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Venture Capital & Green Ventures

Developing an understanding of the investment decision

Written by T. Karampini, E. Sabbi

Paper category

Master Thesis

Subject

Business Administration>Entrepreneurship

Year

2019

Abstract

Master Thesis: Venture Capital Venture capital (VC) is defined as the long-term investment of professional investors in venture equity financing of new enterprises, the main return of which is the ultimate capital gain (Wright & Robbie, 1998). For the purpose of this research, we use the term venture capitalist (VC) to identify individuals who provide venture capital to general venture capital, including members of venture capital companies and business angels. Usually called equity financing, this type of financing can be obtained by pooling individuals or groups of investors. Venture capital is an important resource for financing new companies, professional organization and management. It can be described as a limited partnership, which aims to invest in young companies with high risks and high growth potential. The main difference between venture capital and other forms of finance (such as loans) is that venture capitalists (VC) tend to invest in innovative businesses with significant technological risks (Ghosh & Nanda, 2010). Historically, venture capital is most willing to invest in less capital-intensive industries, which can promise high returns within a time frame of 3 to 5 years (Ghosh & Nanda, 2010). The industries traditionally supported by VC are IT, software, and biotechnology (Ghosh & Nanda, 2010). Another distinguishing feature of venture capital is that they often provide financial capital and play an active role in the company's decision-making process (Wüstenhagen & Teppo, 2006). This is because new enterprises are usually characterized by a high degree of uncertainty and information asymmetry between insiders and outsiders (Wüstenhagen and Teppo, 2006). In addition, this aspect can play an important role in the development of new enterprises, because venture capitalists can provide advice and provide the expertise needed to operate the business (Bocken, 2015). This is why most venture capital companies focus on specific industries or specific company development stages so that they can develop specific knowledge and expertise (Ghosh & Nanda, 2010). Venture capital is usually the source of financing for early and growth stage venture capital (see Figure 1) when the risks involved are too high for other funding providers (Bocken, 2015). From a financial point of view, the basic VC evaluation method is to estimate the value of venture capital by only predicting the terminal flow of investors in an exit event (Leach & Melicher, 2012, p. 364). But there are several other criteria used to evaluate companies to invest in, which will be described later. Companies backed by venture capitalists find it difficult to meet their financing needs through traditional mechanisms (Gompers & Lerner, 1999). Entrepreneurs have very little capital to realize their ideas and must rely on external financiers. At the same time, those who control capital, such as pension fund trustees and university regulators, are unlikely to have the time or expertise to invest directly. 2.6 Green Venture Capital Until recently, investment in environmental companies has been considered by many venture capital firms as a high-risk, low-return proposition—not a very attractive investment portfolio (Steen and Frankel 2003). In the 1990s, the environmental corporate image of the VC community was clearly noticed by the “end of the pipeline” technology (methods and technologies that use additional measures to treat, reduce or otherwise remove pollutant emissions). Its market was mainly driven by regulation and fragmented. However, recently the intersection of environmental technology and venture capitalists has undergone a dramatic shift. Environmental technology has been advertised as the "next wave of industrial innovation" (Parker and O'Rourke, 2006), and in the past few decades, more and more venture capital investors have expressed interest in different aspects of sustainability. Interested in entrepreneurial activities (Randjelovic et al., 2003; Bocken, 2015; Bergset, 2018). Randjelovic et al. proposed an early study on the emergence of green venture capital (VC). (2003), defined green venture investment as “high-risk financial capital provided to ecologically innovative enterprises, providing potential for financial returns, and contributing to sustainable development” (page 241). More and more venture capitalists (VC) are concerned about sustainability issues and therefore invest in green and social enterprises (Bocken, 2015). These investors usually care about the “triple bottom line” and therefore have to consider financial aspects as well as environmental and social aspects (Bergset, 2018). This means that sustainable venture capitalists face the difficult task of identifying venture capital that has the potential to generate economic returns while creating positive environmental and social impacts (Bocken, 2015). Because of this characteristic, Bocken (2015) defines this type of investor as a “pragmatic idealist” who is driven by financial motives and idealistic motives related to sustainability. Therefore, there are now several participants operating in the green venture capital industry, specifically raising green funds to invest in green startups (Bocken, 2015). It is clear from the existing literature on this subject that these investors considered both the potential financial benefits and the positive environmental impact of their investment (Randjelovic et al., 2003; Bocken, 2015) ; Bergset, 2018). 2.6.1 Differences from mainstream venture capital Green venture capital and mainstream venture capital operate in a similar way, but there are some important differences (Randjelovic et al., 2003). Start-ups in emerging industries such as green industries usually have the characteristics of small scale, high risk, and large capital needs. Read Less