Different types of venture capital investors and value-added to high-tech portfolio firms

This paper examines the knowhow in strategic business areas that venture capital companies and organizations impart to their portfolio firms in early-stage high-tech enterprises and the mechanisms they use to impart this knowledge. The paper considers three types of investors, independent, private-sector venture capital firms, public-sector venture capital organizations, and business angels, who can be regarded as informal venture capital investors. The study draws on a limited data set to illustrate their activities. The paper draws attention to different theoretical approaches that might explain the observed behaviour. It examines whether the differences are related to the intermediary position of each investor type and subsequent incentives they have in doing their jobs - especially expounded by contract-based approaches - or the competencies in doing their jobs - based on competence-based view of the firms. It turns out that neither approach alone can account for the observed behaviour. It is claimed that the two different types of rationales have interactive relations thus reinforcing the observed patterns of behaviour. Thus an active involvement both ex ante and ex post by the private sector venture capital firms might be the result of both factors at work. Another important finding relates to the role of public sector venture capital organizations as the most passive among the investor types. This leads the paper to suggest a reconsideration of the role of the public sector organisations in venture capital activity

The effectiveness of the Finnish pre-seed and seed policy schemes to promote innovative high-growth entrepreneurial ventures

This report assesses the effectiveness of the supply and demand side policy initiatives in Finland targeted at pre-seed and seed stage businesses, particularly from the viewpoint of high-growth ventures. In order to obtain a yardstick by which to judge the current policy mix in Finland, this study focuses on systemic functions which these policies can be expected to fulfil to promote a viable high-growth entrepreneurial eco-system. When considering the features of major policy initiatives the study draws on analysis of venture capital policies and especially of typical failures in policy initiatives, as presented by Lerner (2009). The study assesses existing pre-seed and seed stage policy schemes and even though the present policy mix has successful elements, it also exhibits serious flaws in programme design and implementation, which may be counteractive to the achievement of the policy objectives. There is also a need to improve overall policy coordination and strategic leadership in the promotion of high-growth ventures

Venture capital industry in Finland: Country report for the venture fun project

This report is a descriptive account of the major features of the Venture Capital (VC) Industry in Finland. It has been prepared as a background report for a project entitled Venture Fun, carried out in an EU Network of Excellence PRIME and funded from the Sixth Framework Programme. The report provides a brief overview of the evolution and present structures of the VC industry in Finland, and draws attention to factors that affect the development of VC industry, among others, to the nature of policies pursued in this field. One of its observations is the fact that the primary rationale for policies has been closing the early phase funding gap for start-ups, the promotion of SMEs, regional development or other socio-economic objectives, rather than the promotion of VC industry. As a result, policy measures have tended to be permanent, not temporary, since the objectives are difficult to achieve in a fixed time period. Furthermore, the policies pursued have made a separation of the monetary and nonmonetary value-adding functions of VC, and only recently have acknowledged the value of the latter for the growth of high-tech start-ups

Understanding the strategies of venture capital investors in helping their portfolio firms to become international

This paper reports the findings of two empirical studies on the value-added of venture capital with special attention on promoting internationalisation of start-up firms. The first study is based on a survey of Finnish (and a few cross-border) venture capital organisations on the value-adding mechanisms they use with regard to their portfolio firms. The second study is based on interviews with Finnish biotechnology start-ups. Attention is paid specifically to the strategies of three different types of investors in early-stage high growth companies: 1) business angels, which can be regarded as informal venture capitalists, 2) private-sector venture capital firms and 3) public-sector venture capital organisations. Control of agency costs and risks provides a conceptual framework for analysing the strategies of the different investor types. The findings partially corroborate and partially refute the hypotheses made on the basis of theory and the two studies provide somewhat conflicting findings on the role and strategies of the different investor types. According to the venture capital survey, private sector venture capital firms were most actively engaged in ex post monitoring and ‘coaching’ of their portfolio firms in internationalisation, while according to the biotechnology study, business angels turned out to be most actively engaged. The paper discusses potential reasons for these divergent findings

Patentointi biotekniikka-alalla

Tämä raportti koskee biotekniikka-alan patentointikäytäntöjä. Keksintöjen hyödyntämisen turvaaminen patenttien avulla on biotekniikka-alalla erittäin tärkeää pitkien tuotekehittelyprosessien vuoksi. Silti kaikki alan yritykset eivät patentoi. Lääkekehitysyritykset patentoivat eniten ja tällä sovellusalueella tuotteiden kehittämisja hyväksymisprosessit ovat pisimpiä. Erilaiset aineettomien oikeuksien suojaamistavat täydentävät toisiaan sen sijaan, että ne olisivat toistensa vaihtoehtoja. Selvitys osoitti edelleen, ettei tietojen tulkinta ole helppoa eri tietolähteiden erojen vuoksi. Silti voidaan todeta, että suomalaisten patentointi biotekniikka-alalla kasvoi varsin voimakkaasti 1990-luvulla. 2000-luvun alun laskevien patentoimismäärien perusteella on vielä liian aikaista todeta, ovatko kysymyksessä patentoinnin määrällinen lasku vai vain viiveet patentointiprosessissa. Erityisesti Euroopan Patenttijärjestelmässä havaittiin suuria viiveitä patentoimisprosessissa.This paper reports some experimental results obtained in a study of biotechnology patenting in Finland, particularly by biotechnology companies. Securing the commercial utilisation of inventions through patenting is highly important in the biotechnology field. Still, not all companies patent. Drug development companies patent more than other biotechnology companies, perhaps reflecting the fact that firms in the application area face the longest product development and approval times. Companies tend to pursue different ways of securing immaterial rights, which appear to be complementary, not substitutes. The study showed that interpreting the findings is difficult because of differences in the data sources. Nevertheless, overall, Finnish patenting activity in the biotechnology area grew substantially in the 1990s. A declining trend in patenting emerged in the early 2000s, but it may be the result of delays in the patenting process. Delays are quite long, particularly in patent applications filed through the European Patenting Office

Non-financial value-added of venture capital: A comparative study of different venture capital investors

This study focuses on the non-financial value-added Venture Capital (VC) investors bring to their portfolio companies, especially when these represent early-stage, high-technology and high-growth companies. The study draws attention to the extent and nature of non-financial value-added and analyses whether and in what ways different types of VC investors differ in this respect. The data were collected via a web-based survey tool in the autumn of 2006. The study takes into consideration the viewpoint of VC investors as it focuses on Finnish VC companies (private sector VCs), public sector VC organisations and informal investors (business angels). An effort was made to collect data from foreign investors active in Finland though they did not respond actively. Major findings of the study included the observation that private sector VCs were the most and public sector VCs the least active in monitoring their portfolio companies. Informal VCs were less active than expected. The different investor types had distinct profiles in providing management support and advice. Overall, private sector VCs evaluated the non-financial support they provided as the most and public sector VCs the least important for the success of their portfolio companies while informal VCs were between these extremes. These findings differed from those obtained in our study on the value-adding function of VCs in biotechnology, according to which informal VCs were found to have the highest overall value-added and kept closest contacts with their investee firms

Venture capital industries and policies: Some cross-country comparisons

The paper summarizes the findings obtained during the first year of the Venture Fun project, carried out in an EU Network of Excellence PRIME and funded from the Sixth Framework Programme. The paper defines the central concepts of the project, identifies questions for further elaboration and study, and finally provides a rough idea of the different profiles that the studied countries (Finland, Israel, France, Italy, and the UK) evidence in the organization of their VC industries. One of the conclusions of the paper is that Israel, and to a lesser extent, Finland, has succeeded in developing a specialized, independent VC industry oriented to the early phase finance and support of ICT start-ups. By contrast, though the UK has a strong Private Equity industry, it is, however, not focusing on early-stage or high tech areas. Italy and France showed a significant presence of Venture Capital and Private Equity industries (public/private organisations), but in Italy an early phase VC industry has almost disappeared after 2001. The paper further summarises factors that have influenced the development of VC industries in the studied countries

Findings of the ETLA survey on Finnish biotechnology firms

This paper presents the first results of ETLA and Etlatieto Ltd Study of Finnish biotechnology firms. The majority of Finnish biotechnology firms are quite young and still in the early stages of gainful economic activities. Their turnover, profits and exports are, for the younger firms in particular, still low, profits even negative, while their growth expectations are high. The high R&D intensity of especially younger firms indicates that their products are still largely in the development phase and that few of their products are yet in the market. The commercialisation process is long, and only a few of the innovations eventually turn out to be exploitable. This increases the risk assessed and the rate of returns required by the investors. Private and public venture capitalists are most interested in the young companies with relatively high risk and high growth prospects. The oldest firms are more often subsidiaries. This may reflect the fact that foreign companies are willing to take over a Finnish company when its growth prospects are close to being realised. Furthermore, large proportion of the companies have obtained some public funding for the research which led to the foundation of the company or which took place in some other stages of the life cycle of the company. Research spin-off companies in general have more hindrances than other start-up firms, and would benefit from more systematic training in relevant business skills, such as how to make a business plan, how to deal with patenting, and how to obtain funding from venture capital investors

Coaching' small biotech companies into success: The value-adding function of VC

The paper reports an empirical study on the non-financial value-added provided by Venture Capital investors to their investee firms. This study will use a four-class grouping of the various non-financial value-adding capabilities provided by VC firms, namely, scouting, monitoring, signalling and value-adding services. The study examines biotechnology industry in Finland. Finland has a dual system with independent (partially ever-green) VC companies and public or semi-public VC organisations. Additionally, informal VCs are fairly active. Whether the different types of VC organisation aim, are able and indeed do deliver nonfinancial value-added, in addition to their financial input, is the central focus of this study. The paper has an evolutionary perspective on Venture Capital according to which VC promotes a variety of experimentation with new technologies, especially through the foundation of new firms oriented to experimentation and development of new ideas. At the same time, VC industry fulfils a selection function in its role as a financial intermediary. The study data have been collected through interviews, conducted at the end of 2005, with the total population of small and medium-sized, VC-backed biotech companies established in Finland since 1986. Central findings of the study include an observation that all three VC types did provide value-added in the meaning outlined above. Nevertheless, there were clear differences between them in terms of the overall perceived value-added as well as in their activity profiles. Informal investors were found to have the highest overall value-added and kept closest contacts with their investee firms