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The Relationship Between Venture Capital and High Growth Firms

Written by Filip Hedman

Paper category

Master Thesis

Subject

Business Administration>Entrepreneurship

Year

2019

Abstract

Master Thesis: Venture capital and economic growth VC is a factor emphasized by many researchers, analysts and policy makers, and it is an important potential determinant of economic growth (Bygrave & Timmons, 1992; Pottelsberghe & Romain, 2003; Samila & Sorenson, 2011 ). In addition, some researchers believe that venture capital is a relatively scarce resource. This scarcity may be related to slow growth, which has been the case in many countries in the world over the past few decades (Gilson, 2003; Cumming & Macintosh, 2007). Bygrave & Timmons (1986) emphasized the lack of empirical evidence on the role of venture capital in promoting technological innovation. When examining the investment behavior of 464 venture capital companies, they found that venture capital is essential to incentivize innovative companies. In addition, they believe that the unique design of venture capital is a form of financing, which is different in investment methods and investment methods. The results show interestingly that the most important part of venture capital is the knowledge, know-how, network and experience held by investors themselves, rather than the actual capital itself, which is also supported by other researchers, for example. Davila et al. (2003). In the stage of these innovative technology companies, the role of venture capital companies is more management-intensive than imagined. Entrepreneurs themselves are found to look for venture capital companies with the best reputation and value-added contributions from a non-monetary perspective. On the contrary, these well-known venture capital companies can choose the most innovative and promising companies. Bygrave & Timmons (1986) found that 25% of the funds from venture capital firms in the study came from only 5% of them. Although they put forward the results of VC stimulating innovative companies, the title of their work is more illustrative. Interestingly, although the word "economic growth" is included in the title, it is not mentioned. The meaning of this expression is of course a problem of definition, but according to the title, it intuitively implies that venture capital will have an impact on the entire economy. It is questionable whether the implicit inference of the relationship mediated by innovative companies can be proved. Researchers later discussed this implicit hypothesis in Samila & Sorenson (2011). They believe that there is almost no empirical research investigating the effectiveness of venture capital as a broad proposition to stimulate economic growth. They believe that the conclusion that there is a positive correlation between venture capital, entrepreneurship, and economic growth depends on two possibly inaccurate assumptions: Without VC, VC-funded companies would not exist, and the employees of these VC-funded companies The economy of these companies creates more value than non-VC funded companies. Because there is evidence that venture capital has a positive impact at the company level (Davila et al., 2003; Engel and Keilbach, 2007; Jain and Kini, 1995). 2.3 Venture Capital and Entrepreneurship In addition to the belief that venture capital is a potential factor for macroeconomic growth and employment, and mediation by investing companies, these companies play an important role in the commercialization of cutting-edge technologies. The influence of science and innovation that have formed and changed the path of existing industries, as well as the formation of new industries such as the Internet and the World Wide Web, indicate that the venture capital market is an important link between financing and innovation. Start-ups and early-stage companies can access capital markets tailored for financing high-risk activities, but as mentioned earlier, venture capital companies have proven that in addition to the monetary capital they inject, they can also add value to the companies they invest in. Previous research emphasized the management participation of venture capital companies, usually becoming a board member, providing valuable network and knowledge to help key personnel in the recruitment process and establishing and developing customer and supplier relationships and operations (Megginson & Weiss, 1991; Saar Mann, 1990; Vaughan, 1988). This added value means that venture capital companies take the position that is often referred to as an active investor, and it was mentioned in the definition of venture capital before. Over 30 years, inventions in 20 industries in the United States. They believe that the so-called relationship between venture capital and innovation is similar to Samila & Sorenson (2011) claiming that there is a lack of empirical research on its impact on economic growth and has not yet been systematically reviewed. Controlling R&D, they found that VC has a positive impact on the number of patents, but it also has more valuable patents than companies that are not funded by VC. Popov & Roosenboom (2012) also support this positive correlation. There is evidence that in countries with a high ratio of VC to R&D, VC is positively correlated with patented inventions, with an average of about 3.9%. They also found evidence that venture capital can promote innovation relatively better in countries with lower barriers to entrepreneurship. Samila & Sorenson (2010) conducted further research on venture capital and its impact on innovation. They provide evidence that public funding for academic research has a positive impact on innovation measured by patents. In addition, they also showed that with the increase of VC, the above relationship becomes more obvious. Therefore, there is an important interaction between public research funds and private funds in creating an innovation ecosystem. This provides knowledge that may be valuable in future research, such as modelling, in which human capital with education as a proxy can be used as a relevant variable to be considered. Read Less