The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL
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The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL

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This paper examines the influence of financial markets on the investment in venture capital. It highlights the evolution of the number of exit of U.S. venture capital companies in financial markets as ...

This paper examines the influence of financial markets on the investment in venture capital. It highlights the evolution of the number of exit of U.S. venture capital companies in financial markets as well as the European one. Moreover it sheds the light the simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S and Europe. The study focuses on a range of data on US and European venture capital firms covering the period of 1984 to the first quarter of 2012. It relies on the VentureXpert private equity and venture capital performance database, maintained by Thomson Financial data for American Venture Capital markets, and Chausson finance indicator for French venture capital market. It also considers developments in the venture capital markets in Europe and the United States. Indeed our analysis shows that favourable anticipations of Initial public offerings, synonyms for significant capital gains for venture capitalists, are key incentives for the venture capital market. However, when considering the recent investment behavior of European venture capitalists, the relationship between financial markets and venture capital activity is much less clear: the invested amounts seem to be significantly and permanently disconnected from the

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    The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL Document Transcript

    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 1 The INFLUENCE OF FINANCIAL MARKETS ON the INVESTMENT IN VENTURE CAPITAL DISSERTATION: 2ND YEAR MASTER EMPIRICAL FINANCE AND ACCOUNTING Presented by SECK BABACAR Supervised by PASCAL DUMONTIER 2012║2013
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 2 SUMMARY: I-LITERATURE REVIEW: …………………………………………………………………...5 II- PRESENTATION OF VENTURE CAPITAL AND EXIT MODALITIES................ 6 II-1- Presentation of Private equity and its various categories...............................................6 II-2: Cycle of investment and exit in the financial markets.................................................. 8 II-2-1: The Investment Cycle................................................................................................ 8 II-2-2: Exit via IPO.................................................................................................................... 11 III Empirical analysis of the relationship between financial markets and American investment in venture capital...................................................................................................................... 13 III-1: Data Presentation............................................................................................................. 13 III-2 Evolution of the number of exit of U.S. venture capital companies in financial markets 15 III-3 Amounts invested by venture capital................................................................................ 20 A- The volume of the investments of the American venture capital................................. 20 B- The European capital investment..................................................................................23 IV- The simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S and Europe……………………………………………………………………………….24 V- How to explain the differences in investment behavior in the European and U.S. markets? ………………………………………………………………………………………………...26 V-1: Institutional and contractual characteristics of the European Venture Capital……….. 26 V- 2 -Behavior guided by a "limited" rationality…………………………………………... 32 VI- The volume of French venture capital investments............................................................ 33 Conclusion............................................................................................................................... 36
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 3 “Venture capital is now an island of tranquillity in an ocean of stock-exchange disturbances", Christophe Chausson, president of Chausson Finance
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 4 ABSTRACT: This paper examines the influence of financial markets on the investment in venture capital. It highlights the evolution of the number of exit of U.S. venture capital companies in financial markets as well as the European one. Moreover it sheds the light the simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S and Europe. The study focuses on a range of data on US and European venture capital firms covering the period of 1984 to the first quarter of 2012. It relies on the VentureXpert private equity and venture capital performance database, maintained by Thomson Financial data for American Venture Capital markets, and Chausson finance indicator for French venture capital market. It also considers developments in the venture capital markets in Europe and the United States. Indeed our analysis shows that favourable anticipations of Initial public offerings, synonyms for significant capital gains for venture capitalists, are key incentives for the venture capital market. However, when considering the recent investment behavior of European venture capitalists, the relationship between financial markets and venture capital activity is much less clear: the invested amounts seem to be significantly and permanently disconnected from the evolution of financial markets. Keywords: Venture Capital; Private equity; IPO; M&A; Exit; financial market; Cycle; profitability, performance.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 5 INTRODUCTION: Capital investment or private equity plays a key role in the development of the economic activity. For companies that do not involve public offering, it is a substantial support to finance their development for their entire cycle. Thus it contributes dramatically to the promotion of entrepreneurship through the creation of innovative companies, to the renewal of the economic fabric and on the rebound to the growth. Indeed, the private equity business lies substantially in equity stake in unlisted SME (Small and Medium-Sized Enterprise). This acquisition of holdings can be made especially in a minority or majority way in order to finance them during all their life cycle both in start-up phase, growth, transmission and in a situation of recovery. It carries through four segments that are venture capital in the start-up phase of the business; capital development in order to support the growth of the company; buyout or LBO finally distressed investment to help unprofitable companies improve their operations to attain profitability. Indeed, the venture capital which is the object of our study can be considered as a source of funds from professional investors bound for young innovative companies or "start-up", in a strong innovative capacity and which has a fast capacity of growth. Venture capital so allows to substantially improve the financing of "start-up" and allows these companies to grow, but the time horizon of the investment is limited between three and ten years at most. Indeed, understanding the cycle of venture capital is essential for understanding the influence of financial markets on its business. « To understand the venture capital industry, one must understand the whole venture cycle. The venture capital cycle starts with raising a venture fund; proceeds through the investment in, monitoring of, and adding value to firms; continues as the renews itself with the venture capitalist raising additional funds » (Gompers et Lerner, 2001). According to these two authors, the activity of venture capital is analyzed as a cycle of investment including three main phases: the first phase corresponds to the fund raising, then the phase of investment strictly speaking and ultimately the exit which is characterized by an initial
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 6 public offering ( IPO), or negotiated within the framework of a merger or acquisition procedure. This last phase is therefore a very important step in assessing the value created by the company of venture capital which value would allow repaying the amounts advanced by institutional investors during the phase of fundraising and the appreciation of the relevance of procedures for selecting and monitoring. Then another equally important element assessed by the exit phase is the end of the investment cycle. Indeed “The venture capital market is self-sustaining partially. The successes of today foreshadow the future volume of financial resources. The favourable reception of start-ups, either by entering on the financial market or by the repurchase by a large company, directs new funds to this activity and leads investors to invest capital in new projects” Dixit Dubocage 2004. In other words, a new fundraising for implementing a new investment cycle will be caused by the performances realized in t. However, how financial markets influence the number of operations and the value of funds raised by venture capital firms? And what explain the differences observed in investment behavior in the European and U.S. markets? The analysis to bring an answer to these questions starts by introducing theoretical and empirical arguments of the literature that underpin the existence of a relationship between the situation on the financial markets and investments in venture capital. Section 2 introduces the functioning of venture capital and its different modalities of exit. Section 3 presents the empirical analysis of the relationship between financial markets and American investment in venture capital. It is followed by the simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S and Europe in section IV. Then we try to explain the differences in investment behavior in the European and U.S. markets in section V. Finally section VI contains the analysis of the volume of French venture capital investments. I-LITERATURE REVIEW: The link between financial market and the investment in venture capital has been examined by a large literature. The primary insight from theoretical work is the importance of exit by the venture capital fund. With respect to the literature the most attractive option to liquidate a fund is through an IPO. The empirical research led by Venture Economics in 1988 confirms this thesis and shows that
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 7 US$1.00 invested in a firm that eventually goes public yields a 195% average return for a 4.2- year average holding period. In terms of an acquired firm the same investment yields solely on average an estimated return of 40% over a 3.7-year average holding period. As far as are concerned Black and Gilson (1997), the first step in understanding the link between the stock market and the venture capital market involves the importance of exit by the venture capital fund from its investments. They also argue that, an exit mechanism allows the managers the possibility to have a call option on control of the firm, since venture capitalists relinquish control at the time of the IPO. This finding is also consistent to the one of Jeng and Wells (2000) who support by using a panel data set of 15 countries that an increased volume of IPOs should have a positive effect on both the demand and supply of venture capital funds. For them, “On the demand side, the existence of an exit mechanism gives entrepreneurs an additional incentive to start a company. On the supply side, the effect is essentially the same; large investors are more willing to supply funds to venture capital firms if they feel that they can later recoup their investment”1 . The literature shed also the light to the fact that venture capital can be impacted by the economic conditions of the country. The findings of Acs and Audretsch (1994) show that macroeconomic fluctuations influence startup activity in general. Furthermore, in terms of driving forces of Venture Capital Investments Schertler (2003) by using dynamic panel estimators with stock market capitalization as a proxy for the liquidity of stock markets finds that the liquidity of stock markets has a significant positive impact on early stage investments. In the same vein Black and Gilson argue that a liquid stock market offers venture capitalists and entrepreneurs who want to start high-technology enterprises the opportunity to enter into an implicit contract over control. II- PRESENTATION OF VENTURE CAPITAL AND EXIT MODALITIES: II-1- Presentation of Private equity and its various categories: ► Capital-investissement in the broad sense: 1 Cf. The determinants of venture capital funding: evidence across countries (Journal of Corporate Finance 6 _2000. 241–289)
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 8 During their life cycle, firms face many funding opportunities which may occur during the early stages of their life cycle. It’s in this context that comes into play the venture capital which is one element of private equity. By definition, Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The private equity business is divided into three major areas: venture capital whose mission is to provide funding for the creation and development of new businesses, especially in new technologies, growth or expansion capital that accompany business growth and finally turnaround capital which contributes to the financing of firms already established. ► Venture capital strictly speaking : The venture capital which is the object of our study is used within the framework of financing of young innovative companies. These companies are mainly specialized in new technologies and often in the early stages of their development for the major part. Thus, it becomes necessary to mobilize significant resources in the context of financing the expansion of their products, or for some of them to finance their growth, that traditional financial intermediation cannot satisfy. Even though they are considered as companies which indicators reveal that they have a high growth potential, it remains that they pose a significant risk to potential creditors with respect to their assets unable to provide guarantees necessary in order to borrow money because being generally intangible. Hence the relevance to appeal to venture capital is more than essential to overcome this odd. Consequently, the activity of venture capital can be considered as a form of financial intermediation because encompassing its essential qualities. In the same vein, three main actors between whom circulates a certain number of flows develop this kind of "intermediation". Indeed, the first type of actor which are funds have for main role the mobilization of the promises of contributions and constitute in the same way the place of deposits of called-up capital before their use by corporate managers of venture capital, which companies are the eponymous of the actors of the second type and administer these funds in order to finance selected businesses. The latter represent the third actor.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 9 However, even though they are often minority shareholders show a strong involvement in the corporate policy. Indeed, the study of this type of financing brings out three distinctive elements that are the seed capital and as the name suggests, provides funding for research and development of an initial concept therefore occurs at the beginning of the business start- up. This fund raising aims at proving the feasibility of the project. Then comes the creative capital which is the supporting role of the venture capital and represent the financing of the development of the product. It is the "first round financing"2 . Finally, we have the first growth phase ("early stage") or phase funding of post boot. In this case, the company can already justify a finished product. II-2: Cycle of investment and exit in the financial markets: II-2-1: The Investment Cycle: Private equity3 is analyzed by the doctrine as a cyclic activity (Gompers et Lerner, 2001 ; Kaplan et Schoar, 2005 ; Ljungqvist et Richardson, 2003 ; Axelson et al. 2007). The analysis in this prism allows to better understanding the influence of financial markets on the activity of venture capital (see fig. 1). This cycle has three phases: 2 First round financing is the first investment in a company made by external investors. First round financing typically follows the startup phase. First round funding or "venture capital" typically follows seed and early stage capital that was used to build the business' full-time management team, develop the business' first saleable product, and demonstrate that the business is very likely to be profitable. Source: http://www.businessfinance.com 3 Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. Source: http://www.investopedia.com
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 10 The first stage: It is the one of the fund raising of the venture capitalists from economic agents who willing to invest in developing societies which are not listed. The nature of this investment can be diverse and varied because being able to be spending in R & D, building a prototype, written a business plan and tutti quanti. The second stage: this second step is about investing in the strict sense or investment post creation and development. But in order to attend this phase the project must be economically viable. In other words firstly the product must be technically feasible and finally there is a real demand. Therefore, the venture capitalist supports the contribution of funds by establishing control procedures to minimize the risk of its portfolio as well as conflicts of interest may arise in the context of the agency relationship between the managers of the business financed. The third stage: This phase corresponds to the exit. However, this exit is difficult because of the absence of trading on a market that can make the sale of shares at any time. So there are four modalities of exit for investors. The most known is the stock exchange listing. It is
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 11 possible when financial markets are able to absorb smaller companies as in the UK with l’Alternative Investment Market4 . The second alternative in terms of exit and is also the most commonly used is the sale to an industrialist. Then the sale to another investor, possibly through an LBO is the third possibility of exit. And finally, the last alternative for venture capitalists is to sell its shares to the management team. Empirical findings show that the presence of a capital market investment well organized and the existence of strong financial markets through its specialized markets such as NASDAQ5 with the ability to absorb the IPOs explains the plurality of exit choices. Indeed, the hierarchy with respect to the privileged way of exit is not accidental, because the most successful companies use the IPO, those who are less active are sold through a merger and acquisition, and non productive investments or those which have been failed do not make an exit. Thus, initial public offerings seem in many respects, to be the "most glamorous" mode of exit with regard to the investors and the most appreciated because offering more advantages both from the point of view of the yields and from the point of view of the reputation (see fig 2). 4 AIM is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital. Source: http://www.londonstockexchange.com 5 A computerized system that facilitates trading and provides price quotations on more than 5,000 of the more actively traded over the counter stocks. Created in 1971, the Nasdaq was the world's first electronic stock market. Source: http://www.investopedia.com.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 12 Figure2: the various types of exit of the private equity (Delage, Horizon Growth, on 2005) II-2-2: Exit via IPO: The emergence of new technologies has coexisted with an exceptionally euphoric period on financial markets leaving in the shadow the other possibilities of exit and allowing the financing of this “new economy” by the private equity in the middle of the 90s. The operations of initial public offering are not made without consequence on the private equity. In fact, these operations are the result of the cyclicality of private equity and more specifically venture capital. Empirical studies show that the operations of stock exchange listing activities are highly pro-cyclical. This is due to timing factor which is an essential element for this kind of activity.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 13 Thus in the presence of weak financial markets a small number of firms are inclined to go on public contrary to a financial period when markets are characterised by a high liquidity. In this situation initial public offerings are very numerous. In other words, the dynamism of the venture capital is consubstantial with a developed financial market. The more the stock-exchange valuation is important the more exits via IPO are important for investors. Moreover, to illustrate our comments we noticed some countries trying to establish a model of private equity system as the one of the U.S, have failed because of not mature and undeveloped financial markets: « Other countries have openly envied the U.S venture capital market and have unsuccessfully sought to replicate it. We offer an explanation for this failure: We argue that a well developed stock market that permits venture capitalists to exit through an initial public offering (IPO) is critical to the existence of a vibrant venture capital market » (Black and Gilson 1999). Consistent to prior study we find that the adoption of a positive connection between the stream to the venture capital and the situation on the financial markets is the best thesis shared among researchers. Indeed, from the perspective of demand, entrepreneurs have a propensity to create new businesses as long as this way of exit exists. In the same vein, the exit via IPO is also worth its weight in gold on the supply side by the fact that most providers of funds are more likely to provide capital to Venture Capitalists if they anticipate a significant revaluation by an IPO. According to the findings of Gompers, the observed market valuations from the moment they are bullish, show that firms are on a potentially strong growth. This is the traditional approach by Tobin's Q6 , which depends on the investment firms of the difference between the market price and the replacement value of their capital. It is the consequence of the acquisition of holdings of the investors both in listed companies than those that are not on public. In the same vein, the exit on the financial markets compared to other modalities of exit (see above) is more profitable for investment funds in venture capital that’s the reason why it is referred to as being "the royal road "for investment outflows by Schwienbacher (2006). 6 A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets:
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 14 Nevertheless, even though the IPO exit is considered as the "royal road" in terms of exit thanks to its superior performance, the exit by acquisition in some cases could be more efficient specifically in the case of the sale of the start-up to a holding in which the activity of production and / or promotion will be better performed. In addition, this exit does not have purely financial purposes, as it is sometimes used by some investors as a marketing tool for attracting new investments during the next rounds of financing. In addition, for the manager of the start-up, IPO confers him some advantages beyond the profit maximization purely pecuniary permitting to expand the circle of shareholders to change its structure funding. Especially a very important aspect which brings the exit by IPO is the improvement of the reputation of the company on the financial and commercial plan, in particular a contribution of international credibility. Therefore, the exit on the financial markets (IPO) is inherently flexible and convenient because providing to the manager-founder some autonomy substantially in terms of management vis-à-vis of new shareholders as well as an opportunity to increase the financial resources of the company by exercising potential stock options outside the horizon of Lock-up7 III Empirical analysis of the relationship between financial markets and American investment in venture capital III-1: Data Presentation: In this empirical study we have used Venture Expert database which is a product currently marketed by Thomson Financial Data. Indeed, this database is best in search of statistical information on the venture capital and more broadly on private equity. This product offers a dichotomous possibility of consultation: the first is made via a standard computer language by SQL request which gives the possibility to consult all the existing information in the database questioned. Then, by the web system that we have used in which the 7 A contractual caveat referring to a period of time after a company has initially gone public, usually between 90 to 180 days. During these initial days of trading, company insiders or those holding majority stakes in the company are forbidden to sell any of their shares. Once the lock-up period ends, most trading restrictions are removed. Source: http://www.investopedia.com
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 15 consultation takes place naturally in pre-set formats allowing only access to not exhaustive information. Being confronted with this handicap for the realization of our study, I decided to establish a direct correspondence relationship with Thomson Reuters and more specifically with Lauren Herman who is in charge of corporate venture capital statistical release in order to have more exhaustive and more recent information to carry out this study. His contribution was very interesting because the links he sent me was essentially the basis of this work. Our study focuses on a range of data on US venture capital firms covering the period of 1984 to the first quarter of 2012. This database highlights the total number of start-ups that have made an exit on the financial markets (IPO), and the average amount of the repurchases. In the same way it informs us about the exits by mergers and acquisitions (M&A) both on the number of realized operations and on their average values (see table).
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 16 III-2 Evolution of the number of exit of U.S. venture capital companies in financial markets: At first glance, the analysis brings out two trends corroborating our theoretical observations mainly inspired by the literature that is, a strong fluctuation from one year to the other giving the feeling of a cyclical dynamics and the influence of the instability of financial markets. Indeed, if we analyze the number of exits of the venture capital companies by an initial public offering between 1984 and 2012 we find an unstable evolution. Good times are coinciding with the euphoric situations on financial markets especially in times of financial bubbles constitutions as the Internet bubble of the 90s. Indeed, under our curve, we realize the start of a bull cycle in the early 90s and is going to experience its peak in 1996 with 276 IPOs. This period coincides
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 17 with the rise of high valuations of technology stocks in the financial markets with a disconnection of the real value of shares relative to the market value. The IPO of Netscape, one of the most promising start-up at that time is the obvious example to testify it. In fact it’s the day of Netscape IPO in August 1995, which the Internet bubble started. Indeed, from the first trading day, the share of Netscape flies from 28 USD to 75 USD before being assessed at the close to $ 58.25 which represents an increase of 108% and exceed the market capitalization of Delta Airlines on the day of his baptism of fire in the sphere of "listed companies». Moreover, spurred Netscape, many start-ups are IPO between 1995 and 2001, with extravagant valuations. A good indicator of this "fever" is the evolution of trading on the first day. Since that date the NASDAQ index has continued to raise, while culminated in 1000 points on the day of Netscape's IPO, it was multiplied by 5 in 5 years and peaked at more than 5000 points in 2000. Several factors explain this situation: → A strong surplus of savings (pensions of the baby boomers) → An accommodating monetary policy of the FED (moderate cost of the credit for the investors, in particular the VCs) → Macroeconomic change (opening of the market of the telecom, the emergence of the competition and the consolidation of the sector, companies are investing in IT) → The rapid spread of the Internet persuades the emergence of a "fourth" Industrial revolution. The bubble burst in April 2000 gave the exits of start-up on financial markets increasingly rare where the pace of our bearish chart between this period and 2004. Furthermore as shown by the curve, the year 2007 was also marked by a sharp increase in U.S. financial markets with the real estate bubble which is the consequence of a relatively large number of exits of start-up via financial markets.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 18 Indeed, the bankruptcy of Lehman Brother on September 15th, 2008 impacted the whole global financial system and by extension the exit of venture capital firms in the market reaching the lowest levels with no exit recorded for the first and last quarter on the same year. Source : Personal calculation based on data Venture Expert. Besides, if we make a comparison for the same period between the exits by IPO and the exits by mergers and acquisitions we find that the latter is more than a credible alternative for the venture capitalists. In fact, we realize that the exits by mergers and acquisitions are significantly higher than those done on financial markets. However, we realize that they evolve in the same way and in a period of turmoil in financial markets, as in 2008 the venture capital companies prefer exits by merger or acquisition to the detriment of the financial markets. In addition as we notice it on the curve of evolution, year 2010 shows that the American venture capital business has recovered following the dynamism of markets. We observe for the first three quarters of this year, a significant increase of IPO of about 40 exits or 333% compared to the last half of 2009. However, despite this trend observed over the two periods, it does not reach the levels of the year 90s due to the extension of the duration of investment. Indeed, the exit by initial public offering was on average from 4 to 5 years in the middle of the 90s, while now investment funds in venture capital stay at least 8 years on average before envisaging an IPO causing a sharp decline of exits in stock exchange. However, this decrease is Evolution of the number of IPO exit by venture capital companies 0 50 100 150 200 250 300 1984 1986 1988 1990 1992 1994 1996 2005 2007 2009 2011 Periods Number of exit
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 19 not prohibitive for investment funds in venture capital because the return on investment increases linearly with the time investment. The most obvious example is the Facebook IPO on May 18th, 2012. This company created with venture capital had to stay nine years before being listed. This long waiting period of the social networking champion was worth to him a 100 billion USD valuation while the IPO of Google in 2004 was only 28 billion USD. Furthermore, the other not financial element, but finding its source in the crisis of 2001, is the prudent regulations specifically the "Sarbanes-Oxley Act8 ". This Act regulates more drastically the IPOs which is the consequence of the adjustment costs of IPO exit therefore encourages managers of investment funds to expect that firms being more mature with a return on their investment that can compensate the high costs of the IPO. Source : Personal calculation based on data Venture Expert. In 2010, a survey realized by Deloitte (2010 Global Venture Capital Survey) for the NVCA, reveals that U.S. investors suffer IPO market and unfavorable tax environment for 8 An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards. Source: http://www.investopedia.com Comparison IPO exit and M&A exit of US venture capital firms 0 50 100 150 200 250 300 350 400 450 500 2004 2005 2006 2007 2008 2009 2010 2011 2012- 1 Period volume Total M&A deals Number of IPO
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 20 business financing. Besides, limited partners are more likely to invest in emerging countries, such as China, India and Brazil (investment funds consist of managing partners, who are responsible for managing the funds they entrusted to them by limited partners). However, despite the slowdown of the quotations, one can observe that the already listed internet values goes well since 2009. Source : Powershare Nasdaq Internet Portfolio (Bloomberg : PNQ/US) variations of 1 year. One can observe, that the birth of social networks (by 2003) has not impacted as significantly the venture capital market that the development of the Internet, despite a favorable economic environment. This can be explained by a poor evaluation at that time, the economic potential of the social web. It is also necessary to recall that was needed some time for the social networks become more democratic and that a “sustainable” business model is to develop (still remains an open question). However, the emergence of "Social Networking" has accelerated dramatically since 2006, as a reminder: Myspace - LinkedIn 2003 / Facebook - Flikr 2004/2006 Twitter / Zynga - Tumbr - 2007 LivingSocial / Groupon 2008/2009 FourSquare. To date, a lot of its young start-ups knew only the crisis since 2008. Another striking fact is that LinkedIn and Renren (Chinese Facebook), or still Pandora, are the first Web 2.0 start-ups to launch an IPO.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 21 III-3 Amounts invested by venture capital: C- The volume of the investments of the American venture capital: If we analyze the volume of U.S. venture capital investments between the implementation of this kind of investment until today we find a big difference between these two periods with respect to the amounts of funds raised. Indeed, the curve shows that the venture capital began to take an important place in the financing of the companies only from the 90s, because it’s from this period that the funds raised are really starting to grow and far exceeding the volumes observed in the 70s. Indeed, two main reasons can explain this phenomenon. The first comes from the fact that there is a real contrast between the levels of economic activity observed between the two periods. The 70s were a period of recession in the U.S., while the U.S. economic and financial activity was very prosperous towards the 90s. Indeed, the too accommodating economic policy of the American Federal Reserve combined with the opening of telecommunications markets has led to a frenzy of investors in technology stocks which helped the astronomical sums raised to this new economy. Thus, only between 1998 and 2001, investments to technological start-up have been multiplied by five representing more than USD 150 billion in the fourth quarter of this year, so 40% of the total amount invested all sectors combined. With the bursting of the Internet bubble, we notice a slowdown in 2001, which has halved the amount of investment. This is explained by the fact that investment funds base their investment on the market's ability to establish a good growth prospects. But during periods of high market volatility as the case of 2001 crisis, which has decreased the possibilities of exits but also caused the decline of quotations, the funds are naturally less likely to invest. This fact was observed between 2002 and 2004, where the activity of venture capital has been very slow. In 2004, the market experienced a slight increase until the subprime crisis of 2008 as reflected in the above graph. The year 2008 is a year of a sharp decline in the United States venture capital regarding the amount of capital invested and the number of projects supported. The volume of venture capital declines from 32 billion in 2007 to USD 27 billion in
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 22 2008 and USD 18.4 billion in 2009. In the same way at the level of the exits this reduction clearly felt the effects fundamentally as regards the exits in stock exchange. In 2009, the IPO exits financed by venture capital are down historic 62% compared to its level in 2007 and represented only USD 15.2 billion. Other striking fact shown by the crisis of 2008 was the redeployment of investment by sector. In fact at the end of the crisis, venture capitalists have provided the bulk of their investments in the sectors of health, communication and environment. Now IT and web services, medical instrumentation and alternative energy industry become the new darlings of venture capitalists because inhaling more than 70% of the investments. Notwithstanding, this sectorial concentration of investments is not made without disastrous consequence because making more vulnerable the venture capital companies to the cyclic reversals of the market. In the same vein, the other important element which justifies the concentration of investments in technology sectors is due to the fact that the return on investment is faster compared to other sectors such as biotechnology including breakeven spreads on an a little longer temporal horizon and remaining associated with high risks. However, the software industry tops among those that attract the greatest number of equity. This is explained by the fact that the deployment time of the fundraising is shorter and does not require a big investment. In addition, there is a lesser risk of failure that seems attractive to risk- averse investors. Besides, we also observe in the United States since the subprime crisis a substantial reduction of the amount invested and therefore leaving in the prospect the financing of about 5000 start-up of the biotechnology sector. In addition, as we see in our curve it is only from the second quarter of 2010 that things seem to take in the right direction thanks mainly to the fact that large U.S. pharmaceutical companies now use a new model for Research and development and commonly known under "R & D 2.0 model". The upheaval caused by the new model due to the outsourcing of the research mainly regarding the early stages of developing treatments made by the "Big Pharmas" encourage young innovative companies in the sector. The latter compete in ingenuity and in originality in order to seduce big groups so that they delegate them some of their research activities. In addition the other influence operated by the collapse of the financial markets of 2008 is that during the recovery phase in particular in 2010, "clean technology" is the only field of activity
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 23 which sizes the lion's share of investments, what reminded the most optimistic analysts a possible birth of "bubble" as the number and volume of business were important. Indeed, for the first three quarters of 2010, the "cleantech" received USD 3.1 billion or 18% of total investment against only 9% in 2007. In the same vein, 72% of investments raised by U.S. venture capital in 2010 are allocated to renewable energies and to biofuls. The reasons which explain the "rush to clean technologies" are to be watched to the Keynesian stimulus undertaken by the Obama administration after the crisis, which plan envisaged the creation of a vast modern "intelligent" network of electricity called “smart grids9 ” that took into account the production of alternative energy. Also in the same vein of justification of the correlation between financial markets and the "venture capital", one observed according to the data from Thomson Reuters that between 2005 and 2010 which are both periods of recovering following the last two major crises of Wall Street, the sectors that whet the appetite of venture capitalists today were in the past. Indeed, the energy sector before 2005 represented 5 % against a little more than 15 % of the total amount of the investments in 2010. In the opposite direction at the same time there is a reduction of nearly 50% of the weight of investments in telecommunications sector and in information systems. Regarding the software industry and life sciences, we observed a relative steadiness of the capital raised. Evolution curve of amounts invested in U.S. venture capital: Source: Venture Expert 9 A smart grid is an electrical grid that uses information and communications technology to gather and act on information, such as information about the behaviours of suppliers and consumers, in an automated fashion to improve the efficiency, reliability, economics, and sustainability of the production and distribution of electricity.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 24 Moreover, the evolutions curve of French financing start-up follows the same trajectory as the one observed in US. D- The European capital investment: The European capital investment market experienced since the mid 90s significant growth. The investments made by private equity firms, size traditionally fairly smooth, grew rapidly and rather regular, except for the peak in 2000. The considered amounts have increased from 7 billion Euros in 1996 to 50 billion in 2006. The funds raised, more cyclical, have known a much more chaotic evolution: the peak in 2000 is followed by a period of decline and stagnation until 2004. The year 2005 has been synonymous with strong market recovery; the amounts raised reaching 72 billion Euros and 90 billion in 2006. France presented a profile of evolution rather similar to that of the whole continent, albeit with somewhat larger investment and a slowdown of the funds rose in 2006 movements. In trend, like the European statistics, the French market has risen sharply over the past ten years. The European market is dominated by the UK, which is the ideal place for raising and managing private equity funds. In terms of statistic, funds rose in this country in 2005 so represented 63.3% of total funds raised in Europe, ahead of France (15.8%), Germany (3.8%) and the Netherlands (3.3%). Despite the strong growth of the European market, it remains generally down compared to its counterpart in the United States. In 2006, the amounts of capital raised by U.S. funds have thus amounted to nearly 100 billion Euros. The leading position of the United States not only reflects the large size of its economy. Financing channels of this country provide a significant role for the private equity since many years. Several factors can be used in order to explain such a presence of the capital investment in the United States (Gompers et Lerner, 1999; Baygan, 2003). It may for example include efforts undertaken by the U.S. government through the implementation of the SBIC program (Small Business Investment Company), of tax incentives or regulations to promote investment of pension funds in illiquid securities (principle of prudent man of ERISA10 act). It seems that the latter has also played a key role, since institutional investors are the main funders of the private equity 10 The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18) is a federal law which establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 25 market. Their geographic investment scope goes moreover beyond the only territory of the United States, as many investments are made abroad, including the UK. →What are the factors explaining the evolution of the European market? The evolution of the funds raised in Europe since the middle of the decade ninety and the substitution of capital transmission venture capital and development capital based on a number of factors likely to both cyclical and structural. Changes in the macroeconomic and financial environment during this period are a first explanatory factor. The slowdown in the economy from 2001, the bursting of the bubble in technology stocks and more generally poor performance of the financial markets (until 2002) have helped to limit fundraising during the first part of decade 2000s, probably more in the venture capital segment than in the buyout. The academic literature informs well this correspondence between the macro-financial environment and the flows towards the capital investment (Gompers et al., 2005). IV- The simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S and Europe: To better shed the light the link between stock market and the activity of venture capital we present the evolution curve of fundraising on web companies comparatively with the stock indexes in France and in USA. In the table 1, we show the evolution of fundraising on web companies and ITCAC index which represents the “technological” securities belonging to the SBF 250 index. The time horizon is between January 1st, 1999 and September 30th, 2006.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 26 Table1: Evolution of ITCAC and internet fund raising in France11 The ITCAC is divided by 1000 and the funds raised on internet sector are estimated in millions of Euros in order to put the two statistics on the same scale. In addition, we represent on table 2 fund raising allocated to the internet sector and the NASDAQ index for the same time horizon than on table 1. The index is shown on a raw level and fundraising are measured in units of $ 250,000 in order to obtain comparable data scale. Table2: Evolution of the NASDAQ and fundraising in the U.S12 . 11 Source : Journaldunet.org
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 27 The comparison of the two patterns shows interesting results. Indeed, we observe without surprise a very strong growth in fundraising during the Internet bubble followed by a reversal from the first quarter of 2000 in both countries. However, it’s from 2003 that the two tables show different trends. While the slow recovery of the NASDAQ is accompanied by a regular increase in fund-raising in the United States, in the case of France the recovery of ITCAC is not followed by a steady increase in fundraising. In other words since the burst of the internet bubble and more precisely from 2003, the French investment in Venture capital in the internet sector is no longer connected to the evolution of financial markets. V- How to explain the differences in investment behavior in the European and U.S. markets? The existence of appreciably different behavior of investment in venture capital in Europe and in the United States is often attributed to the existence of institutional and contractual specificities. We show that these characteristics determine the form of rationality adopted by venture capitalists in their investment choices, which partly explains the recent disconnection between observed investments in venture capital and financial market conditions in the European case. V-1: Institutional and contractual characteristics of the European Venture Capital ▬ Stock market exits and venture capital investments. One of the major differences between French and US markets was the scarcity of IPOs in France between 2002 and 2005. Moreover, this movement was combined with the withdrawal of family companies of the stock Exchange and has led to a marked reduction in the number of listed companies. It’s just after the creation of Alternext in 2005, which is the compartment to rate innovative small companies that we observed a restart of IPOs. 12 Source National Venture Capital Association nvca.org
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 28 ▬ Exits and profitability of venture capital investments. The study of the profitability of the venture capital is a difficult task for several reasons: the diversity of its forms, the diversity of outputs, the fragmentary nature of the information available and the fact that there is no unified market for a valuation on a common basis. In addition to this, the profitability is of course highly dependent on periods on which it is calculated and that the use of actuarial rates of return, made necessary by the characteristics of venture capital financing in the form of successive outlays prior the simple payback on the date of the exit, make the comparison of its performance with that of other hard assets. A reading of the literature on these questions appears on the one hand the low profitability of venture capital operations with regard to the operations of development capital and especially buyout, and on the other hand, a historical trend to a lower profitability of the European financing with regard to the American financing. The low profitability of venture capital transactions is highlighted by the Artus and Teiletche (2004) study. The authors show that compared to the other forms of intervention in capital, venture capital is characterized by a low average yield associated with high volatility. At the same time, this performance proved highly correlated with changes in the stock market and the Internet bubble: growth, collapse and recovery trend. As far as is concerned a study of Crédit Agricole Asset Management, 2006: this feature is due to a tendency for investors to favor other forms of intervention in capital. On the other hand, the returns of French venture capital are historically low compared to the yields of such investment in the U.S. But performance comparison is difficult. Sources are indeed different. We can mention here three statistics: a Europe / USA comparison, an analysis of the performance in France and an analysis of the performance in the U.S
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 29 Source : Dantas, Machado and Raade (2006) The analysis of the chart shows that during the period 1983-1998 US venture funds has during all this period better returns than European one. Moreover in terms of profitability differential between European and US funds the results show that it’s unfavorable for Europe for most of the time period for which performance data is available. In addition, it sheds the light on the fact that despite the fact that the better relative performance of European funds may turn out to be unsustainable due to a high proportion of unproven funds on the vintage series 1999-2001. Also because of their smallness the samples for the two latest vintages are less reliable. Another interesting pattern shown by the chart is that the performance gap between Europe and the US was more striking for funds formed in the nineties, among which it varies between 8% (1990 vintage) and 67% (1996 vintage). The reason of this pattern is the technology bubble. Indeed as far as are concerned Dantas, Machado and Raade (2006):” European funds do not appear to have benefited from the technology boom the same way as US funds. It could be that it was very closely associated with US centers, such as the Silicon Valley, leaving European players at a disadvantage in accessing opportunities, whether for investments or exits”.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 30 Furthermore, as mentioned by Hellmann and Puri, 2000, Kaplan et Strömberg, 2003a beyond simply providing funds, venture capital firms contribute to the growth of firms mainly through non-financial factors that is to say thanks to their ability to appraise and monitor management decisions. Indeed, these companies operate at three different levels: in the assessment and selection of corporate finance in the development of contracts and finally, in their control throughout the development of the activity. These interventions are closely linked. During the evaluation phase of firms, the venture capital firm seeks to identify areas where it can add value by exercising effective control. Moreover, it is the signing of the contract that the venture capital’s company allocates rights to facilitate him later control of the firm and to minimize the risks it has identified. The contracts concluded by European VCs are significantly different to contracts governing funding relationships in the U.S. equity market. These differences concern mainly the intervention stage of venture capitalist, the contingent character of the financing, the syndication of the investments and even the nature of venture capital firms. The intervention stage of venture capitalist: In Europe, venture capital firms favor long-term relationships by participating in successive rounds. In contrast, the U.S. venture capital firms involved in specific stages of development of the firm, the stage where they know they can help create value through their expertise. In addition, the U.S. venture capital firms often associate companies with their investment operations. Business participation in these operations in Europe is twice lower. This highlights a better ability of U.S. venture capital firms to enlist the expertise of the industry and to facilitate probably the inclusion of projects in the industrial sector. Funding contingent on the results of the firm: Several studies have analyzed the impact of measures making funding contingent on performance. More precisely, it appears that the financing stage is the necessary element for the credibility of a potential investor withdrawal. At the same time, this arrangement allows to avoid a significant portion of the agency problems venture capitalists and managers. Cornelli and Yosha (2003), for example, highlighted the temptation exists for the contractor to handle their accounts, at least in the short term and they show that the provisions aimed at making funding conditional to the achievement of certain performance can greatly reduce the
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 31 agency problem. For a study realized by Bergemann and Hedge in 2003, the financing by stage, by reducing the informational rent of the entrepreneur, stimulates its effort and reduces financial constraints. Most of the time, to be effective these provisions should be included explicitly in the contract. Because, the use of an implicit contract can have for bias to worry the entrepreneur about tits risk of expropriation and reduce its incentive to the effort in the management of the firm. Moreover, Hege and al. (2006) show that in the United States, venture capital firms by making systematically (re-) financing contingent on the results of firms elicit a positive response from companies: specifically, the performance of firms reacts positively to the reduction of the intervals of financing. This difference between the U.S. and Europe would be largely due to the structure of the venture capital industry. Indeed, for Hirsch and Walz, 2006, the part of venture capital associated with government agencies and banks are generally more important in Europe, especially in France and Germany. But this kind of society does not strictly determine those (re-) financing to firm performance. Syndicated operations: This type of financial arrangement carries many advantages. The first known benefit of the syndication of investments is to allow a diversification of the risk. However, we find in the literature other reasons such as finding of a better assessment of the firm through a second opinion on the audit, the exploitation of complementarities in the control and the council of these firms, finally the pooling of information and contacts that will be essential to better manage the exit phase. Hochberg, Ljungqvist and Lu (2005) have also shown that venture capital firms that get the best performance are those that benefit from a favored position within networks syndication. Besides, these syndicated operations appear as the best way to integrate the participation of big firms into the financing of these activities (Hege and al. 2006). This ensures expertise and additional network and also ensures a little more against the risk of hold-up. In 2005, in France, 63% of the amount invested (which corresponds to 50% of investment operations) does not correspond to syndicated operations. Generally, the proportion of syndicated operations is capped at 50%. Hege et al. (2006) shows that in the United States, the investors in venture capital use more efficiently syndication strategies, the part of these joint funds increasing in time, what does not come true in Europe. More generally, these syndicated operations can integrate in these pools of investors more specialized venture capitalists but also
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 32 companies. This result is consistent with the observation made earlier that the European venture capital firms seem to favor long-term relationship rather than an investment in a particular stage of development of the firm. Nature of venture capital firms and types of contracts: The relationship between venture capital firms and the companies that constitute their portfolio attract a great interest on behalf of the practitioners as academic circles. Therefore, appears the question of the existence of an optimal governance structure. Of course, the diversity of national financial systems led to believe that there are different forms of governance but empirical studies all seem to converge to demonstrate the superiority of the Anglo-Saxon model in terms of firm performance. Recently, Hirsch and Walz (2006) examined the differences that may occur in the contracts between the venture capitalists to their portfolio companies. Their work highlights the contractual differences depending on the nature of venture capital i.e. it then distinguishes venture capital firms associated with banks, those associated with public agencies, or independent venture capital firms. The venture capital market is particularly segmented firms with the most innovative projects and therefore riskier, are usually funded by independent venture capital firms. This matching can be explained both by specific strategic considerations to this type of venture capital but also by the specific expertise that these firms need. Moreover, towards the same firm, independent venture capital companies would more turn to contractual mechanisms allowing them to participate more actively in the management of the firms and the project than do firms associated with banks. However, that’s the funds backed by the government agencies that intervene least in the management of the financed companies. This remark opens perspectives to understand the relatively poor performance of venture capital in France compared to yields across the Atlantic, while the French venture capital remains one of the most dynamic in Europe (AFIC, 2006a). Indeed, the banks remain in France the main funder and although they have always overwhelmingly supported venture capital, they occupy this place for the second consecutive year. This observation leads to the conclusion that the observed differences in the contracts would take much more to the nature of venture capital firms to real differences in the behavior of venture capital firms from one country to another. Thus, the differences in performance of venture capital between the United States and continental Europe would not be inconsistent with the observed convergence of financing contracts but would the relative weights of different types of venture capital firms.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 33 V- 2 -Behavior guided by a "limited" rationality: From the previous argument, we draw two important consequences: → the specific institutional structure of the European venture capital makes the signals emitted by the financial markets much less significant for European venture capitalists than their U.S. counterparts. → Because of the particular structure of the European Venture capital - in particular from the relatively important part of the venture capital companies connected to banks or to public bodies - the contractual relationship between venture capitalists and entrepreneurs existing in the European countries does not seem so adapted to the management of the information asymmetries and the possible conflicts of interests than it is in USA. We can deduce that the level of imperfection of the information and the uncertainty existing in the European venture capital market is higher than that prevailing in the U.S. market. In other words the European venture capitalists have more difficulties to interpret the changes in their environment and, more specifically the signals emitted by the capital markets. One can consider that the behavior adopted by U.S. venture capital relatively well suited to an analysis assuming that economic agents have a sufficiently accurate knowledge of their environment that still allows them to determine if the time is right to change their behavior. It’s this reasoning that is used when we study the behavior of an economic agent operating in a policy environment simple probabilistic risk and acting in accordance with the hypothesis of rational expectations (Muth, 1961). This agent has “rationally” a highly irregular behavior because, being totally flexible in its choice, it reacts immediately to any disturbance of the environment to get back into the optimal state. In this analytical framework, a venture capitalist will react in a frequent and fast way to the changes of his environment. In particular, the investment behavior will be characterized by a high sensitivity to signals from the financial markets. However, the behavior observed in the European venture capital market need to use a different analytical framework where we reason under uncertainty, incomplete knowledge and rationality "limited." In this environment, the economic agents receive signals which they interpret with difficulty. So happen, what Heiner (1983) identifies as a gap between the cognitive
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 34 capacities of the agent and the complexity of the environment with which he is confronted [competence-difficulty ("C-D") gap]. This gap ensues from unexpected changes that affect the environment as well as the limited ability of the agents to respond appropriately to these changes. It is this gap that introduces uncertainty in the analysis of choice. But, according to Heiner, it is precisely this uncertainty, as the CD gap, which is the origin of the patterns and thus the predictability of economic behavior. Indeed, if such a gap exists, it is interesting to modify its normal behavior if this change leads to substantial expected gains; that is to say when the gains associated with the change of behavior (or Net gains compared with the situation of not changing its behavior) and their likelihood are high. In this decision making environment, the behavior of the venture capitalist will result in some form of strength vis-à-vis of the information received, including signals from the financial markets. VI- The volume of French venture capital investments: The analysis of trends in the amounts invested by the French venture capital follows a cycle characterized by periods of expansion and recession phases compared to the United States. However, even though that this activity depends on the evolution of stock markets, it is less striking than in the United States. The analysis of the evolution curve of the amounts invested by the French venture capital shows significant investments between 1998 and 2000 with a peak reaching the 1.5 billion Euros of funds rose for the single year 2000. As far as concerned the Chausson finance indicator13 , the amounts invested in the second half of 2000 decreased by 24%. The decline was so striking and dramatic for the first that time since 1998, the value of capital raised by investment funds was lower compared to the previous semesters. Therefore, this decline in the second half of 2000, destroyed the linear increase made by the French venture capital for five semesters, this increase had increased the amount of capital invested from 100 million Euros in 1998 to 1.5 billion Euros in the second half of 2000. Indeed, 13 Chausson Finance Indicator identifies investments every six months made by French venture capital in French start-up and European new technologies.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 35 according to the statistics published by chausson finance the financing concerned 225 French start-ups during that period against 263 during the first six months of the same year. However, this decline during the second half of 2000 is the tree that hides the forest because it obscures the fact that throughout the year, the funds raised had reached a record level, with an historical increase of 250% over the previous year. Overall still on the same source 489 start-ups have benefited from these funds against 281 the previous year. In addition, the average investment undertaken by start-ups on the same horizon increases by 52%. These investments have benefited the most to innovative companies in the healthcare and telecom sector. Nevertheless, if we focus only on investments related to the internet, we see a loss of over 50% for this period. As in the United States, the weakness of financial markets and the decrease of initial public offering have negatively impacted the internet start-up. The observed frenzy of investment funds in venture capital in this sector during the first quarter left now up sector traditionally sought by venture capital: technology. We observed a decrease of 56% of investments in e-commerce and Internet content while the health sector / biotech remained stable, so the drop was not of the same magnitude compared to the United States where it has been greater. Then with the bursting of the Internet bubble, which also influenced the European financial markets, there has been a steady decline in uninterrupted of this amount until the second half of 2003 period which saw the blurred this downward spiral with the key to an increase of 27% representing the highest growth of the other half since 2000. For the full year 2003, the amounts allocated to venture capital are estimated at € 483 million, which amount was for 391 companies. But the average amount invested per company is stable and amounted at that time to 1.2 million. In France, the consequence of the bursting of the speculative bubble of the 2000s technology stocks has resulted in a redistribution of the cards in the sectors financed. Indeed, in terms of statistics during the second half of 2003, we note that the healthcare sector has supplanted the internet as the first sector investment. The amount of money raised for this sector represents 32% of total investment. This sector is the first sector concurrently regarding the quantum of the amounts invested and who demonstrates the highest growth with an increase of 26% compared to the previous year. Then as second sectors that whet the appetite of investors in venture capital: we find software sector with an increase of 9%.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 36 Regarding the field of internet and online sales, it accused a sharp drop of about 43% and now represents only 3% of the total investment. At the same time we see an increase in volumes allocated to the telecom sector result of the net growth estimated at 18% (see graph). Source: personal calculation from the Chausson finance index : In the same vein, another aspect raised by the recovery from the bursting of the Internet bubble and the collapse of financial markets is the impact of investments on the developmental stages of start-up. Indeed, as early recovery of economic activity after a period of disturbance, investors naturally become more risk averse. This recovery continued until the 2008 financial crisis period in which there has been a slight decline in capital invested in venture capital in France. Capital raised in the first half of this year is about $ 470 million, representing a decrease of 17% compared to last semester. This decline seems to us altogether regarding the magnitude of the crisis in which was the European finance system but also compared to the fall in investment in the United States for the same period. Therefore indicates a low correlation between the French venture capital and financial market cycle. This is all the more striking that the French venture capital recorded an increase of 18% in the second semester of 2008 with 556 million Euros of investment. This shows the robustness of the sector and its resilience to volatility in financial markets despite the fact that it is less mature than the U.S. venture capital. Moreover, it is in 2008 that venture capital investments exceeded the French bar history € 1 billion investment for the first time in eight years. Allotement by sector Biotechnologies 26% Medical Devices 6% Softwares 29% Otherss 22% Internet & e- commerce 3% Telecom 14% Biotechnologies Medical Devices Softwares Others Internet & e- commerce Télécom
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 37 Conclusion: As suggested by our analysis, venture capital is crucial for the financing of innovation in the United States and in France and more broadly in Europe. This is all the more compelling that according to the "Wall Street Journal," Americans believe that its French inventor Georges Doriot14 is one of the ten people who have changed the business world in the last century. As we one can see through our analysis, venture capital remains and is further strengthened despite the extreme volatility of financial markets thanks to its adaptability to all these disturbances. Thus, upon prevailing financial markets American and French companies will undoubtedly allow 14 Georges Frederic Doriot (September 1899 – June 1987) was one of the first American venture capitalists. An émigré from France, Doriot became director of the U.S. Army's Military Planning Division, Quartermaster General, during World War II, eventually being promoted to brigadier general. In 1946, he founded American Research and Development Corporation, the world's first publicly owned venture capital firm, earning him the sobriquet "father of venture capitalism". In 1957, he founded INSEAD, a top tier business school with campuses in Fontainebleau (France),Singapore and Abu Dhabi. Source : Wikipedia
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 38 capital companies to cooperate further with the aim of pooling of risks and strengthening in order to have the ability to absorb the repercussions of the financial markets constantly redial. This upheaval will probably allows as predicted by the Harvard Business Review in its edition of June 2010, the coming into play of new platforms of mobile and 'cloud computing' that are already interested in more than 35% of the managers of the largest firms world. This study is a contribution to the literature by helping to understand the disconnection in recent years in Europe between the amount of investments and one of the economic indicators usually considered essential for the activity of venture capital, the evolution of financial markets.
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 39 APPENDIX : ►U.S VENTURE CAPITAL STATISTICS
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 40
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 41
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 42
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 43
    • The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL 44 ►FRENCH VENTURE CAPITAL STATISTICS
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