Venture Capital Investment Evaluation in Emerging Markets
Chotigeat, T., Pandey, I. M., Kim, David J., Multinational Business Review
The growth in the level of venture capital investment in the emerging small economies of Taiwan, Sri Lanka, and Thailand has been nothing short of astounding. This paper describes the development of venture capital in these countries and analyzes the criteria requested for a venture capital firm (VCF) to invest in a venture. To carry out this empirical study, a questionnaire was devised asking VCFs in the three countries to rate the important criteria when investing in a venture; the surveys were conducted in all venture capital firms over the period 1994-1995. The criteria cover diverse areas such as the entrepreneur's capability, the product, finance items, environmental conditions, and the market situation. Analysis of the data at both the category and individual levels of criteria revealed that importance differed according to the country where a VCF was investing: VCFs in Taiwan focus more on expected financial returns as well as potential market growth and size, whereas VCFs in Sri Lanka emphasize financial indicators and management team characteristics; in Thailand, the VCFs consider the quality of the venture management team as the most critical evaluation criteria. Potential areas for further research on VCFs in emerging markets are proposed.
Venture capital is a popular method of financing high technology and high-risk enterprises in developed countries like the United States, the United Kingdom, and Japan. And recently, a number of developing countries have established venture capital firms in the private and/or public sectors to finance technology-related and new small- and medium-sized enterprises (for a comprehensive definition of the term venture capital, see Endnote). In the emerging markets of Asia, venture capital activity has been growing at an impressive rate, especially since the late 1980s. During the five-year span of 1988-1993 the Asian venture capital pool increased from US$9.9 to $26.2 billion, an annual growth rate of 21.5%, while cumulative investment increased from $4.5 to $11.6 billion or 26.7% annually [AVCJ, 1994].
Taiwan and Thailand are fast growing economies, and growth of Sri Lanka is also on the rise. All three have emerging markets where venture capital activity is now well entrenched. Although a good amount of empirical work exists on the venture capital investment process in the US and in other developed countries, no analysis has been conducted on these three countries. The purpose of this paper is to empirically study the venture capital investment firms' evaluation criteria in Taiwan, Sri Lanka, and Thailand. The paper is organized as follows: Venture capital profiles for Taiwan, Sri Lanka and Thailand are provided in the second section; Section 3 summarizes relevant studies on venture capital; the research methodology and the survey data are described in Section 4; Section 5 reports the findings of this study; and finally Section 6 contains the conclusions and the implications of the study, as well as areas for further research.
VENTURE CAPITAL PROFILES: TAIWAN, SRI LANKA, AND THAILAND Taiwan. Venture capital in Taiwan was introduced by the government in 1984 in order to enhance the technological contents of products and processes to attain global competitiveness. The government gave direct support through comprehensive tax incentives and financial assistance programs, as well as through the help of foreign technologies and expertise. A VCF in Taiwan can also establish a domestic fund to directly invest in technology projects in Taiwan and abroad, or invest in other VCFs for indirect investments in technology projects. VCFs are expected to meet the financing requirement of high tech small- and medium-sized firms. Today, many industries in Taiwan have been transformed from imitations to innovations.
The venture capital funds in Taiwan are either managed by the VCFs directly or through a management company. A company may have an in-house team who provide all the services required to select, monitor and assist investee companies. …