Scholarly article on topic 'Venture Capital Markets: A Cross Country Analysis'

Venture Capital Markets: A Cross Country Analysis Academic research paper on "Economics and business"

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{"Venture capital" / "risk capital" / "high risk projects" / "angel investors"}

Abstract of research paper on Economics and business, author of scientific article — Dilek Teker, Suat Teker, Özgür Teraman

Abstract Venture capital (VC) may be defined as a support to entrepreneurial talents and appetite by turning ideas and basic science into products and services which are expected to envy the world. Venture capital funds are able to build companies from the simplest form to mature organizations. Venture capital investors generally actively engage with management of the company by typically taking place on the board. Through the due diligence process the venture capital firms concentrate on the founders, the management team, the concept, the marketplace, the revenue model, the value-added potential of the firm, the amount of capital needed to heal the business and whether all these fit to the fund's objectives. Over the next three to eight years, the venture firm works with the founding entrepreneur/s to grow the company. Once a company funded by venture capital matures and becomes successful, venture funds generally exit by taking it public through an initial public offering (IPO) or by selling it to big companies. This allows the venture funds to be free from the previous investment and invest in the next generation of companies. United States, Europe, Israel, Canada, China and India have the most developed markets for venture capital environment. The size of the venture capital market is nowadays about $50 billion and the United States has the most funds for venture capital of $33.1 billion in 2013. Venture capital firms may invest in promising firms in stages of seed, first round, second round or later. The median investment amounts in the United States in 2013 are $0.5 million for seed, $2.5 million for first round, $5.7 million for second round and $10 for later stage. The most attractive sector for venture capital is information technology for the United States, Israel and Canada, invested over $10 billion in 2013, while the most attractive sector is consumer products for Europe, China and India, invested over $4.8 billion in 2013.

Academic research paper on topic "Venture Capital Markets: A Cross Country Analysis"

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Economics and Finance

Procedía Economics and Finance 38 (2016) 213 - 218

www.elsevier.com/locate/procedia

Istanbul Conference of Economics and Finance, ICEF 2015, 22-23 October 2015, Istanbul,

Turkey

Venture Capital Markets: A Cross Country Analysis

Dilek Tekera*, Suat Tekerb, Özgür Teraman

"I§ik University, 34980 §ile/Ístanbul bI§ik University, 34980 gile/ístanhul cIçik University, 34980 §ile/ístanbul

Abstract

Venture capital (VC) may be defined as a support to entrepreneurial talents and appetite by turning ideas and basic science into products and services which are expected to envy the world. Venture capital funds are able to build companies from the simplest form to mature organizations. Venture capital investors generally actively engage with management of the company by typically taking place on the board. Through the due diligence process the venture capital firms concentrate on the founders, the management team, the concept, the marketplace, the revenue model, the value-added potential of the firm, the amount of capital needed to heal the business and whether all these fit to the fund's objectives. Over the next three to eight years, the venture firm works with the founding entrepreneur/s to grow the company. Once a company funded by venture capital matures and becomes successful, venture funds generally exit by taking it public through an initial public offering (IPO) or by selling it to big companies. This allows the venture funds to be free from the previous investment and invest in the next generation of companies. United States, Europe, Israel, Canada, China and India have the most developed markets for venture capital environment. The size of the venture capital market is nowadays about $50 billion and the United States has the most funds for venture capital of $33.1 billion in 2013. Venture capital firms may invest in promising firms in stages of seed, first round, second round or later. The median investment amounts in the United States in 2013 are $0.5 million for seed, $2.5 million for first round, $5.7 million for second round and $10 for later stage. The most attractive sector for venture capital is information technology for the United States, Israel and Canada, invested over $10 billion in 2013, while the most attractive sector is consumer products for Europe, China and India, invested over $4.8 billion in 2013.

© 2016 The Authors.PublishedbyElsevier B.V. This is an open access article under the CC BY-NC-ND license

(http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of the Organizing Committee of ICEF 2015.

Keywords: Venture capital, risk capital, high risk projects, angel investors.

JEL Codes: G24, G28, M10, M21

* Corresponding author. Tel.:+90-216-528-7128

E-mail address:dilek.teker@isikun.edu.tr

2212-5671 © 2016 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of the Organizing Committee of ICEF 2015. doi:10.1016/S2212-5671(16)30192-7

1. Introduction

Venture capital (VC) may be defined as a support to entrepreneurial talents and appetite by turning ideas and basic science into products and services which are expected to envy the world. Venture capital funds are able to build companies from the simplest form to mature organizations. The start-ups are generally composed of entrepreneurs and an idea expressed as a business plan. Venture capital firms are professional managers of risk capital that enables and supports the most innovative and promising companies. Venture capital funds new, promising and innovative ideas that may not be possibly financed by the ways of traditional banking. Venture capital is in fact a unique investment for institutional investors. When a venture capital investment is made in a company, it is an investment for a proportion of the equity in which the stocks are essentially illiquid and worthless until the company matures three to eight years and turns out to be a significant value. Later on the way the venture investors provide additional funding as the company needs cash injection to grow further. These are called rounds and typically occur every other year or two and also may involve additional equity investments by allocating shares among the investors and management team based on an agreed new valuation of the company. Nevertheless, venture capital is a long-term and risky investment which may have very little or no value unless the company is acquired or goes public.

In the period of 1991 and 2014, a total of 11,686 companies funded by venture capital in the United States over time in which 14% went public, 33% acquired, 35% still private and 18% failed. The most attractive sectors for US venture funds are software (41%), biotechnology (12%), media & entertainment (12%), IT services (7%), media devices (5%) and industrial energy (5%). New commitments to VC funds in the USA are $17.7 billion in 2013 and around $30 billion in 2014.

2. How a Venture Capital System Works

Entrepreneurship has been recognized as a major conduit for sustainable products and processes, and new ventures are viewed as an answer to many social and environmental problems (Hall et al., 2010 and Pacheco et al., 2010). Venture capital has a key role in nurturing entrepreneurship and new ventures. As such, venture capital may be viewed as an important catalyst to develop sustainable businesses (Burer and Wustenhagen, 2008) - those that contribute positively to the environment and society while generating a profit.

Venture capitalists are keys in the emergence of businesses. They can make start-ups grow faster, create more value and generate more employment and innovation (Keuschnigg, 2004). Venture capitalists may be viewed as the "gate keeper" to the emergence of new businesses, as their role is to select venture ideas presented to them by entrepreneurs (Marcus et al., 2013).

Actually, venture capitalists involve more than putting money into a risky business. Venture capital investors in general actively engage with management of the company by typically taking place on the board. Through the due diligence process the venture capital firms concentrate on the founders, the management team, the concept, the marketplace, the revenue model, the value-added potential of the firm, the amount of capital needed to heal the business and whether all these fit to the fund's objectives. Over the next three to eight years, the venture firm works with the founding entrepreneur/s to grow the company. The expected payoff comes only after the company is acquired or goes public. Although the venture capital investors have high hopes for all companies funded, statistically only one company in six ever goes public and one company in three is acquired. The most expensive asset for venture capital firms is time. Therefore, a business approaching venture capital firms should have a concept addressing world markets, superb scalability, expected to be successful in a reasonable timeframe, and be truly innovative filling a gap. A business concept promising a 10 or 20% improvement on returns is not likely to grab the attention of venture capital firms.

The success of venture capital is mostly embedded in the entrepreneurial spirit pervasive in the culture, financial recognition of success, access to advance science, and fair and open capital markets. Motivated entrepreneurs, protection of intellectual property, availability of a skilled workforce and existence of an environment for a good flow of science are the requirements of venture capitalists. A country's cultural look over entrepreneurships,

tolerance for failure, services infrastructure, intellectual property protection, efficient capital markets, and the willingness of big business to purchase small and grown up companies invite venture funds from other countries or encourage new funds to be formed. Once a company funded by venture capital matures and becomes successful, venture funds generally exit by taking it public through an initial public offering (IPO) or by selling it to big companies. This allows the venture funds to be free from the previous investment and invest in the next generation of companies.

3. Cross Country Aspect of Venture Capital

VC funds generally accumulate in Western countries where GDP is high and advancements/innovations are encouraged and supported. Table 1 exhibits global annual venture capital investments for the period of 2006 and 2013. The total amount of VC funds has reached to $48.5 billion in 2013 from $42.7 billion in 2006. Almost two third of the funds is provided by angel investors in the US. The European VC funds exceed $7 billion while the Chinese VC funds are amounted $3.3 billion in 2013. The VC funds globally decreased in 2009 and 2010, representing the effects of the recent crisis. Israel appears to be one of the global players financing start-ups with $1.7 billion in 2013, almost double the amount invested in Canada.

Table 1. Global Annual Venture Capital Investments (bil$)

Country 2006 2007 2008 2009 2010 2011 2012 2013

USA 31.1 34.3 33.3 24.5 29.3 36.2 32.8 33.1

Europe 6.3 7.6 7.8 5.7 7.1 7.3 6.2 7.4

Israel 1.5 1.9 2.2 0.9 1.9 1.9 1.1 1.7

Canada 0.7 1.0 0.8 0.5 1.0 1.2 0.9 1.0

China 2.5 3.9 5.0 2.8 6.1 6.5 5.0 3.5

India 0.6 0.9 1.8 0.8 0.9 1.5 1.6 1.8

Total $ 42.7 49.6 50.9 35.2 46.3 54.6 47.6 48.5

Total Rounds 4991 5805 5435 4748 5349 5820 5741 5753

Table 2. VC Investments by Sectors in the USA (2014)

Industry Groups #of Groups All Investments # of Deals Investment (bil$) Initial Investments #of Groups # of Deals Investment (bil$)

Info. Tech. 2611 3050 35.7 1059 1059 5.2

Medical/Life Sciences 650 827 8.8 174 174 1.1

Non-High Tech 404 484 4.8 177 177 0.9

Total 3665 4361 49.3 1410 1410 7.2

Table 2 presents the VC investments by sectors in the US in 2014. Information technology is the most attractive sector for the angel investors. 3050 deals out of 4361 received investment in the amount of $35.7 billion. The second attractive sector is the medical/life sciences closing 827 deals with an investment amount of $8.8 billion.

Table 3. VC Investment by Countries (2013)

Region Invested Capital (bil$) Invested Rounds % Change Amount Invested % Change in Deals % Change Global VC Activity

USA 33.1 3480 0.9 -4.6 68.2

Europe 7.4 1395 19.4 5.7 15.3

Canada 1.0 176 14.4 23 2.1

China India Israel Total 3.5 1.8 1.7 48.5 314 222 166 5753 -30 12.5 54.5 71.7 20.3 -2.2 17.7 59.9 7.2 3.7 3.5 100

Table 3 shows the dispersion of VC funds over countries in 2013. The total funds has globally reached to $48.5 billion. India and Israel have also become a international player in angel investor market. The statistics indicate that international venture capital behaviour varies over countries. The amount of invested capital, invested rounds, median round size and median time to exit the business may be considered the fundamental parameters to compare the aspects of international VC. The number of rounds indicates how many times a business raises funds via venture capital. This actually represents the depth of the market. The invested rounds in the US, Europe, China and India are 3480, 1395, 314 and 222, respectively. The median round size is $4.20 million in the US, $1.98 million in Europe, $7 million in China and $4 million in India. Venture capitalists eventually expect to liquidate its investment by selling the shares to a portfolio company and exit the business. The average time to exit is three to seven years through an initial public offering (IPO). The median time to exit in the US is 6.8 years while 6.3 years in Europe and 3.9 years in China. The funded businesses may alternatively be acquired or merged. The median time to M&A is 5 years in the US, 6.3 years in Europe, 3.5 years in China and 2.6 years in India.

Table 4. Key Factors for Trends: (exhibits median million dollars by round class in 2013)

VC TRENDS Country 2010 2011 2012 2013

USA 29.2 36.2 32.8 33.1

Europe 7.1 7.3 6.2 7.4

Invested Capital (bil$) Israel 1.9 1.9 1.1 1.7

China 6.1 6.5 5 3.5

India 0.9 1.5 1.6 1.8

USA 3161 3600 3649 3480

Europe 1411 1322 1320 1395

Invested Rounds Israel 160 173 141 166

China 388 404 261 314

India 116 180 227 222

USA 4.16 4.86 4.12 4.2

Europe 2.45 2.14 1.96 1.98

Median Round Size (mil$) Israel 4.6 5 3,5 4,43

China 7.47 10 8 7

India 7.25 5.15 3.97 4

USA 47 46 50 74

Number of Europe 18 15 16 15

Israel 2 2 0 2

VC-Backed IPOs

China 141 99 46 15

India 6 2 2 1

USA 3.2 5.3 11.2 8.2

Europe 0.6 1 0.5 0.6

$ Raised (bil$) Israel 0.4 0.2 NS 0.6

China 22 15.6 4.4 2

India 6 2 2 1

USA 8 6.4 7.4 6.8

Europe 3.8 9.2 6,2 6.3

Median Time to Exit Israel NS NS NS NS

China 2.6 2.5 2.4 3.9

India 4.3 NS NS NS

USA 593 562 490 436

Europe 217 216 162 157

Number of VC-Backed M&As Israel 19 18 19 10

China 18 11 11 20

India 16 6 16 13

USA 37.8 60 60 57.5

Europe 23 40.5 26.7 63.8

Median M&A Valuations (mil$) Israel 35 30 24.9 1431

China 61.4 80 33 87.5

India 27 NS 18.4 46.5

USA 5.3 5.3 5.2 5

Europe 5.7 5.5 5.9 6.3

Median Time to M&A (years) Israel 9.7 6.7 7.5 5.9

China 3.8 4.1 4.4 3.5

India 3.5 4.1 4 2.6

Table 5. Median $ by Round Class 2013 (median time from initial VC to IPO exit -years).

Country Seed 1st Round 2nd Round Later Stage

USA 0.5 2.5 5.7 10.0

Europe 0.3 1.3 3.3 6.7

China 0.4 4.0 10.0 20.0

Canada 0.1 1.6 5.3 5.0

Israel 0.7 2.6 9.5 8.1

India 0.2 1.5 6.0 10.0

Total 2.2 13.5 39.8 59.8

Table 6. Average Time to Exit and Average $ Raised Prior to IPO

_Country 2007 2008 2009 2010 2011 2012 2013

USA 6.8 8.7 7.9 8.0 6.4 7.3 6.8

Average time from initial VC

to IPO exit (years) Europe 6.4 8.1 N/A 3.8 9.2 6.2 6.3

China 1.8 3.8 2.3 2.6 2.5 2.4 3.9

USA 64.4 48.6 42.5 72.1 82.8 78.4 100.9

Average $ raised prior to

IPO (mil$) Europe 7.2 3.0 N/A 21.5 22.4 23.9 26.4

China 18.2 3.7 5.0 6.9 5.9 7.4 46.1

Table 7. Investment by Stage of Development (mil$-2013)

Country Start up Product Development Revenue Recognition Profitable

USA 0.8 2.9 4.8 5.6

Europe 0.3 1.5 2.0 3.3

China 0.0 2.0 7.7 10.0

Canada 0.0 1.1 2.3 6.2

Israel 0.0 4.5 6.4 8.0

India 0.0 2.0 4.0 45.8

Table 8. Exit Environment for VC Investments

Global VC - Backed IPOs 2007 2008 2009 2010 2011 2012 2013

bil$ Raised 12.1 1.4 5.5 26.3 21.9 16.1 11.0

# of IPOs 163 32 58 214 164 114 108

Global VC - Backed M&A 2007 2008 2009 2010 2011 2012 2013

mil$ -Medial Deal 183.6 108.8 102.9 184.1 210.5 162.9 398.3

# of Transactions 899 734 671 864 813 698 636

4. Conclusion

Entrepreneurship has been recognized as a major conduit for sustainable products and processes, and new ventures are viewed as an answer to many social and environmental problems. Venture capital has a key role in nurturing entrepreneurship and new ventures. Venture capital may be defined as a support to entrepreneurial talents and appetite by turning ideas and basic science into products and services which are expected to envy the world. The success of venture capital is mostly embedded in the entrepreneurial spirit pervasive in the culture, financial recognition of success, access to advance science, and fair and open capital markets.

United States, Europe, Israel, Canada, China and India have the most developed markets for venture capital environment. The size of the venture capital market is nowadays about $50 billion and the United States has the most funds for venture capital of $33.1 billion in 2013. Venture capital firms may invest in promising firms in stages of seed, first round, second round or later. The median investment amounts in the United States in 2013 are $0.5 million for seed, $2.5 million for first round, $5.7 million for second round and $10 for later stage. The most attractive sector for venture capital is information technology for the United States, Israel and Canada, invested over $10 billion in 2013, while the most attractive sector is consumer products for Europe, China and India, invested over $4.8 billion in 2013.

The statistics indicate that international venture capital behaviour varies over countries. The analysis shows that the US is the leader country in venture capital investments with a total amount of $33.1 billion in 2013. The median round size is $4.20 million in the US, $1.98 million in Europe, $7 million in China and $4 million in India. The median time to exit in the US is 6.8 years while 6.3 years in Europe and 3.9 years in China. Moreover, the median time to M&A is 5 years in the US, 6.3 years in Europe, 3.5 years in China and 2.6 years in India.

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