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Over the last decade, many researchers have praised the influence of Venture Capital (VC) as a key driver of entrepreneurism, start-ups, innovation and economic growth (Da Rin et al., 2006; Cumming, 2014). VC has long been studied and observed in the United States, it is for these positive reasons that the EU have outlined the development of VC as a major policy priority (EVCA, 2001). It is only within the last 20 years that the European Market has moved from being perceived as an “emerging market” in terms of VC, and that even by the start of the 21st Century, the aggregated investment volume was €12 billion which was less than 25% of the American investment volume at that time (Hege et al., 2003; EVCA, 2001). Due to the relatively recent development of VC in Europe, there is a large gap in the existing research as to the effectiveness and influences of VC in Europe. Certainly Popov & Roosenboom, (2013) bemoan the fact that the majority of existing research into venture capital typically focuses its attention on the United States. Thus, there is a real shortage of effective empirical studies into the behaviours and qualities of European VC. Jeng and Wells (2000) support this view, explaining that factors such as the contracting, organisation of VC firms, exit decisions, and “the peculiarities of Europe” are not fully understood, nor has the features that European markets share with American ones have not been made in strong detail. Thus, this dissertation will provide a comparative study into the American VCs and European VCs. This micro-level study will to address the gap in existing research of the rate of return for VC in the US and the EU, possible the most influential emerging markets for venture financing.
This research will look to examine the performance of US venture capital firms against European venture capital firms to identify whether a gap exists between the two groups and to determine whether European VCs ca improve the rates of return from total investment based on funding frequency and other variables. The main objectives of this dissertation are:
- To determine if there is a gap in the levels of performance amongst American VC and European VC paying particular attention to the type of exit and rate of return.
- To explore whether any gap could be the result of major differences in the contractual relationship between VCs and startups in these regions or from the use of key tools that assert an active role of VCs in the process of value creation.
- To identify any relevant policy determinants including regional tax, investment protection/treaty, Intellectual property rights, and financial regulation.
- To determine whether US VCs have better screening skills than European VCs and whether this produces a higher degree of turning initial investments and funding frequency into successful ventures.
Importance of the Study
This research looks to address the gap in the existing research into the emergence of VC in European markets, and looks to benchmark this against VCs in the United States. Researchers, data providers, and trade associations have all observed the notable gap in existing research into VC in Europe (Da Rin et al., 2006; Cumming, 2014). Trade associations have even pointed to this gap in understanding as a primary factor that causes them to hesitate with early-stage financing. This dissertation study will also be significant as it will look to provide a critical, microeconomic analysis of the main drivers and influence of successful VCs in America and observe these against VCs in Europe, exploring contractual features and firm characteristics to define and quantify the determinants of VC returns. This will look to address the gap in existing research in the European VC sector and provide a greater understanding of VCs in Europe.
Proposed Research Method
A combination of quantitate and qualitative research tools will be used to complete this study. Research data will be found using a range of sources, including the World Bank, the Organisation for Economic Co-operation and Developmen (OECD) and other key institutions with data on several policy factors. These data sources will provide information on an expansive range of portfolio organizations, key investments and valuations. Quantitative data analysis will be completed using the statistical package software SPSS. The statistical package software benefits the cleaning and transformation of the data. Following the completion of the data collection stage, the researcher will analyse the raw data and assemble the results into a data matrix. This data matrix with contain the details of the study with key information sorted into columns, variable and values. The data matrix will then be used for statistical calculations and used for the analysis of the results. This dataset will allows the researcher to study organisation’s performance in terms of Internal Rate of Return (IRR) of the investment amongst the initial investment to the final value of the firm. This study will also aim to quantify the influence of VCs on project profitability in Europe and compare this to the United states. A valuation-based measure of the rate of return will be used to examine the characteristics of European VCs against US VCs. independent variables to be studied will include age (the time elapsed since the VC raised the first fund), Regional (does the VC only invest in their own country), Companies (the number of companies in the VCs portfolio), Duration (the average investment duration in years), and, finally, the taxation policies of the US and Europe. The following equation will be used to calculate estimated values (V1) for the first stage valuation for all European organizations: Qi= V1i=I1i.
Here Qi represents the initial value for company, whereas i is the multiple of the initial investment. The average Qj ratio will be determined of all selected studies.
The research will also use the following hypotheses:
- Hypothesis 1: European VCs performance is positively correlated with the rate of return of the investment between the initial investment and the final valuation of the project/firm.
- Hypothesis 2: increased continuity of VCs engenders a stronger relationship which reduces barriers to financing and will increase returns.
- Hypothesis 3: European Venture-backed companies could benefit from the presence of alternative investments besides independent VCs.
Black, B. S., Gilson, R. J. (1998) ‘Venture capital and the structure of capital markets: banks versus stock markets, Journal of Financial Economics, 47, pp. 243-277.
Cumming, D. (2014) Public economics gone wild: Lessons from venture capital, International Review of Financial Analysis, 36, pp. 251-260.
Da Rin, M., Nicodano, G., Sembenelli, A. (2006) ‘Public Policy and the reaction of active venture capital markets’, in Journal of Public Economics, 90, pp. 1699-1723.
EVCA (2001) A Survey of Private Equity and Venture Capital in Europe, Yearbook 2001
Green, J. (2004) “Venture capital at a new crossroads”, Journal of Management Development, 23(10), pp. 972 – 976.
Hege, U., Palomino, F., Schwienbacher, A. (2003) Determinants of Venture Capital Performance: Europe and the United States, LSE Working Paper, 1, pp. 1-40.
Jeng, L. A., Wells, P. C. (2000) ‘The determinants of venture capital funding: evidence across countries’, Journal of Corporate Finance, 6, pp. 241-289.
Popov, A., Roosenboom, P. (2013) ‘Venture Capital and New Business Creation’, Journal of Banking & Finance, 37, pp. 4695-4710.
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