An article from Norwegian School of Economics (NHH)
The key to success for entrepreneur companies
Funding from both local and international capitalists result in long-lasting success and makes it more likely to become a listed company. Particularly in developing countries.
Norwegian School of Economics (NHH)
“Venture capital is about more than just securing funding for companies in the start-up phase. The venture capitalists also contribute expertise, and their goal is that the company will be a success,” says researcher Tyler Hull at the Department of Finance at the Norwegian School of Economics (NHH).
In a study of 45 countries, Hull studied the connection between entrepreneur companies’ success and how they are funded. The study comprises 30 developed countries and 15 emerging nations that are in the process of becoming developed countries, such as Brazil or India.
What is most important: proximity and local knowledge, or international experience and knowledge?
“It is often assumed that the closer the venture capitalists are to the company they are investing in geographically speaking, the higher the success rate. On the other hand, it is possible that professional and experienced venture capitalists will produce the best results," says Hull.
"What we’re seeing, however, is that syndicates consisting of both local and international venture capitalists produce the best results.”
One way of measuring success, is to look at whether the entrepreneur company becomes a listed company or not.
In the study, syndicates consisting of local and international venture capitalists were most likely to result in stock exchange listing.
Additionally, the positive effects syndicates had on the entrepreneur companies were lasting.
“We saw that, three years after being listed, companies funded by both local and international venture capitalists still had higher value creation than companies funded by syndicates consisting of only local or only international venture capitalists,” says Hull.
The study shows that success is not just due to the fact that syndicates of local and international venture capitalists invest in more viable companies, but also to the fact that the venture capitalists often remain on the companies’ boards and continue to contribute their expertise.
“Monitoring the investment increases the likelihood of success,” says Hull.
Hull shows that the positive effect of collaboration between local and international venture capitalists is stronger in emerging economies than in developed countries.
“In developed countries like Norway, the local venture capitalists often have the same knowledge as the international venture capitalists, and it is therefore less important who invests in the entrepreneur companies,” says Hull.
In less-developed countries, however, local conditions can be unpredictable.
“The international venture capitalists often do not quite know what they are getting into. By collaborating with local companies, they acquire more knowledge about the market,” says Hull.
The research also shows that the local venture capitalists acquire new knowledge as a result of collaborating with the international companies.
“Those who have cooperated with international venture capitalists once are less likely to do so again. At the same time, they perform better in the long term after such collaboration when compared to other local venture capitalists,” Hull says.
Useful for the authorities
The researcher believes the study can be useful to less-developed nations, because it helps to explain what makes local entrepreneurship succeed.
“Creating a local venture capitalist industry is part of the recipe for success, so that these companies can cooperate with international companies.”
“At the same time, the authorities must encourage international venture capitalists to invest in the country. You can’t just do one of the two. To attract international companies, these countries can, for example, offer tax incentives or introduce less stringent capital control,” he says.
- Do Local and International Venture Capitalists Play Well Together? A Study of International Venture Capital Investments, 2010.