Venture Capital in Spain by Stage of Development

Article excerpt

This paper examines the investment decisions of 51 Spanish venture capital firms by stage of development. The results showed that venture capitalists ranked evaluation criteria related to the characteristics of the entrepreneurs, manager background, and management team experience as more important than market and product characteristics. Factors affecting the required rate of return were more important for the early-stage firms than for late-stage firms. Discounted cashflow analysis is the most frequently used valuation method. Private venture capital firms invest more during late development stages, while public venture capital firms invest more during the early stages. The results can be used by firms seeking venture capital, venture capital firms, consultants, and support agencies that provide capital-acquisition assistance. By gaining insight into decision criteria and processes, firms can develop better and more targeted materials to attract capital. Venture capital firms can use the information from this study to better understand their decision processes, individually and relative to competitors. Consultants and support agencies can use the information to provide better advice to both firms and venture capital firms. Information is this study could easily be built into training programs for both new and existing businesses. Finally, the results can also be incorporated directly into university courses that include material related to venture capital.

Introduction

Venture capital (VC) is important to many Spanish SMEs that are rapidly growing or that are developing high-risk products. Traditional financing sources are commonly unavailable as financial institutions are reluctant to provide risk capital and personal equity is often consumed during the early stages of company operations (Van Auken 2001). Venture capital can fund product development, marketing, expansion, turnaround, employee buyout, and acquisition. Venture capital investment can position the firm to obtain additional capital through the venture capitalist's experience, expanded network of contacts, enhanced market creditability, and stronger financial position (Ruhnka and Young 1997). Gupta and Sapienza (1994) suggest that venture capitalists add value to a firm by bringing investors and entrepreneurs together in an efficient manner, making better investment decisions than limited partners would make, and providing nonfinancial assistance that in turn promotes survival. Zacharakis and Meyer (2000) pointed out that VC-backed ventures have higher survival rates than non VC-backed ventures.

Understanding the nature and process of VC investment decisions can improve the likelihood that a firm will be successful in raising funds. Stage of development, risk of the venture, background of the owners, geographic location, and exit opportunities affect the venture capitalists' assessment of risk and return potential (Van Auken 2001). Understanding these issues will enable companies to develop better proposals and negotiate more effectively with venture capitalists (Timmons and Spinelli 2004).

The creation of an active VC market that facilitates the financing of early-stage and high technology ventures has been a high priority for economic politics (Da Rin, Nicodano, and Sembenelli 2005). Early-stage companies that attract VC investment can take advantage of the VC's experience, knowledge, understanding of the entrepreneurial process, and network of relationships (Repullo and Suarez 2004; Lindsey 2003; Lerner 1995). Late-stage companies that attract VC capital have less opportunity to take advantage of these VC contributions (Michelacci and Suarez 2004).

The tendency of the VC in Europe in comparison with Asia countries and the United States is to invest in more in late-stage projects (Allen and Song 2003). This takes place in a higher intensity in Spain, where the investments in early stages only represented 4.2 percent of the invested volume and 21. …