Formal Venture Capital Acquisition: Can Entrepreneurs Compensate for the Spatial Proximity Benefits of South East England and ‘Star’ Golden-Triangle Universities?

Building on the resource-based view of the firm and signalling theory, we challenge the traditional perspective that spatial proximity benefits can be leveraged by university spin-outs (USOs) located in the South East of England (particularly those drawn from 'star' golden-triangle universities with additional reputational benefits), and that USOs located elsewhere will be constrained from obtaining first formal venture capital (VC) required for venture development. With the aid of a longitudinal database of 134 USOs involving unique archival and survey data, event-history analysis identified, counter to the traditional perspective, that USOs located outside the South East of England were significantly more likely to obtain formal VC. Also, counter to the spatial proximity benefits view, star golden-triangle USOs were not significantly more likely to obtain VC. Our evidence supports a spatial mismatch view between investors and investees. Resource-combination signals sent by USOs and favourably received by VC firms were found to differ according to USO location context: USOs located outside the South East of England and star golden-triangle universities that signal the credible presence of habitual founders were more likely to obtain VC. USOs located outside star golden-triangle universities that had previously obtained publicly backed equity finance were also more likely to obtain VC. However, USOs located in the South East of England with reputable management teams were most likely to obtain VC

The evaluation criteria used by venture capitalists:evidence from a UK fund

GRAHAM BOOCOCK AND MARGARET WOODS are Lecturers in Banking and Finance, and Financial Management, respectively, at Loughborough University Business School, England. The paper examines how venture fund managers select their investee companies, by exploring the evaluation criteria and the decision-making process adopted at one United Kingdom regional venture fund (henceforth referred to as the Fund). The analysis confirms that relatively consistent evaluation criteria are applied across the industry and corroborates previous models which suggest that the venture capitalist's decision-making consists of several stages. With the benefit of access to the Fund's internal records, however, this paper adds to the current literature by differentiating the evaluation criteria used at each successive stage of the decision-making process. The paper presents a model of the Fund's activities which demonstrates that the relative importance attached to the evaluation criteria changes as applications are systematically processed. Proposals have to satsfy different criteria at each stage of the decision-making process before they receive funding. In the vast majority of cases, applications are rejected by the fund managers. In addition, the length of time taken by the fund managers in appraising propositions can lead to withdrawal of applications at an advanced stage

Business angel investment activity in the financial crisis: UK evidence and policy implications

The 2008 financial crisis has transformed the financial environment for small and medium-sized enterprises, resulting in significant declines in the availability of bank lending and venture capital. This has prompted government intervention to improve the availability of debt and equity capital. Whereas there are comprehensive statistics on bank lending and venture capital investments, equivalent information on business angel investment activity is lacking. This paper draws upon three sources of evidence on business angel investment activity in the UK—business angel networks, Scottish angel groups, and individual angels—to reveal for the first time how the angel market has fared during the early stage of the financial crisis. While the evidence is not entirely consistent, it is clear that angel investment activity has held up since the onset of the financial crisis. This further emphasises the economic significance of business angels and underlines the need for ongoing government support. Policy options are reviewed

The transformation of the business angel market: empirical evidence and research implications

Business angel investing – a key source of finance for entrepreneurial businesses – is rapidly evolving from a fragmented and largely anonymous activity dominated by individuals investing on their own to one that is increasingly characterised by groups of investors investing together through managed angel groups. The implications of this change have been largely ignored by scholars. The paper examines the investment activity and operation of angel groups in Scotland to highlight the implications of this change for the nature of angel investing. It goes on to argue that this transformation challenges both the ongoing relevance of prior research on business angels and current methodological practices, and raises a set of new research questions

Establishing a new UK finance escalator for innovative SMEs: the roles of the Enterprise Capital Funds and Angel Co-investment Fund

This paper examines UK public policy addressing the seed and early stage equity finance gap since the Global Financial Crisis (GFC). Drawing on lessons learned from recent studies of UK and international government equity schemes, two contemporary models of government backed equity finance are examined. The focus is on the Enterprise Capital Funds (ECFs) and the Angel Co-investment Fund (ACF), the UK government’s main schemes operating in the sub-£2m equity finance gap to address the capital requirements for developing the UK’s young, potential high growth businesses. The paper highlights the shortcomings of traditional interim fund performance analysis and presents current demand and supply side evidence that establishes that these schemes are making attributable impacts on their portfolio businesses and the wider UK economy. It also demonstrates that they are playing important roles in the establishment of a new post GFC UK finance escalator. However, whilst these schemes were found to be currently complementary and effective, their future roles within the UK’s evolving post GFC seed and early stage equity markets are also considered. Key Words: Government Equity Schemes, Venture Capital, Potential High Growth SME

To be financed or not : the role of patents for venture capital financing

This paper investigates how patent applications and grants held by new ventures improve their ability to attract venture capital (VC) financing. We argue that investors are faced with considerable uncertainty and therefore rely on patents as signals when trying to assess the prospects of potential portfolio companies. For a sample of VC-seeking German and British biotechnology companies we have identified all patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find that in the presence of patent applications, VC financing occurs earlier. Our results also show that VCs pay attention to patent quality, financing those ventures faster which later turn out to have high-quality patents. Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do not spur VC financing, presumably because they are anticipated. Our empirical results and interviews with VCs suggest that the process of patenting generates signals which help to overcome the liabilities of newness faced by new ventures

An assessment of the business impacts of the UK's Enterprise Capital Funds

Recent European studies present persistently critical views of the under performance of government backed venture capital (GVC) schemes when compared to their private sector counterparts. However, they assess the performance of outmoded funding models and fail to contextualise the economic development role of these schemes. This paper provides a contemporary assessment of the business impacts of the UK government’s flagship Enterprise Capital Funds (ECFs) VC scheme in addressing the sub-£2m equity finance gap facing young potential high growth businesses requiring investments. Supply and demand-side evidence is presented from interviews with ECF fund managers, alternative private VCs, industry experts and surveys of successful and unsuccessful scheme applicants. We find that, despite the limitations of mid-scheme evaluation, ECFs are addressing the UK equity gap and delivering business employment, revenue and innovation impacts. However, further progress is required in order to achieve optimal business exits and sustainable early stage private VC system impacts