Department of Urban and Regional Planning

Why care?
„ Of increasing interest to states, larger cities with
emphasis on entrepreneurship and innovation
Some basics on venture „ Capital availability as a constant concern of start
capital up businesses
… Shift of political attention to start ups means capital
questions front and center
„ Initial experimentation, by some jurisdictions, in
VC support policies, programs
„ What are the right policies and programs?

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Venture capital defined Differences from traditional capital

„ Money invested in new ventures and developing „ Venture capital „ Traditional
businesses … Less fluid … More fluid
… Requires high return rate … Bears lower return
„ “More than money, synergy”: A significant form … Invested based on longer- … Invested based on
of financial intermediation that provides privately run future immediate future
held entrepreneurial firms with equity or hybrid … Concerned with product … Concerned with past
and market potential performance
forms of financing, in conjunction with
… Venture capitalist and … Loaning bank is creditor
managerial expertise partner are co-owners „ Requires collateral

Source: Hosmer (1982)

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 The role of VC Players in VC industry
„ Enables businesses that would not receive conventional
bank funding to: Actor Role Profile
Entrepreneur Provides innovative business „ Little to no capital/business
… Start-up (pre-seed) idea experience
… Expand (seed) „ Commitment and preparation
„ Knowledge and awareness
„ Typically less developed, higher-risk entrepreneurial firms „ Reasoned risk taker
Ability to get things done
Entrepreneurs with innovative ideas, but no internal
„
„ „ Willingness to share
capital and no business track record ownership
Angel Provides initial money „ Friends/business partners of
„ Examples: SAS, Microsoft, Apple, Staples, TCBY (mostly pre-seed), but no entrepreneur with high
managerial service personal net worth
„ Typically Invest less than
$100,000 in the venture

Source: Gompers (1994) Source: Barry (1994)

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Players cont… VC investment process

Actor Role (in Limited Partnership) Profile Raise funds
Investors „ Provide 99% of investment money „ Individuals/Families (17%)
„ Serves as limited partner (LP) „ Commercial and specialized Identify options
„ Not allowed to be involved in day- banking firms/Insurance (18%) for investment
to-day fund activities, but have some „ Corporate sponsors (2%)
measures of control Pension funds (38%)
„
Execute deal
„ Foundations/Endowments (22%)
Other (3%)
Monitor
„

Venture capitalist General partner Experienced with going public,

„ „
investments
„ Contributes 1% of fund selling/merging a portfolio firm,
liquidating unpromising deals, Sell stake; achieve
„ Responsible for deal origination,
replacement of management return on
screening, evaluation & structuring
as well as post-investment activities „ Providing access to key needed investment
expertise

Source: Barry (1994) Source: Fried and Hisrich (1994)

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 VC funding use at business stage Venture capital contracting problems
Start up Product development and initial marketing
„ Uncertainty – the inability to predict future
event
Establishment of product or service in
First stage
commercial use and generation of early sales „ Information asymmetry between
Operational expansion coverage for a entrepreneur and venture capitalist
Second stage
company with growing sales
„ Agency costs –uncertainty and information
Third stage+
Funding for major expansion of a profitable
company, or bridge financing for a firm
asymmetry mean the entrepreneur is in a
expecting to soon go public position to take advantage of the VC
Acquisition/buy- Financing the purchase of a business for
out companies or management teams
Source: Walter (1985)
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Solution? Public sector rationale in VC?

„ Incentives „ Capital perfectly mobile, available everywhere?
… Shift of control from the entrepreneur to VC … Why might it not be?
… Intense monitoring

… The emphasis on exit to recycle VC

contributions

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 Boom & bust in VC market
„ What shifts VC market (supply/demand)
„ Why is adjustment of VC industry slow, say to
demand growth?
Why does VC market have a tendency to over-
„ Business Administration.
react?
What are the consequences of under- and over-
„ „
shooting?
„ Appropriate government action?
Department of Urban & Regional Planning
Sources
„ Binder, R A, and L A Yow,”Venture capital: Do economic developers want a piece of the pie?”,
PowerPoint presentation, Department of Urban & Regional Planning, University of North Carolina
at Chapel Hill, April 2001.
„ Perez, R. 1986. Inside Venture Capital: Past, Present and Future. Praeger: New York.
„ Amit, R., J. Brander, and C. Zott. 1998. Why do venture capital firms exist? Theory and Canadian
experience. Journal of Business Venturing 13 (6).
Hosmer, L. T. 1982. A Venture Capital Primer for Small Businesses. Washington, DC: Small
„
Berlin, M. 1998. That thing that venture capitalists do. Federal Reserve Bank of Philadelphia
„
Business Review, January/February, pp. 15-27.
Gompers, P. 1994. The rise and fall of venture capital. Business and Economic History 23 (2).
„
Walter, D. 1985. Venture Capital: Where to find it, How to go after it. Seattle, Washington:
Venture Source Publishers.
„ Barry, C. B. 1994. New directions in research on venture capital finance. Financial Management.
23 (3): 3-15.
„ Fried, V. H. and R. D. Hisrich. 1994. Toward a model of venture capital investment decision
making. Financial Management 23 (3): 28-37.
„ Growing New Businesses with Seed and Venture Capital: State Experiences and Options. National
Governors’ Association www.nga.org, 2000.
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