Research in North America, Western Europe and Australia has clearly established that small and medium-sized enterprises (SMEs) are the most significant sources of private sector employment and account for most of the new jobs that have been created during the past two decades. In Western Europe, SMEs provide up to 70% of private non-primary jobs whereas large firms provide only 30% (European Observatory, 1993). Between 1988 and 1993 firms with less than 100 employees had a net employment increase of 2.6 million jobs whereas employment in large firms was static (European Observatory, 1994). In some countries, the large firm sector has actually been contracting in employment terms in recent years. All the indications are that SMEs will continue to play the major role in job creation in developed countries in the foreseeable future.
KeywordsVenture Capital Institutional Investor Equity Capital Venture Capital Fund Venture Capital Firm
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Notes to Chapter 1
- 1.For example, a recent study by the Finnish Ministry of Trade and Industry (Bouix, 1997) which involved a survey of over 50 banks and other financial institutions across Europe, found that most organisations did not possess any particular methods for assessing SMEs in terms of their growth potential and technological abilities.Google Scholar
- 2.However, it is important to acknowledge that venture capital-backed companies make a disproportionate contribution to economic development. They are “the cream of the crop — the pacesetters of advanced, knowledge-based economies” and “produce the rising tide that lifts all of the boats” (Bygrave and Timmons, 1992, 286). For example, venture capital backed companies in the UK increased then-employment by 15% over the 1990/1 to 1994/5 period compared with an overall increase in employment of just 1% (Coopers and Lybrand, 1996). In The Netherlands, 40% of the country’s 75 fastest-growing companies had been financed with venture capital (whereas in aggregate only 2% of Dutch firms receive venture capital). In France, venture capital backed firms were found to have averaged 34% employment growth, a rise in sales of 42%, export growth of 80% and a doubling of investment in the period 1989 to 1993; each of these ratios was three times higher than for a control group of firms (EVCA, 1993).Google Scholar
- 3.Demand for venture capital is further limited by the reluctance of many entrepreneurs to seek external equity finance on the grounds that it will involve a loss of control; investors are likely to wish to limit the freedom of action of the entrepreneur, for example, by insisting on veto rights over major decisions. However, a recent Swedish study which although confirming the reluctance of small business owners to relinquish ownership and control by raising external equity finance, also noted that external equity finance and the associated loss of control is more acceptable to small business owners if there is a compensating gain in management skills as a result of the involvement of the investor in a hands-on capacity (Cressy and Oloffson, 1997). There is also a perception amongst entrepreneurs that equity finance is more expensive that debt finance. However, they ignore the value-added contribution that a hands-on equity investor makes, and which is included in the price of the capital. Entrepreneurs also often fail to acknowledge that lenders will also impose specific conditions that can restrict their actions. Moreover, equity control is of little consolation if the business defaults on its loan repayments, in which case effective control passes to the lender who may decide to wind-up or sell the business (Kelly, 1997).Google Scholar
- 4.The pooled IRR (Internal Rate of Return) for independent venture capital funds in the UK in the period 1980–91 were as follows: 4.3% for funds specialising in start-ups, 6.9% for funds specialising in development capital, 16.2% for mid-MBO funds, 23.8% for large MBO funds and 9.7% for generalist funds. Considering just the top quartile of funds with the highest IRRs, the pooled average amongst startup funds was 16.1%, but here again this compared unfavourably with the equivalent figure for MBO funds (BVCA, 1996a).Google Scholar
- 5.The extent to which these differences are the product of differences in the data sources and methodology used to identify business angels is unclear, but these seem likely to play some role.Google Scholar
- 6.The industrial composition of the sample was as follows: manufacturing (67%), construction (9%), retail (14%), services (6%) and transportation (5%).Google Scholar
- 7.At the time that the study was designed and undertaken the available English-language studies of informal venture capital were limited to the USA, Canada, the UK and Sweden.Google Scholar