Venture Capitalists: Devils or Angels

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Venture CapitalistsDevils or Angels?

• Professor Harry J. Sapienza
• University of Minnesota

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Overview and Purposes

• Purposes Organization of this talk
• The Historically Dark View of Usury
• Research on Venture Capital (VC) in Spain
• Practice of VC elsewhere
• Closing Thoughts

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I. Broad Historical OverviewA Curse Upon the
Money Lenders

• Our Concept of Truth Changes
• Science
• Culture
• The Image of the Money Lender
• Religion
• Law
• Literature

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Usury is a Dirty Word

• Torah and Quran
• Moses, Plato, Aristotle, Cato, Cicero, Mohammed,
  Aquinas
• Ciceros De Re Rustica And, what do you think
  about usury? Well, what do you think about
  murder?
• QuranThose engaging in usury are in the same
  position as those under the devils influence

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Practice of Usury A scourge, a crime, an excuse
for expulsion

• Middle Ages- marginalizing a group
• Crusades
• Edward I declares usury a crime and a sin, 1275
• Expulsion of the Jews from England
• Dantes Inferno
• Shakespeares Merchant of Venice

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Historical Change, Persistent Fear

• Henry VIIIs decree, 1545 50 years before
  Shakespeares works
• Modern economists see financial leverage and
  time value of money as key to growth revolution
• Who weeps for the vulnerable investor?
• Images of greedy lenders
• Lenders fear Ahab at the ships command

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II. Entrepreneurship, Venture Capital, and
Economic Vibrancy

• End of a Millenium, Beginning of an Era?
• Vast fortunes, revolutionary technology
• Sea changes in standard of living
• The Study of a Global Phenomenon
• 1980--Birchs hypothesis New firms as key to
  innovation and new jobs
• 1990s--Storey, Davidsson, Delmar
• 2000s--G.E.M. Mission and methods

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Phenomenon, Research, Policy

• Emerging knowledge combined with technological
  and economic revolution
• Policy makers ask, How can we replicate the U.S.
  experience? What are we missing?
• The light goes on Not all new business are
  created equal!
• Is Venture Capital the answer?

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III. Recent Studies of Venture Capital in Spain

• The work of Marti and disciples
• Alemany A brief history
• Pintado, Garcia, Van Auken
• Comparisons

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Conclusions of These Studies

• VC industry is growing, increasingly funded by
  private sources, still small of GDP
• VC flowing increasingly to later stage ventures
  (especially private VC)
• VC focused little on technology, more on
  traditional sectors
• VC-backed firms outperform others
• Evidence that VCs add value
• Legal structure not oppressive

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Assessment of Research on Venture Capital in Spain

• Quality and quantity of data
• Extra-ordinary access and completeness
• Methods used by Marti, Alemany, et al.
• Superb approach to topic, issues
• Interpretation and Meaning
• Difficult to know fully at this time

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VC in SpainConclusions and Observations

• Trends in VC Industry Development
• Laws and Governance continually adjust
• Tendency to drift toward later stages is
  common, understandable is it regrettable?
• Vast knowledge base, along with G.E.M. data is
  potential policy goldmine
• Spain lags in high expectation startups Why
  is this so? Is this bad? What may policy makers
  do if it wants to change this?

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IV. My Empirical Findings

• Dissertation and related
• Earlier stage venture, more VC involvement
• Less entrepreneurs experience,
• Closer location,
• Small VC firm,
• Higher tech startup firm,
• Higher tech startup firm, more VC-E conflict
• Less VC experience,
• More involvement,
• More involvement, more value-added
• Higher tech startup firm,

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Roles of Venture Capitalists

• Nature of VCs Roles Involvement
• VCs and Es see VC roles in same priority
• Most crucial- Strategic Financial Feedback
• Next is being Confidant/Friend/Mentor
• Finally, Networking Recruiting
• The above pattern holds across stages and
  countries (including, e.g., US, Europe, Asia)
• VCs most involved in US, least in Europe

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Managing the Investment Portfolio

• Strategic Management of VC Portfolio
• VCFs do not diversify to mitigate risk
• VCFs tend to specialize by stage, by industry, by
  region (or by two of these)
• The younger their portfolio, the more focused
  their investments in both stage and geography
• Hence, they appear to try to deal with risk by
  increasing knowledge rather than by diversifying

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Impact of Entrepreneurs Behavior

• How is the VCs attitude toward the CEO and
  venture team shaped?
• VCs are more likely to trust the CEO and team if
  they have influence on decisions and if timely
  feedback is given, regardless of whether the
  performance is good or bad
• VCs are also more committed to decisions reached
  and are more likely to invest further money with
  influence and timely feedback

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Valuing the Investment

• Assessment, Valuation, Target Returns
• (US, UK, France, Belgium, Netherlands, Hong Kong,
  India, Singapore)
• Own due diligence, business plans preferred over
  external evaluations/ sources
• Earlier the stage, more informal valuation
  technique
• Early stage investors charge more in later stage
  ventures and vice versa
• US UK firms require higher promised returns
  than do other VCFs

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Learning, Relations, Involvement

• When do VCFs learn?
• When VCs are less experienced
• When VCs trust in E is low
• When the startups performance is high
• VC-E Relationship and Performance
• Trust, Social Interaction, Goal Agreement and VC
  Commitment are all positively related to
  perceived venture performance
• VC Effort/Involvement
• Involvement is negatively related to reputation
  but positively to size of investment relative to
  VCF group

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Concluding Remarks

• For policy makers, is VC a good investment?
• findings of the Federal Reserve of Minnesota
• For entrepreneurs, when is VC a dream? and, when
  is it a nightmare?
• For investors, what is necessary to succeed in
  this high stakes, high risk game? How can you
  know when Ahab is seeking your money?

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