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Thursday 7 November 2013

Research proposal: How effective is the Provision of Venture Capital to Small and Medium Sized Companies: from the Case of the UK



Introduction
Due to the rapid development of information economy, venture capital is well known to people. But appearance of venture capital does not because of the needs of development of information economy. Focal point of the reason is the development of capital market. In the UK, the history of venture capital can be traced back to 1930s. However, the venture capital began to develop and expand rapidly until 1980s. British Venture Capital Association (BVCA) which founded in 1983, there were only 36 members, nevertheless, reached 124 in 1989. Several factors led to its rapid growth. On the one hand, the growth of venture capital in United States in 1970s played a model role to the venture capital in the UK. On the other hand, in 1980s, British Conservative government supported small businesses as well the global economy became flourishing. In 1990s, there was phenomenon that profits growth declined, market concentration increased, market information balanced. This phenomenon showed that venture capital had entered a mature stage of development in the UK. Recently decade, in the UK, the developed investment of venture capital has been paid more and more attention around the world. Trend of international competition leads the concern of venture capital to small and medium sized companies. Because most of small and medium sized companies belong to emerging companies, which have strong growth and a large space of development, so the investment returns are high. However, the venture capital market has not attained fully maturity. The risk in the growth process and instability of small and medium sized companies has become a pressing problem. The phenomenon was much serious for companies which were technological innovation.

There is more than 30years history since venture capital came into the UK. Under the impact and influence of capital markets, a large number of SMEs are provisioned by the support of venture capital. The United Kingdom mainly uses a variety of regulatory incentives and management consulting to select, support and nurture high-quality small and medium enterprises. But the United Kingdom does very little pre- investments of venture capital. Therefore, in the United Kingdom, the support of venture capital for small and medium sized companies which are innovative technology-based is much weaker than the United States.

High risk with high return, this is the feature of venture capital. The target of venture capital investment is small and medium sized companies with high growth potential. The scale of investment is determined by different stages of investment projects and the capital budget. Venture capital usually takes 4 to 6 years to recover the investment and there is often no revenue during the period. Once fail, lose everything. However, if success, the investors will receive a generous reward. How effective is the provision of venture capital in the UK to small and medium sized companies, namely, thought which means or intermediate variables to influence small and medium sized companies, is a question worth exploring. Venture capital investment is a button for linking the provision of venture capital and small and medium sized companies.

Research Aim and Objective
The research aims to discuss the effectiveness of the provision of venture capital in the UK to small and medium sized companies. The research tries to explore approaches and means that venture capital investors affect small and medium sized companies through feedback and learning effect. In order to achieve this research aims, it is necessary to solve the following several questions:
Ø  What extant conceptual models and theoretical frameworks related to the provision of venture capital in the UK to small and medium sized companies
Ø  Whether venture capital investors really have to intervene all aspects of the management of small and medium sized companies
Ø  Whether the provision of venture capital is effective to the development of small and medium sized companies in the UK
Ø  What approaches and means that venture capital investors can effectively affect small and medium sized companies through feedback and learning effect

Literature Review
The sprout of venture capital emerged in 1930s in the United Kingdom. The relative conservative culture of the European coupled with the shackles of traditional industrialization made the venture capital start really late in the UK. Since 1980s, many scholars began to study on the development of venture capital in the UK, mainly because of macro-economic development. Fried and Hisrichchose (1988) make a review about the main line of the operation process of venture capital firms. In order to address the problem that how the venture capital investors take a free hand to manage the enterprises, Tyebjee and Bumo (1883) created Tyebjee and Bumo Mode in the early of 1980s. The study of Tyebjee and Bumo has shown that that investment decisions were mainly based on ROI and risk of capital. The key elements were the ability of management staff, competitiveness and market attractiveness.

In 1990s, because the models of venture capital were imported from the U.S., the UK gradually became aware of the strategic significance of independent innovation for economic growth and economic independence. There were boom of introduced the U.S. experience in venture capital. In academia, Murray and Robbie (1997) made an investigation on the 10 leading venture capital in the UK. They found that ROI is far from consistent with the expectations of venture capital investors, and investors would adopt a more prudent action if the return on investment declined (Zacharakis, et al., 2007). In this case, venture capital investors in the United Kingdom hope to establish closer relationship with small and medium sized companies to improve the unfavorable situation. In investors’ mind, directly or indirectly involving in the management of SME could increase the return of venture capital. Well, only the company has a good management, the rate of return will be high. Therefore, to strengthen management of SME is the key. In 1999Murray's survey also showed that most of investors( about 59%) were looking to intervene in the operation of the management. They generally hoped to enhance the added investment value and generate competitive advantage through this approach. But they did not give the specific discussion. Therefore, selecting a good enterprise to invest is very crucial (Terje, et al., 2008). Robinson (2000) confirmed an empirical study that when screening for enterprises to invest, venture capital investors were often based on subjective judgments. Investors would avoid some micro-investment, particularly when assessment cost of micro-investment nearly equal to the assessment cost of larger (Henrik, et al., 2008). In a word, these studies have proved that, as suppliers of venture capital, it is necessary to get involved in the management of small and medium sized companies. Such an approach can urge managers to strengthen management and protect investment income.

In the past decade, the venture capital market in the UK has changed a lot. There has appeared a large number models for the study on the provision of venture capital to small and medium sized companies. These models play an important role in the study of venture capital effectively improve the operational efficiency of SMEs (Dixon, 2000). British scholars Sweeting and Wong (2000) chose a venture capital investment institution to make a system investigation. The institution used ‘let go’ operation mode. So the SME has more autonomy to decide its business. Tereza (2001) thought that there were a variety of incentive problems in venture capital market. Based on asymmetric information, entrepreneurs and venture capital investors had to choose an appropriate type and financing model structure, to clear the respective rights and obligations of both parties (Grichnik, 2006). Peirone(2002) used innovative tools that provided by economic literature, especially the point of view of geographical and technical knowledge and the theory of resource based companies, to establish of a financing contract model. The model not only concerns about the financial indicators and monetary incentives, but also deepens the links between venture capital investors and small and medium sized companies. The model is comprehended as a benchmark of enterprise resource (Casamatta, 2009). About the optimal contract, Cumming(2007) proved convertible preferred stock is the optimal form of venture capital financing in small and medium sized companies (Cumming, 2007). When the financial instruments lack of tax incentives, the UK venture capital investors often do not choose the convertible preferred stock. It is a good news for small and medium enterprises in the UK that the application of tax incentives of venture capital. In 1998, the UK introduced two incentives. The one is providing tax relief to SME, the mount of relief depends on the cost of R & D. The other is give tax credits to key executives to attract and retain good managers of new companies which received venture capital. In this context, the profit of SMEs has a great space for improvement.

Empirical research of Rustam and Lackaka (2007) indicates that in the venture capital market, the leading investment targets are high-tech small and medium enterprises in the UK. The most of the investment is in industries of information, computer and communications, accounting for about 60% to 70%. In recent years, the proportion of investment in emerging small and medium enterprises, such as biological engineering, new materials, and technology of ocean development and so on, raises rapidly. The licensed securities market (namely, the second stock market) set up in 1980, has provided 250 enterprises with nearly 30 billion pounds for stock trading. Theorists and practitioners all agree that the venture capital is one of most capital to small and medium enterprises. According to yearbook of U.S. venture capital in 1998, some small and medium enterprises depended on the provision of venture capital being listed companies. After listed, there was a good performance. Some stocks even reached 283% increase (Fried, 2002). But this is rare in the mature stock market. The demand for venture capital and support to small and medium sized companies will lead to the expansion of venture capital. In this case, venture capital investors how to adopt an effective method to manage small and medium sized companies will be very important (Cumming, 2007).

The investors usually did not intend to invest to high-risk areas. So they were willing to choose a better debt way, such as ‘stop-loss mechanism’. The participation of venture capital usually is carried out by the support and promotion of national plans (Allen, 2008). At the same time, Wong (2008) also believes that, although Venture capital investment grows naturally in its rich market economy in the UK, the specific model of development is to learn the experience of the United States. So the government maintains a high level of participation in the provision of venture capital to small and medium sized companies (Wong, 2008). The broad Participation of government in the field of venture capital constitutes the basic characteristics of venture capital model in the UK. In addition, other scholars research the question from other Perspective. Zacharakis and McMullen (2007) analyzed the economic system influenced the venture capital investors when making a decision to provision venture capital to small and medium sized companies (Zacharakis, et al., 2007). Based on the view of investee companies, Terje and Dystein (2008) researched the expectations of small and medium sized companies and perceptions of value added activities (Terje, 2008). The results showed that there was a significant gap between the expectations and perception of entrepreneurs. In short, the provision of venture capital in the UK to small and medium sized companies has become a new focus. This is because the UK has a significant international economic position. However, few scholars to explore how effective is the provision of venture capital in the UK to small and medium sized companies. The research will analyze the issue from the perspective of process of venture capital investment.

Research Method
In order to construct hypothesis and reach new conclusions, it needs to use appropriate research methods. Research method is important because it has important implications to final conclusions of the study (Saunders, et al., 2007). At present, there are two major research methods to study the approach of provision of venture capital to small and medium sized companies. There are positivism research and interpretive research. To address the issues in the research, the study will use empirical research methods mainly.

In order to solve the objectives of ‘whether venture capital investors really have to intervene all aspects of the management of small and medium sized companies’ and ‘What approaches and means that venture capital investors can effectively affect small and medium sized companies through feedback and learning effect’, the article will design the questionnaire according to the literature. The questionnaire will consult other countries as well combine with the actual situation in the UK. The main content of the questionnaire is a series of questions referring to whether it is necessary for the investors to involve in management of small and medium sized companies, and how to implement effective the provision of venture capital. Subjects of the investigation will include venture capital investors, government officials, small and medium sized company managers, shareholders, etc. The questionnaire will sent by e-mail. The research will use content analysis to resolve the feedback questionnaire.

In order to solve the objective of ‘Whether the provision of venture capital is effective to the development of small and medium sized companies in the UK’, the article will adopt empirical research method. It has to collect the financial statements of small and medium sized companies in the UK in the last five years, consult the results of questionnaire to design parameters of the variable. The research will establish a multiple logistic regression model based on the Tyebjee Bumo model. According to the results to analyze whether the provision of venture capital is effective to the development of small and medium sized companies. When selecting the samples, the research will take a consideration of emerging industries. When establishing a multiple logistic regression model, the research will choose the small and medium sized companies which are provisioned of venture capital and not provisioned of venture capital to composition paired samples. Then the research will analyze whether venture capital has an influence to performance, growth, capital structure, financing capacity and the current financial crisis of samples.

Data Analysis
Data analysis is a process of research. It is an important part to describe the facts, identify problems, evaluate models and test the hypothesis. Data analysis can help to highlight important information, give advice conclusion and contribute to make reasonable decisions. The data in this article not only includes raw data (such as the questionnaire data) but also contains secondary data (such as annual reports of small and medium companies and information and data of investors in capital markets). Analysis of the data can use various methods. On the basis of the themes and issues to be addressed, the research will mainly refer to content analysis and theoretical sampling as well as multivariate analysis. In order to get raw data, the study intends to send 1,000 copies of investigation reports. In order to get secondary data, there will be 300 small and medium companies were brought into subjects, including the data that has to be weeded out.

For more theory and case studies on: http://expertresearchers.blogspot.com/

References:
Allen, S. A. & Hever, K. T. (2008) ‘Venture Capital Investing by Information Technology Companies: Did it pay?’ Journal of Business Venturing, 17(22), pp.262-282.

Beckman, C. M., etc. (2009) ‘Early Teams: The Impact of Team Demography on VC Financing and Going Public’ Journal of Business Venturing, 22(2), pp.147-173.

Casamatta, C. C. (2009) ‘Experience Screening and Syndication in Venture Capital Investments’ Journal of Financial Intermediation, 16(3), pp. 368-398.

Cumming, D. (2007) ‘United States Venture Capital Financial ContractingForeign Securities’ Advances in Financial Economics,12(7), pp. 405-444.

Dai, N. (2006) ‘Does Investor Identity Matter? An Empirical Examination of Investments by Venture Capital Funds and Hedge Funds in PIPES’ Journal of Corporate Finance, 13(4), pp. 538-563.

Davis, J. & Coalson, M. N. (2007) ‘Looking for Venture Capital Firms: a Searcher adventure’ Searcher, 15(3), pp.4-50.

Fried, V. H. & Hisrich, R. D. (2002) ‘Venture Capital Research: Past, Present and Future’. Entrepreneurship Theory and Practice, 13(1), pp.15-28.

Grichnik, D. P. (2006) ‘Strategic and Investment Behavior in the UK and Israeli Venture Capital Industries: a Comparison with the USA’ International Journal of Technology Management, 34(2), pp. 88-104.

Henrik, B., etc. (2008) ‘Entrepreneurial Learning and the Role of Venture Capitalists’ Venture Capital, 9(3), pp.165-181.

Hsu, D. H. (2010) ‘Experienced Entrepreneurial Founders, Organizational Capitaland Venture Capital Funding’, Research Policy, 36(5), pp.722-741.

Henley, L.G. (2007) ‘Extending Innovation BoundariesCorporate Venture Capital Gives Small Firms a Strategic Option’ The Journal of Business Strategy, 6(28), pp.36-43.

Nisar, T. M. (2007) ‘Performance Effects of Venture Capital Firm Networks’ Management Decision, 45(5), pp. 923-936.

Peirone, D. E. (2006) ‘Knowledge and Venture FundingComplementarities and Financial Contracts’ Industrial and Corporate Change, 16(5), pp. 851-873.

Saunders, M., etc. (2007) Research Methods for Business Students (4thedn), Harlow, Pearson Education.

Terje, B. U. & Wedding, S. R. (2008) ‘Venture Capital FundsDo They Meet the Expectations of Portfolio Firms?’ Venture Capital, 9(1), pp. 23-41.

Tereza, T. U. (2007) ‘How Important is Participation of Different Venture Capitalists in German IPOs?’ Global Finance Journal, 17 (3), pp.350-378.

Shepherd, D. A., etc. (2007) ‘Requisite Expertise, Firm Reputationand Status in Venture Capital Investment Allocation Decisions’ Journal of Business Venturing, 22(4), pp. 481-502.

Weber, B. P. & Weber, C. N. (2007) ‘Corporate Venture Capital as a Means of Radical InnovationRelational FitSocial Capitaland Knowledge transfer’ Journal of Engineering and Technology Management, 24(2), pp.11-35.

Wong, A. C., etc. (2009) ‘Angel finance: the other venture capital’ Strategic Change, 18(7), pp.30-221.

Zacharakis, A. L., etc. (2007) ‘Venture Capitalists' Decision Policies Across Three CountriesAn Institutional Theory Perspective’ Journal of International Business Studies, 38(5), pp.691-708.

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