Why Venture Capital in Western Europe Emerged Later Than in the United States

Why Venture Capital in Western Europe emerged later than in the United States.

1st semester, 2004/2005

11 february 2005

Strategic Management

Business Studies

Universiteit van Amsterdam

Table of contents

1 Introduction 1

2 The nature of venture capital 2

2.1 Definition of venture capital 2

2.2 (Ad)venturers of the past 2

2.3 How venture capital works 3

2.4 For innovation a vehicle is needed 4

2.5 Venture capital helps create vehicles for innovation 4

2.6 Realization of financial returns 5

3 Screening and evaluation process 6

3.1 Strategies and objectives of venture capitalists 6

3.2 Screening and decision making process 6

3.3 Decision to invest 8

3.4 Deal structuring 9

4 The development of venture capital in Western Europe 10

4.1 General 10

4.2 Environmental factors influencing innovation 11

5 Interview 17

6 Conclusion 20

Bibliography 21

1 Introduction

The phenomenon that is now called venture capital developed after World War II in the United States. Many returning soldiers were unwilling to take back their old jobs and started out on their own. Moreover the war had produced many technological innovations and ideas that could be put to civilian use. Facilities and machines used in the war production had become unnecessary and were often available at bargain prices. The post war economy expanded fast and offered many business opportunities.

It was in this environment that many new enterprises started and needed capital.

The first European venture capitalists appeared in the 60's following the U.S.A. example. In the 80's the venture capital industry in Europe had reached a level comparable to this industry in the United States during the 50's (Bygrave, and Timmons, 1992).

The purpose of this paper is to explain why the venture capital industry in Western Europe has developed so many years later than in the United States.

In chapter two the nature of venture capital will be discussed. The definition and the history of venture capital will be given and how venture capital works will be discussed.

For a better understanding of venture capital, in chapter three, the screening and evaluation process to analyse investment possibilities and to take investment decisions will be discussed.

In chapter four, the factors influencing the development of venture capital and the causes of the later development of the industry in Western Europe will be explained.

Also a brief summary is given of venture capital today in Western Europe based on an interview with a venture capitalist.

In chapter five an interview with a venture capitalist about the changes in venture capital in the Netherlands is given.

Finally, in chapter six a summary of the paper will be given.

2 The nature of venture capital

2.1 Definition of venture capital

Dictionaries describe 'venture' as an undertaking that is dangerous, daring, and of uncertain outcome. At a venture means at stake. 'Capital' is defined as material wealth, money or property, used or available for use in the production of more wealth. 'Venture capital' therefore means a daring undertaking of uncertain outcome in which capital is put at stake for use in the production of more wealth.

2.2 (Ad)venturers of the past

Daring investment have always existed. The ancient Greek noblemen contributed their privately financed battalions to King Agamemnon's force to destroy Troy, according to Homerus not so much motivated by nationalistic zeal as by the promise of great financial reward through war loot (Homerus, and Carel Vosmaer, 1886). Wealthy Dutch merchants formed partnerships in the seventeenth century to equip ships to trade and sometimes fight for the spices of the East Indies. Only one out of three ships returned but then the payoff was 10 to 15 times in two or three years (http://mediatheek.thinkquest.nl).

These examples have one thing in common. The early (ad)venturers entrusted their money to men they trusted and above all considered knowledgeable and able to create success.

The inventor of the term "venture capital" is unknown. However it is generally agreed that the modern venture capital era really began in 1946, when General Georges F. Doriot and others organized American Research & Development (AR&D) in Boston, the first public corporation specializing in investing in early stage companies. Doriot has been an important person in early venture capital (http://vcexperts.com). He not only brought AR&D to success but also introduced a lot of today's successful venture capitalists to the business through the courses he taught at Harvard Business School. Doriot says, "Seek out creative men with the vision of things to be done. Help breathe life into new ideas, processes and products with capital and with sensitive appreciation for creative drive, with management and manpower, with loyalty to the idea and his initiator, the creative man" (http://vcexperts.com).

Venture capital has been and is an industry of investors with the imagination, judgement and nerve to engage in adventures sharing their hopes and expectations