With my entrepreneurial mind I asked myself, “What type of Venture capital fund would I prefer as investor in my future start-ups?”. Following that question, my bachelor thesis’ research question was formed with interesting results to come for the Danish VC-industry.
THE TWO COMPETING PERSPECTIVES ON VENTURE CAPITAL
Venture capital research has for decades been split between believers of 1) the financial intermediary perspective and 2) the value-add perspective.
The first perspective looks at how VC-funds can optimize their performance through a superior selection of investments and mitigation of post-investment principal-agent problems and moral hazard issues. This financial perspective takes the standpoint of VC-funds simply being financial intermediaries who passively invest in start-ups. Thus, VC-funds sort out market information asymmetries to find the best investment opportunities. Hereafter, they passively wait for the entrepreneurs to grow their start-ups.
The second perspective, with its understanding of VC-funds as value-adding investors, focuses on the VC-funds’ contribution to portfolio companies’ development. This perspective thus argues that high-performing VC-funds not only select the right investment but also help grow their portfolio companies towards an exit that results in a favorable financial return.
In reality it has been found that most VC-funds do in fact contribute to their portfolio companies’ development. However, not all VC-funds engage in such value-adding activities, which entrepreneurs must take into consideration when raising capital.
GRADUATION AND THE DANISH VENTURE CAPITAL MARKET
I successfully graduated last week from my bachelor in International Business at Copenhagen Business School. Together with my thesis partner, we investigated how the different VC-fund types contribute and influence their portfolio companies exit activities and internationalisation.
No matter which perspective one takes on VC, the funds’ performance boils down to the exits of their portfolio companies. In fact, exit mechanisms are crucial to the VC-industry’s existence, as portfolio companies rarely pay dividends. Thus, understanding the choice of exitstrategy, and how VC-funds and portfolio companies work together towards the planned exit strategy, is of utmost importance.
In extension to this, internationalization is of particular interest, as portfolio companies usually cannot reach the size that allows for a successful exit by only operating domestically. It thus becomes important to understand VC-funds’ influence and contribution to their portfolio companies’ internationalization.
Our research question thus ended up being:
Do portfolio companies’ exit activities and internationalization depend on the organizational form of the investing venture capital fund?
Our main findings are summarized below firstly in bullets and secondly in text for more in-depth understanding:
- There is no difference in the planned exit-strategy among companies backed by public and non-public VC-funds
- Portfolio companies of different VC-fund types do not have different levels for their intensity of exit-directed activities
- Portfolio companies backed by public VC-funds have a higher focus on international expansion
- Portfolio companies backed by non-public VC-funds (private and captive) perceive their VC-investor’s contribution to internationalization to be higher than those backed by public VC-funds
SUMMARY OF FINDINGS
Our results include five hypotheses of which we finally reject four and accept a single hypothesis.
Through our final models in our multivariate regression analysis, we find that portfolio companies of public VC-funds perceive the importance of internationalization to be higher than those backed by non-public VC-funds. Moreover, we also find that the portfolio companies backed by public VC-funds perceive the VC-funds’ contribution towards internationalization to be lower than those backed by non-public VC-funds.
This poses as a discrepancy between the organizational forms of venture capitalists. This is so, as it indicates that public VC-funds are best at creating awareness and emphasize the importance of internationalization while contributing less than non-public VC-funds to their portfolio companies’ international expansion.
We find this finding surprising, as we through our interviews with prominent investment managers and the Minister of Business and Trade in Denmark, Brian Mikkelsen, find strong evidence that the internationalization of Danish portfolio companies is crucial for creating sufficient value for profitable exits.
For exits and exit-directed activities, we had to reject all of our three hypotheses. This was also surprising to the authors but is partly explained by the inactive Danish IPO market.
It also stands in contrast to the findings of Isaksson (2007), as he does find evidence for a difference between the type of fund and the planned exit strategy for Swedish portfolio companies. Here, it was found that portfolio companies of public VC-funds more often have unclear exit strategies, while portfolio companies of private VC-funds more often pursue IPO exit-strategies.
We do accept our final model for regression on exit-directed activities but do not find a significant relation for the type of lead VC-fund. Only do we find that the intensity of exit-directed activities is statistically significantly linked to the time since investment and the number of external members on the board of directors. This is however not very surprising, as VC-funds have to exit their investment within a given time period. Thus, it makes sense that they increase the intensity of exit-directed activities with time. Moreover, as the number of external members on the board of directors increases, the more people will be able to contribute to and emphasize the exit’s urgency.
Our paper of research thus finds surprising findings on the unique characteristics of the Danish VC-industry and can work as a mean for further investigation of the link between the type of fund and portfolio companies’ exit activities and internationalization.
Lastly, on a simple descriptive level, we find that only 5 % of the Danish portfolio companies pursue an IPO exit route. This figure is incredibly low compared to the 38 % found in Sweden (Isaksson 2007) and tells us that there is much to do for the Danish government to improve the Danish stock market.