mature company Young company Mature company
Private VC 26,5% 18,7% 14,9% 4,5%
GVC 4,8% - 5,8% -
UVC - - - -

  • Private VC = private venture capital, comprising independent VC, bank-related VC and corporate VC
  • GVC = government-related VC
  • UVC = university-related VC
  • Young company = the firm was less than 5 years old at the time of initial VC investment
  • Mature company = the firm was between 6 and 10 years old at the time of initial VC investment
    The table shows that mature companies, financed by a private VC, grow 18 ,7% (in sales) and 4,5% (in employees) more than comparable companies without VC. When mature companies are financed by GVC or UVC, there is no difference in sales or employee growth compared to comparable companies without VC.
    Young companies, financed by private VC, grow 26,5% (in sales) and 14,9% (in employees) more compared to companies without VC. Young companies, financed by a PVC, grow 4,8% (in sales) and 5,8% (in employees) more compared to companies without VC. Young companies, financed by a UVC, are not different from non-VC backed companies.

Well-Defined Choice for Certain Type of Financing

Nevertheless a number of more specific effects of VC largely depend on certain characteristics of the investor. Attracting a specific type of investor can have far-reaching consequences on follow-up financing, both for external equity capital and for debt financing. Entrepreneurs who call upon venture capital therefore have to make well-defined choices: ‘Do I want to raise venture capital?’, and: ‘What type of venture capital?’

1. Different Types of Investors

There are 5 different types of VC financing: independent investors, bank-related investors, investors related to companies, investors related to universities (usually focussed on university spin-offs) and government-related investors. Compared with independent investors, bank-related investors invest in more mature companies, looking to expand their business. Then again government-related investors invest in very young, innovative companies. Their objectives may be broader, such as e.g. job creation or the economic development of certain regions. The chance of attracting additional equity capital is the smallest for university investors. The amount per issue is highest for bank investors, followed by independent investors. Companies supported by university investors obtain the smallest amounts per issue. Company growth and innovativeness is stimulated most in companies financed by independent VC investors.

2. Experienced versus Inexperienced Investors

Companies financed by experienced VC investors grow more strongly than companies financed by their less experienced colleagues. In particular experience in the industry in which the company is active is extremely valuable.

3. Big versus Small Investors

Companies receiving finance from a big player can attract more follow-up finance than those receiving finance from small players. A bigger financier on average invests up to around € 500,000 more follow-up finance in a portfolio company. These big investors in any case have greater financial strength themselves and they can also send out a strong quality signal, which means that the portfolio company can more easily attract other big investors. This is important for companies that are very highly growth-oriented and therefore will need a lot of finance.

4. Local versus International Investors

Although local investors (who carry out their main activity in the same country as the company) are closer to the companies that they have in their portfolio, research shows clearly that international VC backed companies attract significantly bigger amounts of both equity capital and debt capital. Companies financed by a mix of local and international investors grow more strongly than other companies.

How can Policy help?

Big venture capital investors are extremely important for the development of growth-oriented companies. It is therefore better to concentrate support on a limited number of big VC investors, rather than seeking support from a large number of small investors. After all many small funds lead to many small investments in companies that will necessarily remain small. The government can develop an action plan on the one hand to help strengthen the links of local investors with international investors, and on the other hand to attract more international investors directly.

What is the European VICO research consortium?

The VICO project is financed by the 7th Framework programme of the European Commission. The research aims to analyse the impact of venture capital on innovation, employment, growth and competitiveness. In total 9 academic research institutes are involved in the programme, spread over 7 European countries. Research partners: Armines (FR), Politecnico di Milano (IT), Università Carlo Attaneo (IT), Research Institute of the Finnish Economy (FI) Zentrum für Europäische Wirtschaftsforschung (D), Universidad Complutense de Madrid (ES), University College London (UK), Universiteit Gent (B), Vlerick Business School (B). Scope of the research:

  • survey of businesses with and without venture capital and of the venture capital investors
  • 759 innovative European companies financed with venture capital
  • 7617 similar companies that are not financed with venture capital
  • over a period of 10 years from the time of investment, and if possible also before the investment
  • comparison between European and American companies that received venture capital

Download the full article: ‘Venture Capital: Policy lessons from the VICO Project’

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