Strategic Management in Early Stage Venture Capital Funds A Longitudinal Analysis of Success Factors in German Funds

Transcription

1 TU Dresden Chair of Entrepreneurship and Innovation HHL Chair of Innovation Management and Entrepreneurship Strategic Management in Early Stage Venture Capital Funds A Longitudinal Analysis of Success Factors in German Funds Prof. Dr. Michael Schefczyk Prof. Dr. Andreas Pinkwart Dipl.-Kfm. Torsten Fiegler Dorian Proksch, M.Sc. Potsdam, November 09th, 2012

2 Content Introduction Hypotheses Methodology Interim results/discussion Folie 2 von 23

3 Introduction Folie 3 von 23

4 Introduction The German Venture Capital and Privaty Equity market currently consists largely of buyouts. Economically important seed and start-up segments are small. Investments first half % = 1.5 billion Average deal size in million Buy-outs 75% Seed 1% Start-up 8% Later-stage VC 6% Growth 7% Turnaround < 1% Replacement capital 3% Seed Start-up Later stage-vc Growth Turnaround Replacement capital Buy-outs Source: BVK market statistics, own analysis Folie 4 von 23

5 Introduction Early stage investments were pushed by public activities beginning 2006 and 2007 but they also have been stagnating since Investments in early stages in million HTGF NRW Seedfonds 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: BVK market statistics, own analysis Seed Start-up Folie 5 von 23

6 Introduction A substantial gap prevails between early stage investments in reality and early stage research Early stage issues Early stage firms require financing plus intensive non-financial support (Dimov/Murray 2008, Lindsey 2005) At a single point in time, future commercial success cannot be predicted, struggling over a longer time is the norm Venture Capital firms face the dilemma of high risks and usually too moderate returns relative to monitoring and management support costs Current research is usually too cross-sectional and based on secondary data to reflect reality (Hallen/Eisenhardt 2012, Bygrave 2006) Folie 6 von 23

7 Introduction Our aim is to contribute to closing this gap in six areas of Venture and Venture Capital fund management 1. Personal characteristics/ Interpersonal relationships Team structure and background Interpersonal conflicts Homogenity of investors 2. Networks Syndication Follow-up investments Forming of ties to PC Value added in strategic decisions of VC and NTBF 3. Technology/Strategy Intellectual property Milestones Proof of market Proof of concept Strategic Management in VCF 4. Management support Activity Frequence International focus Strategic leverage effect 5. Risk management Contract design Due-diligence Monthly reporting 6. Internationalization Founders international experience International background of the investor Nature of the industry Folie 7 von 23

8 Selected Hypotheses Folie 8 von 23

9 Selected Hypotheses Our first set of hypotheses looks at personal and technology/strategy attributes of the early stage firms Personal characteristics Networks Technology/ Strategy Entrepreneurs develop their know-how and qualification in human capital while leading the company (Colombo/Grilli 2009) A stable interpersonal relation between entrepreneur and investors can reduce conflicts (Hite 2005). We suppose that an active intervention of the investment manager in charge positively contributes to manage and resolve conflicts Syndicated investments in the early stage show because of interweavings of networks and exchange of knowledge a higher success rate than investments where only one investor participates (Manigart et al. 2006) Strong financial relations support VC decisions in their NTBF, e.g. external technology or market expert, the advisory board, or personal contacts of the investment manager If a NTBF have strong intellectual properties, this may count as signals of quality and is simultaneously seen as a predictor for a success (Autio/Acs 2010) The compliance of milestones like the proof of concept have a positive impact on the success of the fund as well as on the NTBF Folie 9 von 23

10 Selected Hypotheses Our second set of hypotheses mostly looks at the Venture Capital and transaction perspective Management support PC supported by an intensive advice of the investment manager show a higher and lasting level of success (Schefczyk, Gerpott 2001) The know-how of investment managers can concerning the valuation and development of risks point the way to the success of investments in early stage funds Risk management VCs focus on contract design which minimizes the agent risk (Kaplan, 2003) Internationalization The founder s international experience and the nature of the industry were founded as the key elements (Johonson, 2004) The VCs can serve as a catalyst for the internationalization of new ventures through their knowledge and reputation (Fernhaber, McDougall- Covin 2009) Folie 10 von 23

11 Methodology Folie 11 von 23

12 Methodology We aim to test our hypotheses with the current generation of Venture Capital-financed firms in Germany based on unusually rich empirical data Survey design to evaluate the VCF and NTBF Preinvestment Phase 1 Phase 1 Preinvestment Phase 2 Investment Quantitative Business plan Résumés Capitalization table Milestones Investment agreement Quantitative reporting Follow-up financing Survey of investment manager * Survey of entrepreneur Qualitative Decision documents Business plan Experts opinions Qualitative reporting Supervisory board Controlling reports * Focus of traditional VC-research Folie 12 von 23

13 Methodology This is work in progress in the context of two more data collection steps to go Process of survey (0) Pretest (1) Venture Capital fund document analysis (2) Investmentmanager survey (3) Entrepreneur survey Comprehensive on-site document analysis Quantitative: spreadsheet tools and statistics package Qualitative: grounded theory tool and statistic package 10 item lime survey for each step missions: avoid overwarning respondents and minimize by excluding all items collected in step 1 First wave completed by mid-october 2012 Research team First wave to be completed until March Folie 13 von 23

14 Methodology So far, we gained a sample of 124 companies financed by 8 venture capitalists holding a large share in the German market Pretest of 8 portfolio companies financed by 4 venture capital firms Sample of 124 portfolio companies financed by 8 venture capital firms partially based on public funds and collectively holding a large market share Portfolio companies usually during the first 18 months of their existence Substantial document analysis on premises of venture capital firms to reduce bias of current perceptions of investment managers and entrepreneurs Failed investments included in the sample albeit difficulties to survey entrepreneurs Sample Folie 14 von 23

15 Methodology Measuring the success of such young firms remains quite challenging Success measures Internal rate of return Successive financing Exit is still far away for most firms in the sample Write-downs can be tracked Terms and timing of next financing round can be tracked Company value is known More suitable terms IRR Conformance to plan Qualitative measures Fulfillment of miserables and plan deviations can be tracked Plans are always over optimistics Decisons of VC measures can be analyzed Subjective perspective of the investment manager is a necessary addition Trust (approximated by other variables) Substantial methods/survey problems Folie 15 von 23

16 Methodology We used One-Way-ANOVA for our first evaluation Success measures Research method We used One-Way-ANOVA to test the influence of various variables Used success measures We use the company evaluation as a first success indicator We clustered the company evaluation in three different classes Folie 16 von 23

17 Interim results/discussion Folie 17 von 23

18 Interim results/discussion Personal characteristics Descriptive statistics show that portfolio companies financed usually fit with classical German paradigms: high education and experience Focus on personal characteristics Influence on company evaluation Looking at the personal characteristics of the founders we found out that the majority has an academic education. Many founders in the area of specialized technology also have a higher degree like a PhD or a professor title. In addition, most of the founders are older than 30 and have more than 6 years of work experience. That shows that German venturefunds value academic education, life and working experience. We tested the variables average industry experience in years, average leadership experience in years, team size of the founder s team and the amount of conflicts. In our sample the have no influence of the company evaluation. A reason for that can be that the team selected are homogeneous in its structure. Folie 18 von 23

19 Interim results/discussion Technology/Strategy Descriptive statistics show that the technology is very significant for the evaluation of the company. Assessment of technology Influence on company evaluation The VC relies on a detailed due diligence to investigate the technology and intellectual properties influence the decision to invest. Tight and detailed milestones are used to motivate the NTBF s to focus on the development of their technology. We tested the variables Patents national, Patents international, and Amount of milestones. In our sample they influence the company evaluation with a significance of 95 per cent. A unique technology is a strong signal for the success of the company. Folie 19 von 23

20 Interim results/discussion Management Support Descriptive statistics show that the management support via coaching contributes to the development of the company. Usage of management support Influence on company evaluation The activity of management support is especially high if follow up investment problems of the liquidity are current. The management support was found in strategic meetings between entrepreneurs and the VCF which leads to an improved business model or decisions in leadership of the NTBF. We tested the variables Usage of coaching, and Number of board meetings. In our sample the number of board meetings has no influence but the number of coaching has a significance of 95 per cent. That prove the influence of the management support. Folie 20 von 23

21 Interim results/discussion Risk Management VCs try to secure less promising investment using a strong liquidation preference. Assessing of risks Influence on company evaluation The risk management of the investigated venture funds differs strongly from each other. Whether some funds use a detailed monthly reporting which invests a variety of different areas other funds rely only on regular phone calls. The main counter-measure when risks are detected is to provide the NTBF with fresh capital even if milestones are not reached. We tested the variable liquidation preference. In our sample it has a significance of 99 per cent. The VCs try to introduce a liquidation preference in investments with a low evaluation. They therefore try ton minimize their risks. Folie 21 von 23

22 Interim results/discussion - Internationalization International oriented companies are evaluated higher than national focused companies. Focus on the home market Influence on company evaluation Only around 39 per cent of the investigated NTBFs planned to go international. We found out that companies with lower technology barriers for international sales e.g. e-commerce firm plan to enter international markets sooner. Also, the willingness to enter international markets is higher when a company owns patents. We tested the variable internationalization. In our sample it has a significance of 90 per cent. Companies with the intention to go international are rated higher. Folie 22 von 23

23 Interim results/discussion The contribution of the study is a holistic longitudinal view to establish strategic management in VCF Limitations Heterogeneous data of every fund and investment manager Time lag between VC measures and reactions of the NTBF Contributions of the work in progress Innovative and extensive methodological design Deep longitudinal insights in success factors for the development of NTBF and measures of VCF A well established strategic management in VCF improves incentives to invest in early stage companies Folie 23 von 23

24 Technische Universität Dresden Fakultät Wirtschaftswissenschaften Lehrstuhl für Entrepreneurship und Innovation Dresden Prof. Dr. Michael Schefczyk Tel Fax Mail Dipl.-Kfm. Torsten Fiegler Tel Fax Mail HHL Leipzig Graduate School of Management Stiftungsfonds Deutsche Bank Lehrstuhl für Innovationsmanagement und Entrepreneurship Jahnallee Leipzig Prof. Dr. Andreas Pinkwart Tel Fax Mail Dorian Proksch, M.Sc. Tel Fax Mail Folie 24 von 23