This paper gives an overview on the main drivers for venture capital fundraising, and their impact on the supply and demand side of investments. First the differences between captive and independent venture capital firms and the difference between the supply and demand of venture capital investment are explained to prevent misunderstandings. The determinants of venture capital fundraising identified here are the Initial Public Offering, the overall economic growth, the capital gains tax rates, the labor market conditions, the financial reporting requirements, the firm’s specific performance and reputation, the existence and regulatory changes of private pension funds and governmental activities and support programs. In addition the impact of the financial crisis on venture capital fundraising has been identified and analyzed in four categories. The risk aversion as a consequence of the financial crisis, the decrease of valuation of venture capital-backed startups, the reduced interest rates and new restrictions and laws designed to protect countries and markets against future financial crisis.
Table of Contents
1 INTRODUCTION
1.1 Definition of Venture Capital
1.2 Independent vs. captive venture capital firms
1.3 Supply and demand effects on VCF
2 DETERMINANTS OF VCF
2.1 IPO
2.2 Overall economic growth
2.3 Capital gains tax rates
2.4 Labor market conditions
2.5 Financial reporting requirements
2.6 Firm’s specific performance and reputation
2.7 Private pension funds
2.8 Governmental activities and support programs
3 IMPACTS OF THE FINANCIAL CRISIS ON VCF
3.1 Risk aversion
3.2 Decrease of valuation of venture capital-backed startups
3.3 Reduction of interest rates
3.4 New restrictions and laws
4 CONCLUSION
Objectives and Research Themes
This paper aims to provide a comprehensive overview of the primary determinants influencing venture capital fundraising (VCF) and to analyze the specific impacts that the global financial crisis has had on the venture capital market. The central research question addresses the underlying drivers of VCF and how the economic instability triggered by the financial crisis has affected this sector.
- The differentiation between captive and independent venture capital firms.
- Key determinants such as economic growth, capital gains taxes, and labor market conditions.
- The role of reputation and institutional factors like pension funds.
- The effects of the financial crisis, specifically risk aversion and valuation changes.
- The influence of governmental policy and regulatory changes on venture capital.
Excerpt from the Book
1.2 Independent vs. captive venture capital firms
The differentiation between captive and independent venture capital firms was introduced by Van Osnabrugge and his colleague Robinson in their paper “The influence of a venture capitalist’s source of funds “.1 The main difference between those two types is, that so called ‘Captive’ firms have been established by financial organizations like banks or pension funds for instance, and ‘independent’ venture capital firms are not associated with a parent organization.
Even if the captives typically have a high operating autonomy, they are anyhow dependent and have to align their portfolio with the overall image, management and strategy of their parent organizations. On the other hand side, as they receive their funding resources from their parent organizations, these funds tend to be open-ended and reflect the overall investment strategy of their parent institution. Independent firms are not associated with a parent organization and raise capital from various outside sources. Fig 1 shows the different relations and flows of venture capital in independent firms. Independent firms are often formed and owned by ancient managers of established venture capital firms. They normally set up funds with predetermined size, investment strategy and a pre-specified liquidation date, “...usually 7-10 years from inception.”2 As independent ones are remunerated by an annual management charge and by a part of the realized capital gain, they are highly interested in generating return for investors.3
Summary of Chapters
1 INTRODUCTION: This chapter provides an overview of the determinants of VCF, introduces the types of venture capital firms, and sets out the research question regarding the impact of the financial crisis.
2 DETERMINANTS OF VCF: This section analyzes various drivers of venture capital activity, including macroeconomic factors like GDP, taxation, labor market conditions, and the firm-specific importance of reputation.
3 IMPACTS OF THE FINANCIAL CRISIS ON VCF: This chapter examines how the financial crisis affected the industry through increased risk aversion, reduced startup valuations, interest rate fluctuations, and new regulatory constraints.
4 CONCLUSION: The final chapter summarizes the findings regarding the drivers of VCF and synthesizes the identified impacts of the financial crisis on both the supply and demand sides of the market.
Keywords
Venture Capital, VCF, Financial Crisis, Fundraising, Economic Growth, Independent Venture Capital, Captive Venture Capital, Risk Aversion, IPO, Pension Funds, Startup Valuation, Market Regulations, Interest Rates, Entrepreneurship, Investment Strategy.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the main factors that determine venture capital fundraising (VCF) and how the financial crisis that began in 2007 has impacted the industry.
What are the central themes discussed in the work?
The themes include the structure of venture capital firms, the drivers of capital supply and demand, the influence of government and tax policy, and the economic consequences of the financial crisis.
What is the core research question?
The research question is: What are the determinants VCF and what is the impact of the financial crisis on VCF?
Which scientific method is utilized?
The paper employs a qualitative literature analysis, synthesizing findings from established economic research and financial studies to explain the dynamics of the venture capital market.
What specific topics are covered in the main body?
The main body details the distinction between captive and independent firms, analyzes economic determinants like GDP and tax rates, and reviews crisis-induced phenomena such as risk aversion and credit crunches.
What are the key terms that define this work?
Key terms include Venture Capital, VCF, Financial Crisis, Risk Aversion, IPO, and Capital Gains Tax.
How do independent and captive venture capital firms differ?
Captive firms are established by financial organizations like banks and must align with the parent's strategy, whereas independent firms operate autonomously, often driven by the prospect of return on investment for their outside investors.
Why is risk aversion highlighted in the context of the financial crisis?
Risk aversion is identified as a critical factor because it causes investors to withdraw from risky start-ups, significantly reducing the supply of venture capital available during economic downturns.
- Quote paper
- Nicolas Klein (Author), 2010, Drivers of Venture Capital Fundraising and the Financial Crisis, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/182488
