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 1999，Murray'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.
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