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Exploring the human capital assessment process used by venture capitalists

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Master Thesis


Business Administration>Entrepreneurship




Master Thesis: The basic principles of venture capital Venture capital (VC) is a kind of private equity, in which equity investment is to start, develop or expand early-stage venture capital (Deville, 2002). Venture capital is made in private companies, usually in industries such as IT, social media, and biotechnology (ibid.). Much like other companies, venture capital is determined by supply and demand (Poterba, 1989). The supply side refers to the financial commitment of institutional investors to start-ups, and the demand side refers to the business ideas generated by entrepreneurs (ibid.). Insurance companies invest a small portion of the capital they manage in venture capital (Kuckertz, Kollmann, Roehm, and Middelberg, 2015). By investing in venture capital, their goal is to obtain higher returns than they expect from lower-risk investments (Deville, 2002). Investment managers of venture capital companies in charge of investment decisions will meet with promising entrepreneurs (ibid.). Investment managers will invest in some of these ideas, so venture capital companies and their institutional investors will share returns and risks with entrepreneurs. Venture capital companies invest in venture capital at different stages of development (Rea, 1989). The different stages of venture capital investment are usually divided into seed stage and start-up stage (ibid.). For companies whose products have not been completed or tested, entrepreneurs usually need financing to complete the product development phase (Deville, 2002). This initial funding is called seed capital (ibid.). Only a few venture capital companies invest in companies in the early stages of development. Investors at this stage are usually family members, friends, business angels and/or regional venture capital companies. The entrepreneurial stage is a later stage, there may be some income, but usually no profit. At this stage, the participation of venture capital companies is more common. The line between the seed phase and the start-up phase is blurred (Landström, 2007). Therefore, the term "early" is often used to refer to all types of investments in young companies with little or no financial history (ibid.). A key factor that distinguishes venture capital companies from other types of investors is that planned exit is an important part of investment decisions (Landström, 2007). It may take up to seven years for venture capital companies to withdraw from early-stage venture capital (ibid.). Two common exit strategies are sale and IPO (initial public offering) (Deville, 2002). When the invested company is sold to an industrial company, the transaction is called a trade sale (ibid.). Buyers may come from the same industry, or they may come from another industry that wants to enter the investee company's industry (Berk & DeMarzo, 2013). 4.4 Human capital theory considers that organizational performance is affected by human capital. Practitioners believe that human capital behavior has economic value to both the organization and the market (Smart, 1999; Unger, et al., 2011). Human capital theory (HCT) can be defined as the skills and knowledge that an individual acquires through education or experience, which ultimately helps to improve his or her economic productivity (Becker, 1964; Garibaldi, 2006). HCT is built on the basis that knowledge is specific and not easily available, which in turn generates personal competitive advantage (Barney, 1991). Therefore, human capital is an important source of organizational innovation, strategy and economic growth (Bontis & Fitz-enz, 2002). Pennings et al. (1998) and Becker (1964) believe that human capital is the key to explaining organizational performance. Becker (1964) proposed different concepts of human capital attributes: human capital investment and the result of human capital investment. Human capital investment is related to experiences such as education and work experience. These experiences may or may not bring personal knowledge and skills, while the results of human capital investment are related to the knowledge and skills acquired. According to Becker (1964), individuals try to obtain compensation for investment in human capital. Therefore, considering their own human capital attributes, individuals also aim to maximize their economic benefits. Therefore, human capital is related to organizational performance, because organizational human capital and excellent performance are related to having irreplaceable, valuable and scarce resources (Barney, 1991). Therefore, personal knowledge is an important resource of the company, and therefore the core of understanding organizational performance (Spender, 1996). Polanyi (1966) defines knowledge as a component: (i) Tacit knowledge, which can be defined as skills, ideas, and experiences embedded in an individual's mind, so it is complicated to evaluate. Therefore, transfer between individuals is not coded and complicated; (ii) Explicit knowledge can be defined as knowledge that is easy to codify and express between individuals. Spender (1996) believes that tacit knowledge is embedded in the traditions, values, and anticipation of the company's social background, making the competitive advantage lasting, because tacit knowledge is often attached to specific individuals and companies in some way, which makes replication. Since human capital is developed through personal experience and education, it contributes to both types of knowledge within the company (Dimov & Shepherd, 2005). Read Less