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Venture Capitalists: Devils or Angels?

Venture Capitalists: Devils or Angels?. Professor Harry J. Sapienza University of Minnesota. 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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Venture Capitalists: Devils or Angels?

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  1. Venture Capitalists:Devils or Angels? Professor Harry J. Sapienza University of Minnesota Universidad Pablo de Olivade

  2. 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 Universidad Pablo de Olivade

  3. I. Broad Historical Overview:A Curse Upon the Money Lenders • Our Concept of Truth Changes • Science • Culture • The Image of the Money Lender • Religion • Law • Literature Universidad Pablo de Olivade

  4. Usury is a Dirty Word • Torah and Qur’an • Moses, Plato, Aristotle, Cato, Cicero, Mohammed, Aquinas • Cicero’s De Re Rustica: ‘And, what do you think about usury? Well, what do you think about murder?’ • Qur’an…’Those engaging in usury are in the same position as those under the devil’s influence…’ Universidad Pablo de Olivade

  5. 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 • Dante’s Inferno • Shakespeare’s Merchant of Venice Universidad Pablo de Olivade

  6. Historical Change, Persistent Fear • Henry VIII’s decree, 1545: 50 years before Shakespeare’s 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 ship’s command Universidad Pablo de Olivade

  7. 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--Birch’s hypothesis: New firms as key to innovation and new jobs • 1990s--Storey, Davidsson, Delmar • 2000s--G.E.M.: Mission and methods Universidad Pablo de Olivade

  8. 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? Universidad Pablo de Olivade

  9. III. Recent Studies of Venture Capital in Spain • The work of Marti and disciples • Alemany: A brief history • Pintado, Garcia, Van Auken • Comparisons Universidad Pablo de Olivade

  10. 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 Universidad Pablo de Olivade

  11. 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 Universidad Pablo de Olivade

  12. VC in Spain:Conclusions 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? Universidad Pablo de Olivade

  13. IV. My Empirical Findings • Dissertation and related • Earlier stage venture, more VC involvement • Less entrepreneur’s 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, “ “ Universidad Pablo de Olivade

  14. 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 Universidad Pablo de Olivade

  15. 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 Universidad Pablo de Olivade

  16. Impact of Entrepreneurs’ Behavior • How is the VC’s 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 Universidad Pablo de Olivade

  17. 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 Universidad Pablo de Olivade

  18. 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 Universidad Pablo de Olivade

  19. 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? Universidad Pablo de Olivade

  20. Universidad Pablo de Olivade

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