International venture capital investors and their portfolio companies in Europe
Publication typeDissertation - Collection of articles
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AbstractMany companies including Apple, Facebook, Google, Microsoft and Starbucks may not have existed, or may not have developed to the same level and size they have without venture capital (VC) funding. VC investments are in essence long-term, illiquid, high-risk, hands-on, privately held, minority equity investments in high-growth-potential companies initiated and managed by professional investors. While these specific characteristics explain the benefits of VC’s proximity to portfolio companies (PCs), paradoxically the fraction of non-domestic investments has been increasing significantly in the last two decades. The increasing occurrence and disadvantages of investing across borders hence raises the question of how international VC firms manage the additional difficulties and what their impact is on PCs. The focus of my dissertation lies on the differential impact of VC origin (i.e. cross-border, branch and domestic VC firms) in three main aspects of the VC investment cycle. In a first step, VC firms carefully select potential investment targets based upon the future prospects. Second, VC firms typically do not only provide financial resources but also engage in time consuming post-investment monitoring and value adding activities. Finally, in contrast to other investors, VC firms are not interested in taking permanent equity positions in their PCs. Instead, they exit their investments after a five to seven year holding period. In a first study I examine the impact of VC origin on the mutual matching decision combining preferences of both investors (i.e. supply side) and entrepreneurs (i.e. demand side). From a supply perspective, results show that cross-border VC firms have a higher probability to invest with local investors, larger investment syndicates and more experienced investors. We further demonstrate that investing through a local branch allows foreign VC firms to exhibit the same investment behaviour as domestic VC firms. These results thereby exhibit that local and more resourceful co-investors or establishing a local presence mitigate the disadvantages linked to foreign investing. From a demand perspective, findings show that less developed companies have a higher probability to match with domestic VC. Moreover, seed stage companies in which only cross-border VC firms co-invest have a higher probability to attract a local VC firm as opposed to an additional cross-border VC firm. These results display that entrepreneurs dynamically assess their companies’ resource gaps and consequently target VC investors with specific geographic origins based upon the required resources. My second study concentrates on the role of domestic and cross-border VC in PCs’ growth. Findings demonstrate that companies initially backed by domestic VC investors exhibit higher growth in the short term compared to companies backed by cross-border investors. In contrast, companies initially backed by cross-border VC investors exhibit higher growth in the medium term. Finally, companies that are initially funded by a syndicate comprising both domestic and cross-border VC investors exhibit the highest growth. Overall, this study provides a more fine-grained understanding of the role that domestic and cross-border VC investors can play as their PCs grow and thereby require different resources or capabilities over time. Finally, in a third study I analyse how cross-border, branch and domestic VC firms behave when PCs do not meet initial expectations. Results show that domestic investors have a high tendency to escalate their commitment to a failing course of action. In contrast, cross-border investors terminate their investments efficiently, even when investing through a local branch. This is explained by cross-border investors having more limited access to soft information, a lower social involvement with the project and a lower embeddedness in the local economic and social environment, which are all factors that contribute to lower escalation of commitment. Local branches of cross-border investors are further shielded from escalation of commitment through structural safeguards. Domestic investors may hence benefit from mimicking cross-border investors’ behaviour.
KeywordAccounting & Finance, Two-sided Selection, Investment Strategies, Liabilities of Foreignness, Resource-based View, Divestment, Escalating Commitment, Exit, Cross-Border Investments, Technology, Portfolio Company Growth, International, Cross-Border, Venture Capital, Domestic
Knowledge Domain/IndustryAccounting & Finance