Venture Capital 2.0: From Venturing to Partnering
Joseph A. McCahery, Tilburg University Law School, Tilburg, The Netherlands, jamccahery@gmail.com , Erik P. M. Vermeulen, Tilburg University Law School, Tilburg and Philips Lighting — Legal Department, Amsterdam, The Netherlands, E.P.M.Vermeulen@uvt.nlAbstract
Against the backdrop of an ever-changing financial landscape sometimes characterized by an abundance of funding and start-up opportunities, but usually characterized by down rounds and decreasing valuations (leading to funding, investment and liquidity gaps), "venture capital" has taken on a new uncertainty and complexity. In this review, we suggest that venture capital should not exclusively — or even primarily — be defined in terms of providing risk capital (and advise) to founder-entrepreneurs. Such an approach to venture capital, which is often described in terms of a "venture capital cycle", seems to represent the conventional wisdom in most recent discussion. According to this perspective, the solution to the funding, investment, and liquidity gaps is for new sources of capital — be they government, corporate or crowd — to step in and provide founder-entrepreneurs with money, capacities and connections that allows them to start, scale, and grow their businesses.
These ingredients are necessary but not sufficient to maximize the economic potential of start-ups. Clearly we need something more. Recently, alternative forms of finance and a new breed of venture capital providers have emerged which focus more on collaborations and the process of building long-term relationships constructed around sharing, mutual trust and respect (partnering) than making money (venturing). Online platforms, such as AngelList, play an important role in encouraging these collaborative models. Some investors have labeled this process as "venture capital 2.0". We explore the view that reforms that relax rules and regulations governing initial public offerings should attract new "venture capital 2.0" investors and high volumes of business. However, the growth rates for new segment listings in Europe and the United States have stalled recently, casting doubts on the usefulness of the of the IPO route for both young firms and investors. We suggest that a renewed focus on private IPOs, followed by a trade-sale or public IPO, is necessary to accommodate the preferences of entrepreneurs and investors.
Venture Capital 2.0: From Venturing to Partnering
Venture Capital 2.0: From Venturing to Partnering provides a better understanding of the alternatives to bank financing for SMEs and entrepreneurs and examines a range of 'new' external financing providers, including crowdfunding platforms, the new breed of venture capital firms, and corporate venture capitalists. The authors assess the likely impact of each of the different financing options available to SMEs and high growth companies and ask whether they can, with greater network resources, improve the selection of investments and access to follow-on funding in later stages of a start-up's development. These new breed of capital providers have introduced 'collaborative models' which appear to play an invaluable role in the selection of the right mix of portfolio companies, and can also offer the access to new technologies as well as possible exit opportunities. Simultaneously, the authors explore the role of government equity co-investment programs that provide funding and advice through public-private partnerships. The research suggests that as long as these government programs add value to the collaborative venture capital models, they can play an important role in funding innovative projects.
Following an introduction, Section 2 discusses how governments can encourage entrepreneurship and the launch of start-up companies and influence the development of SMEs. Section 3 provides an overview of the traditional venture capital cycle and focuses on the funding, investment and liquidity gaps in this cycle. Section 4 examines some of the developments recently introduced in practice that have proven to be an effective step in bridging the gaps in this cycle. The goal of this analysis is to show that the new breed of 'venture capital providers' no longer think of their function as simply providing a source of capital in the expectation of financial return. This section illustrates that the task is to build an open and collaborative relationship with 'their' portfolio firms. Some investors have labelled this trend as 'venture capital 2.0'. Section 5 presents the authors conclusions.
