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

Universidad Pablo de Olivade 1

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 UsuryResearch on Venture Capital (VC) in SpainPractice of VC elsewhereClosing Thoughts


I. Broad Historical Overview:A Curse Upon the Money Lenders

Our Concept of Truth Changes ScienceCulture

The Image of the Money LenderReligionLawLiterature


Usury is a Dirty Word

Torah and Qur’anMoses, Plato, Aristotle, Cato, Cicero,

Mohammed, AquinasCicero’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…’


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

Middle Ages- marginalizing a groupCrusades Edward I declares usury a crime and a

sin, 1275Expulsion of the Jews from EnglandDante’s InfernoShakespeare’s Merchant of Venice


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 lendersLenders’ fear: Ahab at the ship’s command


II. Entrepreneurship, Venture Capital, and Economic Vibrancy

End of a Millenium, Beginning of an Era?Vast fortunes, revolutionary technologySea changes in standard of living

The Study of a Global Phenomenon1980--Birch’s hypothesis: New firms as key

to innovation and new jobs1990s--Storey, Davidsson, Delmar2000s--G.E.M.: Mission and methods


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?


III. Recent Studies of Venture Capital in Spain

The work of Marti and disciples

Alemany: A brief history

Pintado, Garcia, Van Auken

Comparisons


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


Assessment of Research on Venture Capital in Spain

Quality and quantity of dataExtra-ordinary access and completeness

Methods used by Marti, Alemany, et al.Superb approach to topic, issues

Interpretation and MeaningDifficult to know fully at this time


VC in Spain:Conclusions and Observations

Trends in VC Industry Development Laws and Governance continually adjustTendency to ‘drift’ toward later stages is

common, understandable– is it regrettable?Vast knowledge base, along with G.E.M.

data is potential policy goldmineSpain lags in ‘high expectation’ startups:

Why is this so? Is this bad? What may policy makers do if it wants to change this?


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, “ “


Roles of Venture Capitalists

Nature of VCs’ Roles & InvolvementVCs and Es see VC roles in same priorityMost crucial- Strategic & Financial Feedback Next is being Confidant/Friend/Mentor Finally, Networking & RecruitingThe above pattern holds across stages and

countries (including, e.g., US, Europe, Asia)VCs most involved in US, least in Europe


Managing the Investment Portfolio

Strategic Management of VC PortfolioVCFs do not diversify to mitigate riskVCFs 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


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


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


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


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