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Findings of Thesis: Value-Added Activities in Venture Capital and the Effects of Stage- An Empirical Study

Findings of Thesis: Value-Added Activities in Venture Capital and the Effects of Stage- An Empirical Study

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Published by Martin Collignon
This thesis explores how Venture Capital funds’ value-added activities differ between stage and if the Venture Capital funds specialize accordingly.

Departing from the value-add perspective of Venture Capital, in which funds transfer knowledge through the relationships with their portfolio companies, this empirical study surveys 275 deals from Danish-based Venture Capital funds operating within ICT or Life Science.
The survey consists of 28 questions on the perceived contribution of the VC funds in various value-added activities, as well as a maximum of 37 questions on the characteristics of the firm, the founders, the deal, and the level of interaction with the fund.
With 69 usable responses, the effect of the stage on the portfolio companies’ perceptions is analysed through a factor analysis which constructs eight factors from the 28 questions on perceived value-add to be used as dependent variables in an ordinary least-squares regression.
We construct two models using backward selection: First a model including independent
variables for company stage, industry, age, founder experience, prior funding, the size of
investment, and a factor for the degree of interaction between the firm and the fund. Thereafter, we construct an identical model which additionally includes nine dummy variables for the individual funds in our sample which assesses the specialization of funds by modelling whether the effect of stage from model one is removed by the funds.
We find that the perceived importance of value-added activities differs across portfolio company
stages for factors of strategy, market position, and credibility, while we find no difference across stages for factors of technology, professionalization, finance, internationalization, or exit orientation. We also find that Venture Capital funds specialize in stage with respect to value-added activities within strategy, market position, and credibility. Finally, we find that increasing the amount of interaction between the Venture Capital fund and its portfolio company results in a higher perceived contribution of the fund, all else equal.
This thesis explores how Venture Capital funds’ value-added activities differ between stage and if the Venture Capital funds specialize accordingly.

Departing from the value-add perspective of Venture Capital, in which funds transfer knowledge through the relationships with their portfolio companies, this empirical study surveys 275 deals from Danish-based Venture Capital funds operating within ICT or Life Science.
The survey consists of 28 questions on the perceived contribution of the VC funds in various value-added activities, as well as a maximum of 37 questions on the characteristics of the firm, the founders, the deal, and the level of interaction with the fund.
With 69 usable responses, the effect of the stage on the portfolio companies’ perceptions is analysed through a factor analysis which constructs eight factors from the 28 questions on perceived value-add to be used as dependent variables in an ordinary least-squares regression.
We construct two models using backward selection: First a model including independent
variables for company stage, industry, age, founder experience, prior funding, the size of
investment, and a factor for the degree of interaction between the firm and the fund. Thereafter, we construct an identical model which additionally includes nine dummy variables for the individual funds in our sample which assesses the specialization of funds by modelling whether the effect of stage from model one is removed by the funds.
We find that the perceived importance of value-added activities differs across portfolio company
stages for factors of strategy, market position, and credibility, while we find no difference across stages for factors of technology, professionalization, finance, internationalization, or exit orientation. We also find that Venture Capital funds specialize in stage with respect to value-added activities within strategy, market position, and credibility. Finally, we find that increasing the amount of interaction between the Venture Capital fund and its portfolio company results in a higher perceived contribution of the fund, all else equal.

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Published by: Martin Collignon on Jun 21, 2013
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VALUE-ADDED ACTIVITIES IN VENTURE CAPITAL AND THE EFFECTS OFSTAGE: AN EMPIRICAL STUDY
SUMMARY OF FINDINGS
 
This thesis explores how Venture Capital funds’ value-added activities differ betweenstage and if the Venture Capital funds specialize accordingly.We used a survey targeting 275 venture capital deals from Danish-based Venture Capitalfunds operating within ICT or Life Science. The survey consisted of 28 questions on theperceived contribution of the VC funds in various value-added activities, as well as amaximum of 37 questions on the characteristics of the firm, the founders, the deal, andthe level of interaction with the fund.We obtained 69 usable responses, and through that the effect of the stage on the portfoliocompanies’ perceptions was analysed. These are our main findings:
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Funds differ:
We find significant differences between portfolio companies’perceptions of their funds’ contribution. This implies that a portfolio companyshould, to the extent it is possible, choose a fund based not just of money, but onthe specific needs of the firm
 
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8 distinct areas of value-add
: We confirmed that Venture Capital funds add valuewithin at least 8 overarching areas: Strategy, Technological position, Marketposition, Professionalization, Financing, Credibility, Internationalization, and Exitorientation.
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Value-added activities differ:
We find significant differences between theimportance of these 8 areas of value-added. Portfolio companies in our sample, onaverage, ranked the funds’ contributions within Credibility, Professionalization,Finance, and Strategy to considerably more important than the rest.
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3/8 value-added activities depend on stage:
We find that the perceivedimportance of Venture Capital funds’ activities differs across portfolio companystages for Strategy, Market position, and Credibility. We find no difference acrossstages, however, for the remaining 5 areas of Technology position,Professionalization, Finance, Internationalization, and Exit orientation.
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Funds specialize in stages:
We find that some Venture Capital funds specialize instage, in order to deliver focused value-added activities within Strategy, Marketposition, and Credibility.
 
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Interaction matters:
We find that the degree of interaction between the VentureCapital fund and their portfolio companies has a positive effect on the perceivedimportance of the funds’ value-adding contributions.
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Stamps of approval are important:
We find that the funds’ function ascertification of portfolio companies is highly important and depends positively onstage. Thus, credibility is more important in later stages, which implies that payingfor affiliation to a reputable fund might be worthwhile.OTHER FINDINGSWe found that Market position depends on stage. This is an interesting finding, which weinterpret not as less of a need for Market position value-add in the earlier stages, butrather a need for an operational focus on Market position in early-stage ventures that thefunds’ simply cannot provide.With respect to financing, no funds were significantly better perceived than others, whichindicates that funds are either a) not measurably different in this regard or b) the effortsin helping the venture get financing are not adequately perceived by the portfoliocompanies.We also find that Credibility is more than simply the funds’ ability to provide Financing.We cannot fully explain why portfolio companies in later stages perceive funds’ value-addto Credibility significantly higher, while there is no difference in Financing. Our opinion isthat while financing is necessary throughout the life of the venture, the importance of credibility becomes increasingly greater, as the firms mature and the investment sizesgrow and amount of stakeholders which the company is exposed to grow. We thereforeencourage entrepreneurs to look at the track record of funds and their ability to pass onthe firm to later-stage investors.Internationalization had no difference between stages, and our findings suggest that theinternational focus of a company is conducted on a case-by-case basis. Furthermore, nofunds displayed any specialization in international value-add, and portfolio companiesranked internationalization as the area which Venture Capital funds contribute the least.We find this to be a supporting argument of the extremely national focus of DanishVenture Capital. Of course not all firms are meant to be international, but we encouragethe trend of Venture Capital funds’ broadening their network and focus.Finally, these findings are based on a sample of ICT and Life Science funds in Denmark. Wecan therefore say nothing of the trends in other industries, countries, and for later growth

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