Researchers Complete Largest Academic Study of European Venture Capital
January 28, 2004
STANFORD GRADUATE SCHOOL OF BUSINESS—The European venture capital industry is much more integrated than previously believed, with significant links to the United States, and increasingly emulates U.S. investment practices, according to a new academic study. However, some aspects remain distinctively European, such as the prominence of banks and corporations as investors. Removing barriers to cross-border investments could give a substantial boost to the industry.
These were the conclusions of leading researchers from Bocconi University, the University of Turin, and Stanford University's Graduate School of Business. Their just-completed Survey of European Venture Capital is the largest academic study of the industry to date, including more than 1,300 investment companies and more than 150 venture capital funds operating between 1998 and 2002.
The authors were Laura Bottazzi, associate professor of economics at Bocconi University; Marco Da Rin, assistant professor of economics and finance at the University of Turin; and Thomas Hellmann, assistant professor of strategic management at the Stanford Graduate School of Business. Their study results are summarized in their report, "The Changing Face of the European Venture Capital Industry: Facts and Analysis."
It is often believed that European venture capitalists are purely local investors who do not venture beyond their country borders. "The study disproves this belief, showing that the European venture capital market is surprisingly integrated," says Hellmann "First, 27 percent of all venture firms in our sample have a secondary office in a foreign country. Second, 25 percent of all venture capital firms have partners that come from a foreign country. Third, 24 percent of investments are made in foreign companies."
The fraction of deals with foreign investors is particularly high in industries such as financial services (42 percent), media and entertainment (34 percent), or telecommunications (31 percent). The United States is by far the most popular destination for foreign investments, accounting for almost a third of all foreign deals. There are multiple additional links between the European and U.S. venture capital market. For example, as much as 34 percent of all European venture capitalists had some work experience in the United States.
The project profiled European venture capital firms by linking data on investment deals to the partners in charge to document the interrelationships between human capital and investment styles. The unique study shows that partners with a higher academic degree are more likely to make early stage deals and investors with a master's or doctoral degree are much more likely to sit on the board of directors. Having professional experience prior to venture capital also leads to a seat on a board: Almost all venture capitalists who sit on a board have prior experience in finance, and three out of four also have a science education.
Although European venture capitalists are often described as conservative and noninterfering ("hands-off") compared to their U.S. peers, the new study suggests that the stereotype is changing and that Europe is now home to a variety of investment styles. For example, 60 percent of all deals are seed or early stage investments, indicating a healthy risk tolerance. In terms of getting involved with their companies, 68 percent of European venture capitalists sit on the board of directors and 69 percent of them monitor their company on a monthly or weekly basis. Forty-two percent report that they help to recruit key managers for their investment companies.
The European venture capital industry is also undergoing change. Where older venture capital firms tend to have more conservative investment styles, new entrants tend to be more risk tolerant and get more involved. The data shows that new entrant firms invest more at the seed stage and monitor their investments more closely. The average age of a European venture capitalist is 42 years, and researchers found no difference in the age of partners in new entrant firms as opposed to the old guard. Partners in new entrant firms are also more likely to have a business education and a master's degree. All of these characteristics help to explain why the new entrant firms adopt investment styles that resemble more closely those of U.S. venture capital firms.
A unique feature of the European market is that a significant number of venture capital firms are owned and managed by banks and corporations. Prior research has shown that in addition to financial goals, such firms may also have strategic objectives. The study data suggests that in Europe, corporate venture capital firms invest more in early stage companies as compared to bank-owned venture capital entities. Partners in these corporate firms have relatively less venture capital experience, although they are more likely to have a master's degree and/or a science education. By contrast, partners in bank-owned venture capital firms are more likely to have a business education. Most strikingly, bank venture capital firms also invest much less in early stage deals and are less likely to frequently monitor their firms or have a partner sit on the board of directors.
The study generates many important and novel policy implications. The first and most important finding is that human capital is a key driver of the investment activities of venture capital firms. Improving the availability of postgraduate education, including executive education or other professional training, is likely to have a very positive effect on the level of professionalism in the industry.
Second, the extent of cross-country activity within Europe-and across the Atlantic—shows promising signs of an integrating market. European venture capitalists clearly consider it important to be able to invest outside of their own country. Simplifications of tax rules and cross—border investment regulations are likely to have a strong beneficial impact on the integration of the European venture capital industry. Third, the study documents a wide variety of behavior by different types of venture firms. "It is very important that healthy competition among these different approaches to venture financing be encouraged," says Hellmann. "Measures that reduce bureaucratic red tape or increase the limited partners' ability to invest in all types of venture firms, and also across borders, are likely to serve this purpose."
Related Information
For more information about Prof. Hellman's research go to:
http://strategy.sauder.ubc.ca/hellmann/.For more research on venture capital go to:
http://web.econ.unito.it/darin/
Jg
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