SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET

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A STUDY ON THE INVESTMENT CONDUCT OF EUROPEAN VENTURE CAPITALISTS

A STUDY ON THE INVESTMENT CONDUCT OF EUROPEAN VENTURE CAPITALISTS

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  • 1. SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET A STUDY ON THE INVESTMENT CONDUCT OF EUROPEAN VENTURE CAPITALISTS Examiners: Dipl.-Kfm. Stefan Eghbalian Prof. Dr. Jörg Schmütz
  • 2. AgendaBackground of the studySignificance of the topicPurpose and object of the studyProcedure of the study Overview Definition of Sustainability Application of investment criteria Venture Capital Survey methodology Survey resultsConclusions Insights Problematic issues SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 3. Background of the study„[...]the overall level of capital 4500 VC conduct changes in the U.S.investment in sustainable 4000 3500electricity technologies is not 3000 Companies 2011sufficient to make a significant 2500 2012difference in the penetration rate 2000of renewable energy and in 1500reducing undesirable byproducts 1000going forward.“ 500 0 Overall VC Seed stage Early stage investmentMoore, B. & and Wüstenhagen, R. (2004): INNOVATIVE PricewaterhouseCoopers/National Venture Capital Association (2013):AND SUSTAINABLE ENERGY TECHNOLOGIES: THE MoneyTree™ Report, Data: Thomson ReutersROLE OF VENTURE CAPITAL. In Business Strategy and theEnvironment 13 (pp. 235–245). St. Gallen: John Wiley & Sons,Ltd and ERP Environment SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 4. Significance of the topic Current research / industry status • No proven common opinion about responsible behavior influencing investing patterns or share prices • Motives of investors often hidden from the public • Lack of investment strategy research in the private sector Personal relevance • Concernment of the author • Involvement with VisionGreen SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 5. Purpose and object of the study Core question Does sustainability influence the investment strategy of Venture Capital firms? Subordinate questions – How do VC interpret the term “sustainability”? – By which means do they ensure their investment strategy to be sustainable? – Which outcomes do VC expect from a sustainable investment strategy? – Which motives do VC follow? SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 6. Procedure of the study- Overview- Definition of the term “Sustainability” Application of various investment criteria as well as the current market situation Venture Capital branch and the financial sectors already having sustainable investment criteria in place Survey of a sample of European VC regarding sustainability and the design of their investment criteria SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 7. Procedure of the study- Definition of Sustainability - Definition of the term “Sustainability” • Utility for future generations = utility Applicationgeneration investment for present of various criteria as well as the current market • Triangular model vs. egg model situation • Weak definition = constant capital stock Venture Capital branch and the Public understanding of “sustainability”. German online households of all ages. • Strong definition = preservation of financial sectors already having Referring to Nielsen PanelViews Homescan, 2011 sustainable investment criteria in place the environment and its natural functions for future generations • Survey of a sample ofof Difference: balance European VC ESG regarding sustainability and the design CSR artificial, physical capital and of their investment criteria natural, environmental capital PRI SRI SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 8. Procedure of the study- Application of investment criteria - • Ecological evaluation Definition of the term “Sustainability” • Social Evaluation Process methods Impact methods Application of various investment criteria as well as the current market situation Monetization methods • Governance Evaluation Effect of RI approaches on performance. Referring to Eurosif, 2009, p. 12 Venture Capital branch and the • Codices / guidelines financial sectors already having sustainable investment criteria in place Frankfurt-Hohenheim Guidelines • Ratings Survey of a sample of European VC • regarding sustainability and the design Indices of their investment criteria Outperformance of SRI. Referring to Kiernan, 2009, p. 66 SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 9. Procedure of the study- Venture Capital - • Venture Capital vs. Venture Definition of the term “Sustainability” Philanthropy and Donations • Independent VC vs. Corporate VC and Government-sponsered VC and Application of various investment • criteria as Stages: the current market Funding well as Seed stage situation Early stage Venture Capital branch and the financial sectors already having sustainable investment criteria in place Moore, B. & and Wüstenhagen, R. (2004): INNOVATIVE AND SUSTAINABLE ENERGY TECHNOLOGIES: THE Survey of a sample of European VC ROLE OF VENTURE CAPITAL. In Business Strategy and the regarding sustainability and the design Environment 13 (pp. 235–245). St. Gallen: John Wiley & of their investment criteria Sons, Ltd and ERP Environment SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 10. Procedure of the study- Survey methodology - • Nonprobability sample at a 95% Definition of the term “Sustainability” confidence interval • Target population: 459 seed and early stage European VC funds Application of various investment (2011) criteria as well as the current market situation • Question types: dichotomous Yes / No questions Venture Capital branch and the free response questions financial sectors already having multiple choice questions sustainable investment criteria in place ranking and rating questions • Participation quota of 7.8% Survey of a sample of European VC regarding sustainability and the design of their investment criteria SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 11. Procedure of the study- Survey results 1 - • Average investment level 460.000 € - Definition of the term “Sustainability” 740.000 € • Expected return rates 14.6% - 21.1% • Focus on production of sustainable Application of various investment criteria as well as (in RE/Cleantech) goods / services the current market situation Associations of the term "Sustainability" • Main investors: Public institutions / High Net Worth Individuals Venture Capital branch and the financial sectors already having sustainable investment criteria in place Survey of a sample of European VC Activity in SRI regarding sustainability and the design of their investment criteria SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 12. Procedure of the study- Survey results 2 - • Focus on RE production and natural Definition of the term “Sustainability” resources protection (“green” technologies) • Negative criteria were equally Application of various investment distributed criteria as well as the current market Positive criteria • All methodologies treated rank situation below “sometimes”: Best-in-class approach Venture Capital branch and the Engagement financial sectors already having Codices/guidelines sustainable investment criteria in place Ecological evaluation Social impact assessments Ratings / indices Survey of a sample of European VC Evaluation methodology ranking regarding sustainability and the design of their investment criteria SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 13. Procedure of the study- Survey results 2 - • Involvement with SRI increases both Definition of the term “Sustainability” the employees motivation and investor attraction • Impairment of sustainable conduct Applicationleads to specific only rarely of various investment criteria as well as the current market situation Repercussions of SRI engagement measures (such as exclusion of ventures from the portfolio) Venture Capital branch and the financial sectors already having sustainable investment criteria in place Survey of a sample of European VC regarding sustainability and the design of their investment criteria SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 14. Conclusions Insights • “Sustainability” does influence investment conduct: – Product choice – Lowered average investment amount, but similar return expectations – Outcume expectations similar to standard investment • Common understanding of sustainability = VC’s understanding: – Availability of products and services on a “green” market – Energy turnaround • Motives: fiduciary duty, reputation vs. additional profit / outperformance  remaining a non-core issue • Means to control the investment strategy to be sustainable are often left unused SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien
  • 15. Conclusions Problematic issues • Gained data may be affected by a hybrid error • Sampling error: – Nonprobability sampling method not random, but arbitrary and purposive (uneven proportions: German VCs in favor) – Low precision due to sample choice  bias-variance tradeoff • Non-response error: – Lack of participant cooperation – Large question catalogue SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET1st February 2013 Master Thesis - Gratian Permien