A recipe for success for entrepreneur companies
Funding from both local and international venture capitalists ensures entrepreneur companies' viability, particularly in developing countries with growing economies. This is shown by the research conducted by the FIBE prize winner Tyler Hull.
'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 Tyler Hull, post-doctoral researcher at the Department of Finance at NHH.
In a new study of 45 countries, Hull has 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.
'The question we ask is: 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. What we're seeing, however, is that syndicates consisting of both local and international venture capitalists produce the best results,' says Hull.
One way of measuring success is to look at whether the entrepreneur company becomes a listed company or not. The study shows that syndicates consisting of local and international venture capitalists were most likely to result in stock exchange listing. The study also shows that the positive effects syndicates had on the entrepreneur companies were lasting effects.
'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 'new' nations, on the other hand, 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. This indicates learning.'
Useful for the authorities
According to Hull, the study can be useful to new 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.
Although syndicates of local and international venture capitalists have the greatest effect in new nations, Hull believes that they can also be useful in developed countries like Norway.
'We have many successful venture capitalists in the fields of oil and technology in Norway, but perhaps not in the medical industry. It could be an advantage to collaborate with international venture capitalists who have that expertise,' he says.
Tyler Hull won the FIBE prize for 2014 for his article 'Do local and international venture capitalists play well together?' A study of international venture capital investments'. Hull is a post-doctoral researcher at the Department of Finance at NHH. He has a PhD in international economics and finance from the International Business School at Brandeis University of Massachusetts.
Text: Torill Sommerfelt Ervik