As a result of the neglect of CVC in the research literature, very little is known about either the investment process or the experiences of companies that have made these investments in the UK. These issues are important to this study for three reasons. First, an examination of the internal organisation and investee selection procedure used by investing companies will provide an insight into the corporate decision-making process and enhance our understanding of the dynamics and corporate objectives behind the CVC process. Second, identification of the performance of investments and constraints experienced by investors in the past may provide some further clues as to the underdeveloped nature of CVC in the UK. Third, and of particular significance, a consideration of the characteristics of CVC investments can help to determine which types of firms are most likely to benefit from this finance source. In the light of the second main aim of this book, namely to examine the role of CVC as a source of external equity finance for small firms and venture capitalists, the main focus of this chapter is on the role of CVC in the bridging of the equity gap.
The difficulties encountered by small firms, and specifically technology-based firms (TBFs), in raising capital for start-up and growth were considered in some detail in Chapter 2. These difficulties are particularly great in the UK, where, despite the rapid growth of the venture capital industry since the early 1980s, fund managers have consistently failed to back technology-based ventures in the early stages of their development (Murray, 1992b; 1995; Abbott and Hay, 1995). The reluctance of the venture capital industry to invest in such firms appears to be increasing, reflecting the preference of institutional investors for less risky later stage deals and MBOs/MBIs which tend to produce more consistent returns in shorter time periods (Abbott and Hay, 1995). Furthermore, venture capital providers are often unable to provide investee firms with appropriate value-added skills and resources (Murray, 1993; 1995).