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Differences in Venture Capital Financing of U.S., UK, German and French IT Start-ups
 

Differences in Venture Capital Financing of U.S., UK, German and French IT Start-ups

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Independent Venture Capital (IVC) has been paramount in the emergence of the infor-mation technology industry in both the United States and Europe. There are relatively few large global information ...

Independent Venture Capital (IVC) has been paramount in the emergence of the infor-mation technology industry in both the United States and Europe. There are relatively few large global information technology companies in Europe. A widening gap is observable in the success rate of IVC backed start-ups between the U.S. and Europe in the information technology industry. This difference could be attributable to the differences in the venture capital financing of start-ups in the U.S., UK, Germany and France. This book deals with "Differences in Venture Capital Financing of U.S., UK, German and French Information Technology Start-ups". The comparative analysis is conducted on a microeconomic level (managerial venture capital research), i.e. on the venture capital firm level.

The differences are analyzed for the whole venture capital investment cycle: contact phase, initial screening phase, due diligence phase, deal structuring and negotiation phase, management phase — value adding services, and exit phase. The research framework model examines the following differences in the venture capital investment cycle: average size of investment in the seed stage, average size of investment in the start-up stage, aver-age size of investment in the growth stage, percentage of start-ups in pre-revenue phase at time of investment, percentage of start-ups not managed by founders but experienced managers, percentage of investment in start-ups with me-too products, percentage of mar-ket analysis due diligence done informal, typical liquidation preference multiple, percent-age syndicated exits that are outperformers, number of tranches per investment round, number of board seats per partner and the cash multiple X that defines an outperformer. The empirical research work is based on an extensive scientific online questionnaire with VCs in the U.S., UK, Germany and France. Before the online questionnaire was drafted, a preliminary face-to-face expert interview was conducted with 24 VCs in Silicon Valley, London, Paris, Hamburg, Berlin and Munich. The primary data collected in the question-naire served as basis for quantitative parametric and non-parametric statistical analysis.

The book is bespokenly written for decision makers in the venture capital industry in the U.S, UK, Germany and France; all entrepreneurs and professionals who want to under-stand the economics and mechanics of venture capital term sheet clauses; venture capital industry professionals; venture capital associations; researchers and venture capital gov-ernment policy wonks.

The printed book can be purchased on your local Amazon bookstore or on Grin
(http://bit.ly/gDPwz9). The e-Book is available on Grin (http://bit.ly/gDPwz9).

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    Differences in Venture Capital Financing of U.S., UK, German and French IT Start-ups Differences in Venture Capital Financing of U.S., UK, German and French IT Start-ups Document Transcript

    • Differences in Venture Capital Financing of U.S., UK, German and French Information Technology Start-ups — A Comparative Empirical Research of the Investment Process on the Venture Capital Firm Level Doctoral Dissertation Paper Presented to: Prof. Dr. Klaus Nathusius Research Group Entrepreneurship UNIVERSITY OF KASSEL and Prof. Dr. Rainer Stöttner Financing, Banking and Insurance UNIVERSITY OF KASSEL for the degree of Dr. rer. pol. (rerum politicarum) By Dipl.-Kfm. Michael Jurgen Garbade Submitted on: June 15, 2010 Date of Disputation: March 14, 2011
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups AcknowledgementI hereby first and foremost express great gratitude to my primary academic supervisorProf. Dr. Klaus Nathusius for all the academic consultation and structural support fromApril 2008 to March 2011. He was available in-person for discussions and most im-portantly always promptly responded to e-mails within three days. The completion of thewritten doctoral dissertation in two years was only possible because of Prof. Nathusius`fast reaction to e-mails. In addition, I commend Prof. Nathusius for organizing the quar-terly colloquium where all doctoral candidates gave presentations on the status of theirresearch work. The colloquium was always useful to attend and very effectual to the pro-gress of my doctoral dissertation. I really enjoyed exchanging ideas with other doctoralcandidates there.I appreciate Prof. Dr. Rainer Stöttner for taking over the role of secondary academic su-pervisor. I owe Jutta Salzmann, Alexander Kampe and Martina Tisafalvi a lot for provid-ing a seamless, impeccable and timely administrative support over the three years.I am highly indebted to the following libraries for granting me a full free access to litera-ture resources: Penrose Library, DU Denver; Perry-Castaneda Library, UT Austin; Boat-wright Library, University of Richmond; Jackson Library, Stanford University; UniversityLibrary, University of Cologne. I am obliged to the following venture capital associationsfor providing me a full free access to their publication database: John Taylor from Nation-al Ventura Capital Association (NVCA), Scott Sage from British Venture Capital Associ-ation (BVCA), Ewa Ly from Association Française des Investisseurs en Capital (AFIC),Attila Dahmen from Bundesverband Deutscher Kapitalbeteiligungsgesellschaften(BVKAP) and Dan Magirescu from European Venture Capital Association (EVCA).I am very grateful to all the venture capital firms in the U.S., UK, Germany and Francethat partook in the scientific online survey in early 2009. Moreover, I am sincerely be-holden to the 24 venture capital firms in Silicon Valley, London, Paris, Hamburg, Munichand Berlin that participated in the face-to-face 30 minutes expert interviews, which wereinstrumental in designing the underlying research framework model of the doctoral disser-tation. I
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups II
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups ContentsList of Tables ..................................................................................................................... VIIList of Figures ...................................................................................................................VIIIList of Abbreviations .......................................................................................................... IX1. Introduction .....................................................................................................10 1.1. Topic .......................................................................................................................... 10 1.2. Research Objectives ...................................................................................................14 1.3. Research Design ........................................................................................................17 1.4. Structure ..................................................................................................................... 172. e-Business in Business Administration Theory ............................................20 2.1. Definitions, Characteristics and Concept of e-Business ............................................20 2.1.1. Definitions of the Term e-Business ....................................................................20 2.1.2. Contrasting e-Business and e-Commerce ...........................................................20 2.1.3. Applications in e-Business .................................................................................. 24 2.2. Market and Transaction Categories in e-Business .....................................................25 2.2.1. Consumer as Value Generator: C2C, C2B, C2G ................................................26 2.2.1.1. Consumer-to-Consumer (C2C) .................................................................... 26 2.2.1.2. Consumer-to-Business (C2B) ...................................................................... 29 2.2.1.3. Consumer-to-Government (C2G) ................................................................30 2.2.2. Business as Value Generator: B2C, B2B, B2G ..................................................31 2.2.2.1. Business-to-Consumer (B2C) ...................................................................... 31 2.2.2.2. Business-to-Business (B2B) ........................................................................ 33 2.2.2.3. Business-to-Government (B2G) ..................................................................35 2.2.3. Government as Value Generator: G2C, G2B, G2G ............................................36 2.3. e-Business Model ....................................................................................................... 38 2.4. e-Business and Entrepreneurship Theories ................................................................42 2.4.1. Creative Destruction Theory ...............................................................................42 2.4.2. Entrepreneurial Discovery and Competitive Market Process .............................443. Venture Capital Financing of Start-ups in Business AdministrationTheory ..................................................................................................................47 3.1. Equity Financing: Venture Capital Financing ........................................................... 47 3.1.1. Institutional Venture Capital Financing .............................................................. 49 3.2. Independent Venture Capital Financing (IVC) .......................................................... 51 III
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups3.2.1. Definitions and Characteristics of Independent Venture Capital Financing....... 513.2.2. Stages in the Financing Life Cycle of a Start-up ................................................543.2.3. Structure of Independent Venture Capital Firms ................................................633.2.4. Role of Independent Venture Capital Firms in Start-ups.................................... 643.2.5. Theoretical Foundation for Explanation of the Behavior of VentureCapital Firms .................................................................................................................67 3.2.5.1. Agency Theory Model: Asymmetric Information, Moral Hazard and Adverse Selection...............................................................................................67 3.2.5.2. Mitigation of Agency Risks ......................................................................... 693.2.6. Typical Venture Capital Investment Process: VC Investment Cycle .................713.2.6.1. Contact Phase ................................................................................................... 723.2.6.2. Initial Screening Phase ..................................................................................... 753.2.6.3. Due Diligence Phase ........................................................................................77 3.2.6.3.1. Investment Criteria: Management Team, Market, Product, Potential Exit Channel ......................................................................................................... 78 3.2.6.3.1.1. Evaluation of Management Team ..................................................78 3.2.6.3.1.2. Evaluation of Business Model: Product or Service .......................80 3.2.6.3.1.3. Evaluation of Market: Market Analysis .........................................82 3.2.6.3.1.4. Evaluation of Potential Exit Channel ............................................. 83 3.2.6.3.2. Financial Due Diligence: Valuation of Start-ups .................................. 83 3.2.6.3.2.1. Dilution .......................................................................................... 84 3.2.6.3.2.2. Pre-Money and Post-Money Valuation.......................................... 86 3.2.6.3.2.3. Virtual Valuation ........................................................................... 88 3.2.6.3.2.4. Multiples: Comparable Companies and Comparable Transactions Method .............................................................................................................. 88 3.2.6.3.2.5. Discounted Cash Flow Method (DCF) .......................................... 89 3.2.6.4. Deal Structuring and Negotiation Phase .................................................. 93 3.2.6.4.1. Deal Negotiation ............................................................................... 93 3.2.6.4.2. Structuring a Venture Capital Deal ...................................................973.2.6.5. Management Phase — Value Adding Services .............................................1103.2.6.6. Exit Phase....................................................................................................... 1123.2.6.7. Venture Capital Investment Syndication ....................................................... 1153.2.6.8. Staged Financing of Start-ups ........................................................................118 IV
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups4. Macroeconomic Environment of the Venture Capital Industry in theU.S., UK, Germany and France .......................................................................1205. Previous Empirical Research: Differences in Venture Capital Financingof U.S., UK, German and French Start-ups ...................................................124 5.5.1. Venture Capital Financing — U.S. and Europe.................................................... 124 5.5.2. Venture Capital Financing — Europe .................................................................. 1246. Research Framework Model and Hypotheses Development ....................135 6.1. Average Size of Investment .....................................................................................136 6.2. Venture Capital Investment Risk Strategy............................................................... 138 6.3. Management Team Due Diligence ..........................................................................140 6.4. Product–Service Due Diligence ...............................................................................142 6.5. Market Analysis Due Diligence ...............................................................................144 6.6. Investment Committee ............................................................................................. 145 6.7. Deal Structuring ....................................................................................................... 146 6.8. Investment Syndication............................................................................................ 148 6.9. Milestone Financing ................................................................................................ 149 6.10. Management Phase — Value Adding Services .....................................................151 6.11. Exit Phase .............................................................................................................. 1537. Empirical Research Design ..........................................................................156 7.1. Research Method .....................................................................................................156 7.2. Data Sample Collection Method .............................................................................. 1608. Quantitative Inferential Statistical Significance Tests ..............................164 8.1. Parametric Inferential Statistical Significance Tests ............................................... 164 8.1.1. HA: Average Size of Investment — Seed Stage...............................................166 8.1.2. HB: Average Size of Investment — Start-up Stage..........................................171 8.1.3. HC: Average Size of Investment — Growth Stage ..........................................175 8.2.Non-Parametric Inferential Statistical Significance Tests ........................................ 179 8.2.1. HD: % of Start-ups in Pre-revenue Phase .........................................................181 8.2.2. HE: % Start-ups not Managed by Founders .....................................................185 8.2.3. HF: % of Investment in Start-ups with Me-too Products .................................189 8.2.4. HG: % of Market Analysis Due Diligence done Informal................................193 8.2.5. HH: Size of Investment Committee .................................................................. 197 V
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups 8.2.6. HI: Typical Liquidation Preference Multiple (LPM) ........................................201 8.2.7. HJ: % Syndicated Exits that are Outperformers ...............................................205 8.2.8. HK: Number of Tranches per Investment Round .............................................209 8.2.9. HL: Number of Board Seats per Partner/Investment Professional ................... 213 8.2.10. HM: Cash Multiple X that Defines an Outperformer .....................................2179. Comparison of Key Findings of the Dissertation with Resultsof the Expert Interviews and Previous Comparative Research Studies ......221 9.1. HA: Average Size of Investment — Seed Stage .....................................................225 9.2. HB: Average Size of Investment — Start-up Stage ................................................ 226 9.3. HC: Average Size of Investment — Growth Stage .................................................228 9.4. HD: % of Start-ups in Pre-revenue Phase ................................................................229 9.5. HE: % Start-ups not Managed by Founders ............................................................232 9.6. HF: % of Investment in Start-ups with Me-too Products ........................................232 9.7. HG: % of Market Analysis Due Diligence done Informal ......................................233 9.8. HH: Size of Investment Committee ......................................................................... 234 9.9. HI: Typical Liquidation Preference Multiple (LPM) ..............................................236 9.10. HJ: % Syndicated Exits that are Outperformers ....................................................239 9.11. HK: Number of Tranches per Investment Round ..................................................242 9.12. HL: Number of Board Seats per Partner /Investment Professional .......................245 9.13. HM: Cash Multiple X that Defines an Outpeformer ............................................. 249 9.14. Other Research Findings from the Online Questionnaire ......................................25210. Implications for Future Research on Differences in Venture CapitalFinancing of U.S., UK, German and French Start-ups .................................260Appendix: Online Questionnaires ...................................................................... XAppendix: Expert Interview Questionaire ...................................................... XIReferences .......................................................................................................................... XII VI
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups List of TablesTable I: Continued Activities ................................................................................................ 41Table II: Schumpterian versus Kirznerian Entrepreneurship................................................ 46Table III: Forms of Institutional Venture Capital ................................................................. 54Table IV: Summary of the Stages in the Life Cycle of a Start-up ........................................ 62Table V: Numerical Example of Dilution Effects ............................................................... 85Table VI: Funding Clauses ................................................................................................... 95Table VII: Corporate Governance Clauses ........................................................................... 96Table VIII: Liquidation Clauses ........................................................................................... 96Table IX: Numerical Example Equity Math .................................................................... 98Table X: Distribution of Liquidation Proceeds ................................................................... 109Table XI: Macroeconomic Framework ............................................................................... 121Table XII: Venture Capital Financing — U.S. and Europe ................................................ 124Table XIII: Venture Capital Financing — Europe ............................................................. 132Table XIV: Integrated Research Framework Model .......................................................... 135Table XV: Preliminary Expert Interviews .......................................................................... 157Table XVI: VC Participants in Expert Interview ................................................................ 157Table XVII: U.S. Federal Reserve Average Exchange Rates 2002-2008 .......................... 161Table XVIII: Information on Sample Size of the Personalized Online Survey .................. 162Table XIX: Geographic Dispersion of Respondent VCs .................................................... 163Table XX: Hypotheses HA: Raw Data ($ million) ............................................................. 166Table XXI: Hypotheses HB: Raw Data ($ million) ............................................................ 171Table XXII: Hypotheses HC: Raw Data ($ million) .......................................................... 175Table XXIII: Hypotheses HD: Raw Data (%) .................................................................... 181Table XXIV: Hypotheses HE: Raw Data (%) .................................................................... 185Table XXV: Hypotheses HF: Raw Data (%) ...................................................................... 189Table XXVI: Hypotheses HG: Raw Data (%) .................................................................... 193Table XXVII: Hypotheses HH: Raw Data.......................................................................... 197Table XXVIII: Hypotheses HI: Raw Data .......................................................................... 201Table XXIX: Hypotheses HJ: Raw Data (%) ..................................................................... 205Table XXX: Hypotheses HK: Raw Data ............................................................................ 209Table XXXI: Hypotheses HL: Raw Data ........................................................................... 213Table XXXII: Hypotheses HM: Raw Data ......................................................................... 217Table XXXIII: Valuation 2 ................................................................................................. 225Table XXXIV: Average Size of Investment 1 .................................................................... 227Table XXXV: Average Size of Investment 3 ..................................................................... 227Table XXXVI: VC Investment Risk Strategy 2 ................................................................. 230Table XXXVII: VC Investment Risk Strategy 3 ................................................................ 231Table XXXVIII: VC Investment Risk Strategy 4 ............................................................... 231Table XXXIX: Market Analysis Due Diligence 1 .............................................................. 234Table XL: Investment Committee 1 ................................................................................... 234Table XLI: Investment Committee 2 .................................................................................. 235Table XLII: Investment Committee 3 ................................................................................. 236Table XLIII: Deal Structuring 1 ......................................................................................... 237Table XLIV: Deal Structuring 2 ......................................................................................... 238Table XLV: Investment Syndication 1 ............................................................................... 239Table XLVI: Investment Syndication 2 .............................................................................. 240Table XLVII: Investment Syndication 4............................................................................. 240Table XLVIII: Investment Syndication 3 ........................................................................... 241 VII
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsTable XLIX: Milestone Financing 1 ................................................................................... 244Table L: Investment Committee 4 ...................................................................................... 246Table LI: Management Phase 1 .......................................................................................... 247Table LII: Management Phase 2 ......................................................................................... 247Table LIII: Management Phase 3........................................................................................ 248Table LIV: Management Phase 4 ....................................................................................... 248Table LV: Investment Committee 5 ................................................................................... 248Table LVI: Average Size of Investment 4 .......................................................................... 251Table LVII: Exit Phase 4 .................................................................................................... 251Table LVIII: Valuation 1 .................................................................................................... 252Table LIX: VC Investment Risk Strategy 6 ........................................................................ 252Table LX: Management Team Due Diligence 3 ................................................................. 252Table LXI: Management Team Due Diligence 4 ............................................................... 253Table LXII: Management Team Due Diligence 2 .............................................................. 254Table LXIII: Management Team Due Diligence 5 ............................................................. 255Table LXIV: Management Team Due Diligence 6............................................................. 256Table LXV: Product Due Diligence ................................................................................... 257Table LXVI: Exit Phase 1 ................................................................................................... 258Table LXVII: Corporate Development Meetings ............................................................... 258Table LXVIII: VC Celebrity Status .................................................................................... 259Table LXIX: Theoretical Research Framework - Expert Interview .................................... IX List of FiguresFigure I: Link between e-Commerce and e-Business ........................................................... 23Figure II: Applications in e-Business ................................................................................... 25Figure III: Market and Transaction Categories in e-Business .............................................. 26Figure IV: Customer Chain — Stages of a B2C e-Commerce Transaction ......................... 32Figure V: Disintermediation in B2C e-Commerce ............................................................... 33Figure VII: e-Business Model Architecture .......................................................................... 39Figure VIII: Categories of Venture Capital .......................................................................... 49Figure IX: Venture Capital Firms as Financial Intermediaries ............................................. 51Figure X: Stages in the Life Cycle of a Start-up ................................................................... 55Figure XI: Categorization of Venture Capital Firms by Investment Stage .......................... 63Figure XII: Venture Capital Investment Process .................................................................. 71Figure XIII: The Four Pillars of Deal Negotiation ............................................................... 93Figure XIV: Research Design ............................................................................................. 156 VIII
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups List of AbbreviationsAFIC Association Française des Investisseurs en CapitalAR&D American Research & DevelopmentBVCA British Venture Capital AssociationBVK Bundesverband Deutscher KapitalbeteiligungsgesellschaftenCAGR Compound Annual Growth RateCMV Common Method Variance ProblemCp. Compare or seeCVC Corporate Venture CapitalDtA Deutsche AusgleichsbankEBITDA Earnings before Interest Taxation Depreciation and AmortizationEt seq. Et Sequence: and the next page or following pagesET Entrepreneurial TeamFCF Free Cash FlowIBM International Business Machines CorporationIPO Initial Public OfferingIRR Internal Rate of ReturnIVA Israeli Venture Capital AssociationIVC Independent Venture CapitalKfW Kreditanstalt für WiederaufbauNASDAQ National Association of Securities Dealers Automated QuotationsNDA Non-Disclosure AgreementNPM New Public ManagementNVCA National Venture Capital AssociationPVC Public Venture CapitalPwC PricewaterhouseCoopersR&D Research & DevelopmentS&P Standard & PoorsSBA Small Business AdministrationSBIC Small Business Investment CompaniesSBIR Small Business Innovation ResearchSME Small and Medium Enterprises IX
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups1. Introduction1.1. TopicVenture capital has been paramount in the emergence of the information technology in-dustry in both the United States and Europe. It plays a major role as a source of financingfor information technology start-ups. The U.S. venture capital industry first emerged inthe 1960s in Boston, Massachusetts investing in young technology firms.1 The Europeanventure capital industry emerged twenty years later emulating the success of the U.S. ven-ture capital industry. In 1960, the U.S. venture capital industry in Silicon Valley laid theconducive environment for the information technology industry to furl and is the majordriving force in its outstanding trajectory growth. Venture capital firms do not only pro-vide innovative information technology start-ups with financial capital but also humanand social capital with their managerial expertise, experience and diverse industry net-works. They monitor the start-ups in which they invest and coach entrepreneurs in allstages of development of a portfolio firm. Since most venture capitalists have operationalor entrepreneurial experience prior to joining a venture capital firm, they understand theneeds and problems of start-ups very well. Hence, venture capital is an important vehiclein stimulating innovations, promoting entrepreneurship and nurturing young entrepre-neurs. Internet giants like Google, Yahoo and eBay would not exist today if they had notreceived venture capital funding in their seed, start-up and growth stages. Notable start-ups which were founded between 2003 and 2007 in the U.S., such as Rent.com, RightMedia, Friendster, PayPal, LinkedIn, About.com, Ask.com, Ticketmaster, Stubhub,MySpace, Facebook, YouTube, Photobucket, Flickr and Bebo were all financed with ven-ture capital. In Europe, notable start-ups which were founded between 2003 and 2007such as Skype, Xing, Last.fm, GumTree, StudiVZ, Tradera, Loquo and Kijiji were allfinanced with venture capital. The availability of venture capital in a region is a vital pre-requisite for a constant creation of new innovative and disruptive start-ups.A widening gap is observable between the U.S. and Europe in the information technologystart-up industry. There are relatively few large global information technology companiesin Europe. Furthermore, empirical evidence from Jeng and Well; Sapienza et al.; Bruton,1 Cp. Spencer, Ante. (2008): Creative Capital: Georges Doriot and the Birth of Venture Capital, CambridgeMA 2008, p. 1 et seq. 10
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsFried and Manigart suggests that the rate of success of venture capital backed start-ups inEurope is far less than that of the U.S.2 The scope and sophistication of the venture capitalindustry in the U.S. is one reason for the exceptional ability of the U.S. to continually nur-ture new global and trailblazing information technology gazelles. The U.S. venture capitalindustry is more developed and matured than the venture capital industry in Europe. Ac-cording to Jeng and Well, in comparison to European venture capitalists, the propensityand frequency at which high-growth information technology start-ups are built by U.S.venture capitalists are much higher.Significant research has been conducted on venture capital financing of start-ups in theU.S. and Europe. In most of the studies, comparative analysis of the venture capital fi-nancing of start-ups in the U.S. and Europe is performed on a macroeconomic level. Onlya few research studies on the field deal with the comparative analysis on the microeco-nomic level (managerial venture capital research), i.e. on the venture capital firm level.There is a large empirical research gap in managerial venture capital research regardingthe differences in venture capital financing of U.S., UK, German and French informationtechnology start-ups. The venture capital financing studies completed hitherto felt short toresearch the differences in venture capital financing of U.S., UK, German and Frenchinformation technology start-ups over the whole venture capital investment process and tostudy the four countries simultaneously. Jessen published in 2002 at the University ofFrankfurt (Oder) the doctoral dissertation Venture Capital in Germany and USA —Method of Post-investment Management of Innovative Start-ups.3 First, Jessens empiri-cal research work only covered the post-investment phase of the venture capital invest-ment process. Second, it considered only the countries U.S. and Germany. Ortgiese in2007 released at the University of Kassel the doctoral dissertation Value Added by Ven-ture Capital Firms: An Analysis on the Basis of New Technology-Based Firms in USA2 Cp. Jeng, Leslie/Well, Philippe (2000): The Determinants of Venture Capital Funding: Evidence AcrossCountries, in: Journal of Corporate Finance, Vol. 6 Vol. (2000), pp. 241-289; Sapienza, Harry et al. (1996):Venture Capital Governance and Value Added in Four Countries, in: Journal of Business Venturing, Vol. 11(1996), pp. 439-490; Bruton, Garry/Fried, Vance/Manigart, Sophie (2005): Institutional Influence on theWorldwide Expansion of Venture Capital, in: Entrepreneurship, (2005), November, pp. 773-760.3 Cp. The topic of the dissertation has been translated from German to English. See Jessen, John (2002):Venture Capital in Deutschland und in den USA — Methode zur Managementbetreuung von innovativenFrühphasenunternehmen, Doctoral Dissertation at University of Frankfurt (Oder) 2002. 11
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsand Germany.4 Unlike Jessens study, Ortgieses empirical research work examined thestart-ups perspective, i.e. start-ups in lieu of venture capital firms participated in theonline survey.This research study deals specifically with the described research gap: Differences inVenture Capital Financing of U.S., UK, German and French Information TechnologyStart-ups — A Comparative Empirical Research of the Investment Process on the VentureCapital Firm Level.It compares the approach of U.S., UK, German and French independent venture capitalfirms in the financing of information technology start-ups over the entire venture capitalinvestment process. The empirical part of the study therefore excludes public venture cap-ital and corporate venture capital firms in the U.S., UK, Germany and France. Moreover,the study is wholly dedicated to information technology start-ups; biotechnology (Bio-Tech), medical technology (MediTech) and clean technology (CleanTech) start-ups areintentionally disregarded in this study. Information technology start-ups are start-ups inone of the six sub-sectors of the information technology industry: software; communica-tion technology; mobile business (M-Business, wireless); hardware, networking and infra-structure; semi-conductor; electronic business (e-Business). The information technologyindustry is commonly abbreviated as IT, TIMES or TMT. IT stands for information tech-nology; TIMES represents telecommunications, information, media, entertainment andsecurity; TMT stands for technology, media and telecommunications.Software: The software sector in information technology encompasses system software,programming software and application software. "System software helps run the computerhardware and computer system. Programming software usually provides tools to assist aprogrammer in writing computer program. Application software allows end users to ac-complish one or more specific not directly computer development related tasks."5Communication technology: "The communications technology industry is responsiblefor closed-circuit and cable television equipment; studio audio and video equipment; light4 Cp. Ortgiese, Jens. (2007): Value Added by Venture Capital Firms, Doctoral Dissertation at University ofKassel 2007, p. 1 et seq.5 Software Industry (2008): Dictionary.com Website, http://dictionary.reference.com/browse/software,03.04.2008, online. 12
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upscommunications equipment; transmitters, transceivers, and receivers (except householdand automotive); cellular radio telephones; fiber optics equipment; communication anten-nas; receivers; RF power amplifiers; satellite communications systems (space and groundsegments); fixed and mobile radio systems."6M-Business: "Mobile business can very simply be characterized as an extension of elec-tronic business (e-business) to mobile devices."7 "Mobile business arises from an individ-uals ability to have permanent access to information and services independent of placeand time using a mobile phone, personal digital assistance (PDA) or pocket PC via a wire-less radio or infrared connection."8 The vital advantages of mobile business are ubiquityof mobile phones (pervasive mobile business); personalization and identification; andlocalization. Localization enables a precise determination of the geographic position of aconnected mobile device. It allows for provision of location-based services and geotag-ging.Hardware, networking and infrastructure: Hardware consists of computer hardware,infrastructure hardware and network hardware. Computer hardware means central pro-cessing units (CPUs), memory, storage and peripherals (keyboards, mice, printers, etc.).Also included in this definition are servers, electronic security, and storage devices usedin data centers.9 "Computer networks allow computers to communicate with each otherand share resources and information. They can be classified according to the hardwareand software technology that is used to interconnect individual devices in the network,such as optical fiber, Ethernet, Wireless LAN, HomePNA, Power line communication orG.hn."10Semi-conductor: "This is the generic name for discrete devices and integrated circuitsthat can control the flow of electrical signals. Silicon is the basic material from which6 Communications Technology Industry Focus (2006): Definition of the Sector,http://www.missouribusiness.net/iag/focus_communications.asp, 03.04.2008, online.7 M-Business, Berkeley.edu (2003), M-Business, www.ocf.berkeley.edu/~cwlee/definition.html09.05.2008, online.8 Diederich, Bernd. et al. (2001), Mobile Business Märkte, Techniken, Geschäftsmodelle, Wiesbaden 2001,p. 17 et seq; Detecon & Diebold Consultants (2002): Mobile Business,http://www.detecon.com/en/search.html?search_term=diebold, 06.06.2008; Zobel, Jörg. (2001): MobileBusiness und M-Commerce – die Märkte der Zukunft erobern, Munich 2001, p. 3.9 Cp. Terminology For Computer Networking (2008): Hardware, Networking and Infrastructure,http://www.ieee802.org/3/ba/, www.webopedia.com, http://www.engineer.ucla.edu/ sto-ries/2004/Internet35.htm, 02.02.2008, online.10 Terminology for Computer Networking (2008), online. 13
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upssemi-conductors are fabricated. The semi-conductor industry is the aggregate collection ofcompanies engaged in the design and fabrication of semi-conductor devices."11e-Business: The e-Business sector is broadly illustrated as an exemplary case study in thetheory section.1.2. Research ObjectivesAlthough there are certainly differences in the venture capital financing of start-ups withinone given country, this study no more than focuses on the differences across countries:U.S., UK, Germany and France. The Boston way of venture capital financing of start-upsindisputably differs somehow from the California way. Likewise, the London way of ven-ture capital financing of start-ups indubitably deviates from the Manchester way. Suppos-edly, the Paris way of venture capital financing of start-ups is distinctive from the Lyonway. Moreover, the Munich way of financing of start-ups alternates from the Berlin way.The research study willfully neglects a priori the minor differences within each countryand views each country as a homogeneous cluster. Therefore, the implicit assumptions ofthis empirical research study are: • There is a U.S. way of venture capital financing of start-ups • There is a UK way of venture capital financing of start-ups • There is a German way of venture capital financing of start-ups • There is a French way of venture capital financing of start-upsThat means in the empirical analysis, there are four clusters to be compared with eachother, which are called U.S., UK, Germany and France. This research study is not a de-scriptive but rather a comparative analysis. The goal is to portray the differences betweenthe four countries on a two-country comparison basis: U.S. — UK, U.S. — Germany,U.S. — France, UK — Germany, UK — France, Germany — France. The aim of thisempirical research work is not to conduct factor or cluster analysis to determine successfactors (success factors research).11 Semi-conductor Industry Association Factsheet (2009), Semi-conductor, http://www.siaonline.org/cs/industry_resources/industry_fact_sheet, 20.04.2008), online. 14
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsThe differences are to be analyzed for the whole venture capital investment cycle: contactphase, initial screening phase, due diligence phase, deal structuring and negotiation phase,management phase — value adding services, and exit phase. In regard to the whole ven-ture capital investment process, this empirical research aspires to answer the followingmain research questions, propositions and phenomena: • What are the differences in the way U.S. and UK start-ups are financed with ven- ture capital? • What are the differences in the way U.S. and German start-ups are financed with venture capital? • What are the differences in the way U.S. and French start-ups are financed with venture capital? • What are the differences in the way UK and German start-ups are financed with venture capital? • What are the differences in the way UK and French start-ups are financed with venture capital? • What are the differences in the way German and French start-ups are financed with venture capital?More precisely, it attempts to answer the following questions which plague U.S., UK,French and German venture capital firms concerning discrepancies between the countries: • Is the average size of investment in start-ups in the seed, start-up and growth stage in the U.S. post exchange rate adjustments bigger than in UK, Germany and France? • Is the average size of investment in start-ups in the seed, start-up and growth stage in the UK post exchange rate adjustment bigger than in Germany and France? • Is the percentage % of start-ups in the pre-revenue phase which are financed by venture capital firms in the U.S. bigger than in UK, Germany and France? • Is the percentage % of start-ups not managed by founders but an experienced CEO bigger in the U.S. than UK, Germany and France? • Is the percentage % of me-too product investments by venture capital firms in the U.S. smaller than in UK, Germany and France? 15
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups• Is the percentage % of market analysis due diligence that is done informal in the U.S. bigger than in UK, Germany and France?• Is the average size of the investment committee which votes on investment deci- sions the same in the U.S., UK, Germany and France?• Do U.S. venture capital firms put lower liquidation preference multiples in term sheets than their UK, German and French counterparts?• Do UK venture capital firms put lower liquidation preference multiples in term sheets than their German and French counterparts?• Which country is more inclined to tranching of a venture capital investment round, U.S., UK, Germany or France?• Do German and French venture capital firms tranch investments more than their UK counterparts?• Do U.S. venture capital firms add more value to their portfolio companies than their UK, German and French counterparts?• Is the definition of an outperformer cash exit multiple in U.S. venture capital fi- nancing higher than in UK, Germany and France?• Is the definition of an outperformer cash exit multiple in UK venture capital fi- nancing higher than in Germany and France? 16
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups1.3. Research DesignRelevant theoretical literature on start-ups and venture capital financing of start-ups inbusiness administration theory published by leading researchers in the U.S., UK, Germa-ny and France is read, summarized and opined in the theoretical section. In addition, thecorollaries, data sample and research method of prior empirical studies on differences inventure capital financing of start-ups in the U.S., UK, Germany and France are portrayedand elaborated. The theoretical research framework is herein constructed from theknowledge and insights gained in the theory section. An extensive preliminary face-to-face expert interview is conducted with venture capital firms in the San Francisco BayArea, London, Paris, Hamburg, Munich and Berlin. It is aimed at gathering possible ques-tions (aspects, factors, criteria, phenomena) for the online questionnaire and garneringpractical feedback from venture capital firms in the four countries. Based on the inputsand information from the face-to-face expert interview with venture capital firms in theSan Francisco Bay Area, London, Paris, Hamburg, Munich and Berlin, the theoreticalresearch framework is modified to obtain a revised research framework, which functionsas the microeconomic research framework.Next, the macroeconomic environment of the venture capital industry in the U.S., UK,Germany and France are extensively reviewed to build the macroeconomic framework ofthe venture capital market in each country. The hypotheses are subsequently construed outof the revised research framework (microeconomic environment) and macroeconomicresearch framework. The questions of the empirical scientific online survey are deducedfrom the formulated hypotheses. The scientific online survey is conducted nationwidewith venture capital firms in the U.S., UK, Germany and France to collect primary empir-ical data to test the hypotheses for statistical significance.1.4. StructureThe following dissertation paper is organized in nine main chapters. Chapter 2 elaboratesbusiness administration theories behind the key elements of e-Business: Definitions,Characteristics and Concept of e-Business; Market and Transaction Categories in e-Business; e-Business Model; e-Business and Entrepreneurship Theories. It starts withbasic definitions of the term e-Business and contrasts e-Business from e-Commerce. Mar-ket transaction categories review the exchange of goods and services that take place be-tween consumers, government and businesses. Moreover, the section e-Business model 17
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upspresents components of e-Business models and their potential taxonomies. The last part ofchapter 2 discusses linkages between e-Business and the creative destruction theory fromJoseph Alois Schumpeter and the entrepreneurial discovery theory from Israel Meir Kir-zner. The Austrian School is parlayed to portray e-Business as a creative disruptor with ahuge start-up innovation potential.Chapter 3 is focused on venture capital financing of start-ups in business administrationtheory: Venture Capital Financing, Independent Venture Capital Financing (IVC). First,the forms of non-institutional and institutional venture capital are examined. It differenti-ates between the 4Fs, angel investors, corporate venture capital, public venture capital andindependent venture capital. It also weighs a plethora of anecdotal myths about independ-ent venture capital financing in the U.S., UK, France and Germany and offers a bottom-line judgment. Second, a detailed description of the unique characteristics of independentventure capital firms is given. Chapter 3 also shows the stages in the financing life cycleof a start-up and the role of independent venture capital firms at each stage. Furthermore,it adopts the principal agency theory model to explain the theoretical foundations for thebehavior of venture capital firms. The negative external effects of a principal agency rela-tionship, such as asymmetric information, moral hazard and adverse selection betweenventure capital firms and entrepreneurial teams are modeled and illustrated. Guidelines onmitigating these malignant agency risk problems are provided. Chapter 3 analyzes the keyinvestment decision criteria in venture capital financing and outlines the whole venturecapital investment cycle: contact phase, initial screening phase, due diligence phase, dealstructuring and negotiation phase, management phase — value adding services, and exitphase. The four main venture capital investment decision criteria management, market,product and potential exit channel are considered. Deal structuring and negotiation dealswith the typical provisions and clauses in venture capital term sheets — funding clauses,corporate governance clauses and liquidation clauses. Chapter 3 concludes with conceptsof motives for investment syndication and staging of venture capital investments in start-ups.In order to understand the differences in venture capital financing of information technol-ogy start-ups in the U.S., UK, Germany and France, it is inevitable to have a comprehen-sive insight into the macroeconomic environment of the venture capital markets in the 18
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsU.S., UK, Germany and France. Chapter 4 depicts the essential macroeconomic factorsthat shape the macroeconomic framework of the venture capital industry in the four coun-tries.Chapter 5 provides prior empirical research on differences in venture capital financing ofinformation technology start-ups in the U.S., UK, Germany and France. It looks at bothempirical research work that studied the differences between the U.S. and Europe, andwithin Europe itself. The underlying research framework, which functions as the funda-mental grid of the empirical analysis is developed in chapter 6. It espouses 12 elementswhich analyze every aspect of the venture capital investment cycle: Average Size of In-vestment, Valuation, VC Investment Risk Strategy, Management Team Due Diligence,Product-Service Due Diligence, Market Analysis Due Diligence, Investment Committee,Deal Structuring, Investment Syndication, Milestone Financing, Management Phase —Value Adding Services, Exit Phase.The empirical research design in chapter 7 imparts on the pertinent scientific research anddata collection method employed in this study. The penultimate chapter covers the devel-opment of the 78 hypotheses and the content of the empirical online questionnaire. Re-search results of the survey are presented and the 78 hypotheses are statistically tested forsignificance based on two-sample parametric and non-parametric statistics. Chapter 9 isdedicated to the comparison of the key findings of the study to results of the expert inter-views and previous comparative research studies. 19
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups2. e-Business in Business Administration Theory2.1. Definitions, Characteristics and Concept of e-Business2.1.1. Definitions of the Term e-BusinessThere is no single generally accepted definition of the term electronic business, abbreviat-ed e-Business. As a result, the scope of the e-Business industry is completely open to in-terpretation. An array of acronyms such as new economy, internet business, interneteconomy, net economy or electronic economy are sometimes used to refer to the e-Business industry. The term e-Business was coined in the 1990s by former IBM CEOLouis V. Gerstner, Jr., who is largely credited with turning around IBM.12 Louis Gerstnerembraced the internet as a business phenomenon and made it a core part of his turnaroundstrategy at IBM. He realized at an early stage the potential of the internet as a future tech-nology trend and best prepared IBM by investing a lot of financial and human resourcesinto developing and augmenting IBM s electronic business solutions. At IBM, e-Businessis defined as an organization that connects its critical business systems directly to its cus-tomers, employees, partners and suppliers via internet, intranet or an extranet.13 IBMsdefinition of e-Business is therefore not confined to the internet alone but encapsulatesintranet and extranet as well. Briefly, an intranet can be understood as a private versionof an internet accessible only to members within an organization; intranet differs fromextranet in that the former is restricted to the employees of an organization while the lattercan also be accessed by customers, suppliers and other approved parties.Chaffey describes e-Business as all electronically mediated information exchanges, bothwithin an organization and with external stakeholders supporting the range of businessprocesses.14 Information and communication technology consists of all software applica-tions, computer hardware and networks used to create e-Business systems. Unlike IBM,Chaffey broadens the definition of e-Business to cover all forms of information exchangeswithin an organization. He uses e-Business as an adjective to delineate pure play firmssuch as Google, Yahoo, eBay, Amazon, MySpace, YouTube, Photobucket, Facebook,Bebo and StudiVZ, which mainly operate online from bricks-and-clicks and bricks-and-mortar businesses. Bricks-and-clicks are firms which have both an online and a physicalbricks-and-mortar presence. Mesenbourg explains that e-Business is any process that a12 Cp. IBM e-Business (2007a): Definition of e-Business, http://www.ibm.com/e-business, 09.12.2008,online.13 Cp. IBM e-Business (2007a), online.14 Cp. Chaffey, Dave (2002): E-Business and E-Commerce Management, Essex 2002, p. 14. 20
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsbusiness organization conducts over a computer-mediated network.15 Mesenbourgs defi-nition is not very useful because it is too broad. Following Mesenbourgs definition everybusiness will be considered as e-Business in that computers are used in almost everycompany today.According to Kalakota and Robinson, e-Business is a complex fusion of business process-es, enterprise applications and organizational structure necessary to create a high-performance business model.16 This definition has a strong technological blueprint byprimarily focusing on architectural design and integration of computer hard- and softwarethat form a firms e-Business IT infrastructure. It represents the value chain that deliversproducts and services to customers and clients. Using the definition, any organization thatuses IT applications will be characterized as an e-Business firm. Kalakotas definition isnot very useful because it does not help in drawing a clear distinction between e-Businessand non-e-Business organizations.PricewaterhouseCoopers (PwC) defined e-Business in 1999 as application of informationtechnologies to facilitate buying and selling of products, services, and information overpublic standard-based networks.17 This definition has a strong focus on electronic com-merce. Hartley defines e-Business as electronic connection of general business operationsto customers, suppliers, partners and employees.18 Hartleys understanding of e-Businessencompasses product marketing, lead identification, order entry, inventory tracking, orderfulfillment and post-sales support.Zwanziger and Herden define e-Business as integrated transformation and execution ofthe business processes of a firm with the help of information and communication technol-ogy over a network, such as internet, intranet or extranet to deliver value to customers.19Zwanziger and Herdens definition of e-Business leans toward the IBM definition of e-Business.15 Cp. Mesenbourg, Thomas (2001): Measuring the Digital Economy. Discussion Paper, Bureau of the Cen-sus, www.census.gov/cos/www/papers/umdigital.pdf, 15.07.2008, online.16 Cp. Kalakota, Ravi/Robinson, Maria (2000): e-Business 2.0: Roadmap for Success, 2nd Ed., Reading, p.xx.17 Cp. Pricewaterhouse Coopers e-Business (1999): e-Business Strategy, http://www.pwc.co.uk/eng/issues/e_business_strategy.html, 20.10.2008, online.18 Cp. Hartley, Kenneth et al. (2000): E-Business and ERP: Transforming the Enterprise, Hoboken2000, p. 6 et seq.19 Cp. Herden, Sebastian/Zwanziger, Andre (2004): A Mediator for Interorganizational Integration of Rela-tionship Management Systems in E-Business, in: Proceedings of IV International Conference on AppliedEnterprise Science (International Symposium on Business Informatics), Santa Clara 2004, pp. 354-367. 21
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsFor the purpose of this study, e-Business is defined as an organization that connects itscritical business systems directly to customers, employees, partners and suppliers via in-ternet, intranet or an extranet.2.1.2. Contrasting e-Business and e-CommerceThe term e-Business is often confused with e-Commerce and hence interchangeably used,although there is a significant difference between the terms. e-Commerce is a subset of e-Business as illustrated in Fig. I. e-Business encompasses e-Commerce and is just one ofthe many applications in e-Business like e-mailing, e-banking, e-learning. e-Commerce issometimes referred to as internet commerce, e-retail, e-shopping or online shopping.Chesher, Kaura and Linton view e-Commerce as the use of the internet and informationtechnologies for marketing, buying and selling of products and services to a business orconsumer.20 McKay describes e-Commerce as commercial transactions mediated via theinternet, including all those computer-mediated activities involved in supporting that rev-enue generation.21 It implies that e-Commerce constitutes all pre-sale supply chain activi-ties, advertising, delivery and after-sales customer service that enable the purchasingtransaction to take place. Kalakota and Whinston characterize e-Commerce as buying andselling over a digital media.22 A digital media can be the internet, intranet or extranet.This definition somehow paraphrases the definition of Chesher, Kaura and Linton. e-Commerce is any transaction completed over a computer-mediated network that involvesthe transfer of ownership or rights to use goods or services.23 Mesenbourgs definitionemphasizes the legal aspects of e-Commerce to the detriment of the business and technol-ogy aspects. Hartley construes e-Commerce as the buying and selling of goods and ser-vices over the internet.24 This definition is inept in that it omits any form of commerceover intranet or extranet. According to Clark, e-Commerce is the conduct of commerce ingoods and services, with the assistance of telecommunications and telecommunication-based tools.25 Clarks definition is far too broad and does not reflect what counts in na-20 Cp. Chesher, Michael/Kaura, Ricky/Linton, Peter (2003): Electronic Business & Commerce, Surrey,2003, p. 40.21 Cp. McKay, Judy/Marshall, Peter (2004): Strategic Management of e-Business, Milton 2004, p.4.22 Cp. Kalakota, Ravi/Whinston, Andrew (1997): Electronic Commerce. A Managers Guide, Reading MA1997, p. 3.23 Mesenbourg, Thomas (2001), online.24 Cp. Hartley, Kenneth et al. (2000), p. 6 et seq.25 Cp. Clark, Roger (2000): Electronic Commerce Definitions, Roger Clark, http://www.rogerclarke.com/EC/ECDefns.html#EC, 15.07.2008, online. 22
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upstional statistics as e-Commerce because telecommunication-based tools include telephone,mobile phones and fax machines.For the purpose of this research study, e-Commerce is denoted as an e-Business applica-tion that mainly consist of distributing, buying, selling, marketing, and servicing of prod-ucts or services via internet, intranet or extranet to a consumer, business or government. e-Business e-Commerce e-Commerce is a subset of e-BusinessFigure I: Link between e-Commerce and e-Business26e-Commerce has revolutionalized retailing by altering the traditional sales model andegregiously redesigning the value chain in commerce. Prior to the internet age, commercewas to some extent restricted by space and time.27 Space can be understood twofold.The size of a physical store premises is limited, so stores do have stock limitations and donot always display all their merchandise. Internet shops like Amazon.com have no stocklimitations on the number of products they offer. For example, Amazon.com offers morethan five million books and products. The physical distance between a store and the houseof a potential customer can hinder the customer from going to the store. Consumers likeshopping online because it is much more convenient and time-saving.e-Commerce has reinvented the dynamics of commerce by shifting bargaining powerfrom the sell-side that is manufacturers and suppliers to the buy-side, which can stand fora consumer, business or government. The internet eliminates paucity of information andtransaction costs. It gives consumers, businesses and government full access to all rele-vant product or service information like price, quality, reputation, delivery duration andseller rating at no significant costs. In light of the fact that consumers, businesses andgovernment are effectively harnessing the bargaining power of e-Commerce, they aretoday more demanding with heightened expectations when purchasing online and offline.26 Cp. Chaffey, Dave (2002), p. 15.27 Cp. Amor, Daniel (2002): The E-business (R)evolution, Upper Saddle River NJ 2002, p. 31. 23
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsThe reputation of an online store, data transaction security, delivery time reliability, quali-ty and price are five main factors that immensely influence the purchasing decision of anonline customer.28e-Commerce firms can be generally classified into two categories: brick-and-clicks andpure play firms. Examples of bricks-and-clicks are Barnes & Noble, Wal-Mart, Dillards,BestBuy, Circuit City, Macys, Marks & Spencer, Kaufhof, Karstadt, C&A, etc. A pureplay e-Commerce firm operates only through an online platform, e.g. Amazon.com, Otto,Neckarmann, etc.2.1.3. Applications in e-BusinessAn e-Business application defines an activity for which the internet, intranet or extranet isused by a consumer, business or government.29 Although e-Commerce is very popular ine-Business, there are many more e-Business applications as the mnemonic in Fig. IIshows: e-mailing, e-banking, e-working, e-publishing, e-calling, e-legal service, e-auctioning, e-dating, e-social networking, e-gambling, e-gaming, e-health care, e-trading,e-ticketing, e-reservation, e-learning, e-conferencing, e-recruiting, e-consulting, e-procurement, e-customer relationship management, e-research, e-billing, etc.e-Business applications define how people work and play. The growth of internet usageand rapid adoption of e-Business applications have led to continuous development of newe-Business applications. Some e-Business applications are commonly used by consumers,businesses and government; others are only chiefly used by a respective group. The e-Business applications e-mailing, e-banking, e-auctioning, e-commerce and e-reservationare very successful among all three groups. Consumers also use the internet for activitiessuch as e-dating, e-social networking, e-trading, e-gaming, e-ticketing and e-learning.Businesses use the e-Business applications; e-trading, e-conferencing, e-recruiting, e-consulting, e-procurement, e-customer relationship management, e-franchising and e-billing.28 Cp. McKay, Judy./Marshall, Peter. (2004), p. 24.29 Cp. Own definition. 24
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups Applications in e-Business e-Networking e-Retailing e-Ticketing e-Mail e-Accounting e-Business e-Auctions e-Learning e-Gambling e-Working e-Publishing e-Trading e-CallingFigure II: Applications in e-Business30Government use e-Business applications such as e-tender offer, e-request for proposals, e-ticketing and e-registration.2.2. Market and Transaction Categories in e-BusinessA transaction represents an exchange of goods or services between economic partners. Asportrayed in Fig. III, e-Business transactions can be grouped in nine categories based onthe type of transaction partners between whom a transaction takes place. The transactionpartner in e-Business can be a consumer (C), business (B) or government (G).31Each of these transaction partners can function at one time as a value generator at anotheras a value receiver. A value generator is a supplier of a product or a service and value re-ceiver, the consumer. Given the three transaction partners, nine electronic business con-stellations are feasible: Business-to-Business (B2B), Business-to-Consumer (B2C), Busi-ness-to-Government (B2G), Consumer-to-Consumer (C2C), Consumer-to-Business(C2B), Consumer-to-Government (C2G), Government-to-Consumer (G2C), Government-to-Business (G2B), and Government-to-Government (G2G).30 Cp. Own visualization of exemplary e-Business applications.31 Cp. Chaffey, Dave. (2002), p. 12. 25
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups Value Receivers Consumer Business Government Consumer-to- Consumer-to- Consumer-to- Consumer Consumer Business Government e.g. internet classified e.g. job banks with e.g. tax-processing of a ads market ads from job seekers private person Value Generators Business-to-Consumer Business-to- Business-to- Business Government Business e.g. online shops e.g. e-Procurement e.g. tax processing of companies Government-to- Government to Government-to- Government Consumers Business Government e.g. handling support e.g. online tenders e.g. transaction between services from governments public institutionsFigure III: Market and Transaction Categories in e-Business32In the 3×3 matrix in Fig. III, value generators are represented in the vertical and valuereceivers in the horizontal axis. The denotation of each e-Business transaction begins withthe value generator followed by the receiver, e.g. if a consumer delivers a service to abusiness, the transaction is called Consumer-to-Business (C2B).2.2.1. Consumer as Value Generator: C2C, C2B, C2G2.2.1.1. Consumer-to-Consumer (C2C)C2C e-Business is the most radical form of e-Business transaction. There are differentforms of C2C e-Business transactions: C2C e-Commerce, C2C e-banking, C2C socialnetworking, C2C e-auctioning, C2C e-learning, C2C e-dating, C2C e-lending, C2C e-exchanges. In C2C e-Business transactions revenue is generated through advertising,insertion fees or membership premiums. Classified ad platforms such as Craigslist, Kijiji,32 Cp. Chaffey, Dave. (2002), p. 12. 26
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsFreeadscity, Gumtree, Loot, Vivastreet, Avis, Dhd24, Quoka, and Kalaydo all representC2C e-Commerce. They are a popular centralized network of online urban communities,featuring free classified advertisements. These platforms make newspaper classified ad-vertising, garage sales and flea markets obnoxious. Consumers publish classified ads fornew and second-hand goods, pictures and videos can be included with each ad. Interestedbuying consumers then contact the vendors by e-mail or telephone.eBay, QXL and Ricardo are epitomes of C2C e-auction. eBay was founded by PierreOmidyar in September 1995. Today eBay conducts business in more than 30 countriesincluding Brazilian, China, India and Turkey realizing total annual revenue of $8.5 billionwith 16,000 employees in 2008.33 Consumers trade over one million different items oneBay everyday ranging from collectibles, books, appliances, electronics, jewelry, comput-ers, software, furniture, vehicles, etc. The success of electronic auctions among consumerscan be attributed to the traditional transaction frictions that eBay, QXL and Ricardo dis-solved; all that an interested bidder needs is a computer with an internet connection whichobviates the need to travel from one place to the bidding location. Electronic auctionssave time, millions of bidders can take part in the auction, and they offer an opportunity toreview all relevant product information.The Web 2.0 wave in e-Business was unleashed with the launching of C2C social net-working sites like Friendster, MySpace, Hi5, Facebook, Friends Reunited, Bebo,StudiVZ, etc. C2C social networking has systemically transformed the way young and oldpeople socialize and communicate with friends. These platforms nowadays serve as thepreferred mode of communication over mobile phones and landlines among young peo-ple. The first Web 2.0 social networking site Friendster was launched by JonathanAbrams in 2002 in Mountain View, California; Friendster became very popular in a shorttime but made one cardinal strategic blunder; it banned musicians and artists from dis-playing and promoting their work on Friendster.34 In August 2003 employees from eUni-verse seized on this opportunity and launched MySpace by emulating many of the fea-33 Cp. eBay Investor Relations (2009): eBay Annual Report 2008, http://investor.ebay.com/index.cfm, 10.10.2008, online.34 Cp. Webupon (2008): The History of Friendster, http://webupon.com/social-networks/the-history-of-friendster/, 15.07.2008.Webupon (2008), online. 27
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upstures on Friendster and opening it to all interested users including musicians and artists.35Many Friendster users neglected the platform and created new accounts on MySpace. Dueto the fact that eUniverse was already a marketing agency it was more successful in mar-keting the new social networking platform. It had a complete infrastructure of finance,human resources, technical expertise, bandwidth and server capacity right out of the gate,so the MySpace team wasnt distracted with typical start-up issues.36 It was managed byChris DeWolfe, Josh Berman and Tom Anderson. MySpace was acquired by MurdochsNews Corporation for $580 million in 2005.37 After the huge success of MySpace manystart-ups emerged that imitated the business concept by launching vertical social network-ing sites for specific target groups. Facebook was specifically launched as a social net-working site for students in 2004 by Mark Zuckerberg. Today, Facebook has surpassedmy Myspace to emerge as the largest social networking site in the world with 350 millionusers as of January 29, 2010 (3.10 pm PST). Facebook is currently valued at a marketcapitalization of $6.5 billion.38 Friends Reunited, the UK social networking site, wasbought by ITV1 for $208 million in 2005.39 StudiVZ, a social networking site which issimilar to Facebook was launched in 2005 by Ehssan Dariani, Dennis Bemmann and Mi-chael Brehm. In the first quarter of 2007, StudiVZ was sold to the educational and tradepublisher Holtzbrinck Group, headquartered in Stuttgart, Germany.40 Bebo, the Britishsocial networking site founded by Michael and Xochi Birch in July 2005 in San Francis-co, was acquired by AOL in March 2008 for $850 million in an all-cash acquisition trans-action.41C2C e-lending platforms like Zopa, Lending Club, Prosper, PPDai, Virgin Money, Wongaand Smava offer an alternative to traditional lending intermediaries like banks. The peer-to-peer lending marketplace matches peer-lenders with peer-borrowers offering loans with35 Cp. Webupon (2008), online.36 Cp. Theoriginof. (2008): Myspace, http://www.theoriginof.com/myspace.html, 15.07.2008, online.37 Cp. News Corporation (2008): News Corporation to Acquire Intermix Media, Inc.,http://www.newscorp.com/news/news_251.html, 15.07.2008, online.38 Cp. Facebook Statistics (2010): Statistics, http://www.facebook.com/press/info.php?statistics,29.01.2010, online.39 Cp. BBC Technology News (2008): ITV Buys Friends Reunited Website, http://news.bbc.co.uk/2/hi/business/4502550.stm, 20.09.2008, online.40 Cp. Holtzbrinck-Networks (2007): Studivz, http://www.holtzbrinck-networks.com/?studivz_en,01.06.2008, online.41 Cp. Techcrunch (2008): AOL Buys Bebo For $850 Million, http://www.techcrunch.com/2008/03/13/aol-buys-bebo-for-750-million/, 01.01.2009, online. 28
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsinterest rates lower than those of traditional banks. The growth of C2C e-lending has beenencumbered by the lack of trust of potential peer-lenders in the online marketplace.2.2.1.2. Consumer-to-Business (C2B)Consumer-to-Business e-Business transactions are not very common like C2C but they doexist in the e-Business industry. Examples are online recruiting and online consumer mar-ket research services.e-recruiting: Electronic recruiting reduces the cost of acquisition of new personnel fororganizations. It reduces time and cost of job application for applicants as well. Firmshave their own online recruiting sections on their Websites and also use web recruitingservices like Monster.com, Careerbuilder.com and Stepstone.com. It saves companiestime in evaluating and processing candidate information. Young professionals prefer ap-plying for jobs online than through a traditional channel of sending job application docu-ments by postage. Electronic recruiting is not only a cost reduction tool in the human re-source department, it elicits a higher response rate from potential candidates, speeds up arecruiting process and eases the management and storage of job application documents.With e-recruiting tools, organizations automate the recruiting pre-selection phase by win-nowing the field to a few candidates based on defined criteria, e.g. years of job experienceor grade point average. Monster.com is the largest job search engine and career Websitein the world with approximately 5000 employees and operations in over 25 countries. Itwas created in 1999 by the merger of The Monster Board (TMB) and Online Career Cen-ter (OCC), which were two of the first and most popular career Websites on the Internet.42Monster provides online career search services for more than 10,000 partners. Mon-ster.coms annual revenue declined from $1.4 billion in 2007 to $1.34 billion in 2008.43The services that consumer market research firms such as Nielson, Forrester Research,TNS Global, GfK and JupiterResearch render to fast moving consumer goods (FMCG)clients such as Procter & Gamble, Beiersdorf and LOréal represent C2B transactions. Allthese research firms organize consumer online panels and surveys to periodically collect42 Cp. Monster.com About Us (2008): Our Company, http://about-monster.com/content/who-we-are,01.01.2009, online.43 Cp. Monster.com About Us (2008), online. 29
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsdata on consumer buying habits — consumers perception of new products, how oftenthey buy a certain product, where they go grocery shopping, why they buy a specificproduct, their favorite brands and who goes grocery shopping in the family. These con-sumer market research surveys and panels provide FMCGs with insights and deeper un-derstanding of consumer behavior.2.2.1.3. Consumer-to-Government (C2G)One typical C2G e-Business transaction that consumers deliver to Government is onlinefiling of annual tax papers. Internal revenue service government agencies across the Unit-ed States, UK, Germany and France are harnessing the power of e-Business to increaseefficiency in tax filing by offering tech-savvy taxpayers an alternative — an electronic taxpreparation and filing solution. Tax-payers are lured into filing tax papers online knowingthat their documents will be processed expediently. In regard to huge tax administrationcost that the IRS amounts annually, e-filing is a viable and practical solution in savingtax-payers money.Online voting is a consumer-to-government e-Business transaction that is going to play animportant role in the way elections are organized in industrialized nations with fully de-veloped internet infrastructure. Although online voting is currently legally nefarious in theUnited States, Europe and Asia due to lingering security flaws, online voting will becomethe dominant mode of organizing elections in the next 15 years. When consumers as legalcitizens take part in elections by voting online instead of going to a polling booth, theyexercise their civic right to take part in elections through e-voting. There are many e-Business companies in Silicon Valley and in India now working on new technologicalsolutions to upend security problems that flounder e-voting as a legally accepted mode ofelection. Electronic voting will increase election participation rate because it is convenientand less time-consuming; citizens take part in elections right from their homes. Currentlyan average of 50-70 percent of the eligible population in the United State and Europe par-ticipate in elections; with e-voting this rate can be easily invigorated to 80-85 percent.44The introduction of e-voting as a legal mode of organizing elections will first start in less-important elections such as county-level elections and gradually move to state and finally44 Cp. Encarta (2007): Election, http://encarta.msn.com/encyclopedia_761569491/election.html,03.03.2008, online. 30
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsnational level for general elections when the majority of voters are familiar with it and thecurrent opaque security flaws are obsolete. Thousands of people voted online in theDemocratic primaries in Arizona in 2000 and Michigan in 2004. The city of Geneva,Switzerland, has held several online referendums, the first in January 2003.45 The Balticrepublic Estonia broke new ground in e-voting in 2005 when it became the first country inthe world to hold a nationwide election allowing voters to choose their representatives inmunicipal elections over the internet; a Linux-based voting system coupled with a specialID card and device that reads the card were used as a technology solution in the onlineelection.46 This technology solution incurred no additional costs for Estonians becauseabout 80 percent of Estonian voters already had the ID card and reader, which have beenused since 2002 for online access to bank accounts and tax records.2.2.2. Business as Value Generator: B2C, B2B, B2G2.2.2.1. Business-to-Consumer (B2C)A B2C e-Business transaction is a transaction between a business and a consumer. Thetransaction volume in B2C is far less than that of B2B, but transaction frequency in B2Cis higher.47 The most common B2C e-Business transaction comprises B2C e-Commerce.The customer chain in Fig. IV depicts the stages in a B2C e-Commerce transaction: pre-sale, sale execution, sale settlement and after-sale. Pre-sale e-Commerce activities includeinformation seeking and communication, marketing and providing online catalogs. Busi-nesses use the internet to gather information about potential and existing online customersto know who their customers are, what they are purchasing online, how satisfied they areand what they want in terms of future services and products. Online stores use numerousmarketing techniques to acquire new online customers, e.g. banners and search engines.45 Ruth, Steve/Mercer, David. (2008): Voting from the Home or Office? Dont Hold Your Breath,http://doi.ieeecomputersociety.org/10.1109/MIC.2007.94, 04.09.2009, online.46 Cp. Theregister.com (2005): Estonias Local Elections to be Settled Online, http://www.theregister.co.uk/2005/10/11/estonia_evoting/, 06.07.2009, online.com.47 Cp. New York Times Technology News (2008): B2B versus B2C, http://www.nytimes.com/pages/technology/index.html, 08.08.2008, online. 31
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups Pre-sale Sale exe- Sale set- After-sale cution tlement Information Online ordering Online pay- Customer pro- seeking and ment filing and pref- communication erencing Marketing Online deliv- presence ery Online catalogFigure IV: Customer Chain — Stages of a B2C e-Commerce Transaction48and personalized target marketing based on previously collected customer data. The pro-vision of online product catalogs empowers an online store to list its products on differentelectronic marketplaces and enables product comparison between online shops. The saleexecution stage which characterizes the online ordering process is a critical stage in an e-Commerce transaction at which many online shops fail. This requires seamless integrationof the platform backend information system with the distribution information system,which triggers the delivery of the purchased product in the physical logistic chain. After-sale consists of customer retention and extension. Customer retention is a set of activitiesand techniques used to actively maintain relationships with customers to turn them intoloyal repeat customers. Customer extension on the other hand is aimed at increasing thelevel of involvement of a customer with an online store.B2C e-Commerce alters the traditional sales channel model by eliminating certain or allintermediaries between a consumer and manufacturer. The partial or total elimination ofintermediaries such as wholesalers, retailers or brokers in a sales channel is termed disin-termediation. It increases the bargaining power of a manufacturer and cuts multiple distri-bution channel costs; an opportunity to cut out the middleman. Fig. V shows the tradi-tional consumer distribution channel and three potential disintermediation modes.48 Cp. Beynon-Davies, Paul. (2004): E-Business, New York 2004, p. 308. 32
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups a) Producer Wholesaler Retailer Consumer b) Producer Wholesaler Retailer Consumer c) Producer Wholesaler Retailer Consumer d) Producer Wholesaler Retailer ConsumerFigure V: Disintermediation in B2C e-Commerce49The highest level of disintermediation occurs (d) where a manufacturer sells products di-rectly to a customer through its own online distribution platform as illustrated in Fig. V.Total disintermediation is currently not feasible in B2C e-Commerce due to dispropor-tionately high transaction costs compared to Fig. V(b) and Fig. V(c). Consequentially,manufacturers opt for one of the three other possible disintermediation modes. Brick-and-click companies view B2C e-Commerce as a complementary sales channel while pureplay e-Commerce companies such as Amazon envision it as a completely new businessmodel.2.2.2.2. Business-to-Business (B2B)B2B e-Business is more critical to GDP growth in industrialized nations than B2C e-Business.50 Wise and Morrison estimate that the value of B2B transactions is typicallytenfold the value of B2C.51 B2B e-Business is germane to e-procurement, supply chainmanagement, Just-in-Time sourcing, e-collaboration and electronic marketplaces. e-Procurement is synonymous to online sourcing and refers to the execution and automationof procurement processes for raw materials, basic supplies and components via intranet,extranet or the internet; it is the electronic integration and management of all procurement49 Cp. Chaffey, Dave. (2002), p. 45.50 Cp. Cunningham, Michael (2002): B2B: How to Build a Profitable E-Commerce Strategy, Cambridge2002, p. 7 et seq.51 Cp. Wise, R./Morrison, D. (2009): Beyond the Exchange: The Future of B2B, in: Harvard Business Re-view, March (2009) p. 10 et seq. 33
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsactivities including purchase request, authorization, ordering, delivery, and payment be-tween a purchaser and a supplier.52 e-Procurement is directed at improving performanceof the six areas of sourcing; price, time, quality, quantity, source and place of delivery.53All the raw materials, components, basic supplies and equipment that companies buy canbe grouped into two broad categories; production and non-production related goods. Oftenidentical materials and supplies are purchased repeatedly, straight re-buy or with someslight changes, modified re-buy. e-Procurement systems are more likely to be employedin straight re-buys. In general, there are two main types of e-procurement, which are sys-tematic sourcing and spot sourcing. Systematic sourcing — negotiated contracts withregular suppliers, typically in long-term relationships. Spot sourcing — fulfillment of animmediate need, typically of a commoditized item for which it is less important to knowthe credibility of the supplier.54Development of B2B e-Business can be divided into three stages: electronic data inter-change (EDI), internet catalogs and electronic exchanges (marketplaces).55 EDI has beenused by firms since the 1980s. It enables exchange of standardized business informationsuch as orders, contracts or product requests via a private value-added network (VAN).EDI accelerates business processes and reduces manual errors. The infrastructure of EDIis very expensive, only big firms deploy EDI. One other disadvantage of EDI is the factthat it is not compatible with different IT systems. Albeit with the introduction of extensi-ble markup language (XML), EDI is compatible with different IT systems.High availability and usage of the internet across all industries led to a new form of B2Belectronic trading: internet and intranet catalogs. Due to the open and single documentstandard that the internet and intranet uses, many businesses started trading via internet orextranet within the upstream and downstream supply chains. The highest level in the evo-lution of electronic trading in a supply chain network is the emergence of exchange-likemarketplaces for goods and services. An electronic marketplace (e-Market) is an efficientmarket which brings buyers and sellers together to trade raw materials, basic supplies andcomponents in real-time.56 As on a stock exchange the prices fluctuate based on demandand supply. On electronic marketplaces suppliers compete in live auctions for orders.52 Cp. Chesher, Michael/Kaura, Ricky/Linton, Peter. (2003), p. 119.53 Cp. Chaffey, Dave (2002), p. 300.54 Chaffey, Dave (2002), p. 313.55 Cp. Chesher, Michael/Kaura, Ricky/Linton, Peter (2003), p. 133.56 Cp. Ariba Freemarkets Inc. (2007): e-Marketplace, http://www.ariba.com/supplier/, 07.05.2008, online. 34
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsThrough the use of reverse auctions buyers benefit from lower prices and a wide selectionof potential suppliers. e-Markets in B2B enable simultaneous interaction between all mar-ket participants. It has erased sourcing frictions in supply chain networks and graduallyrepressed systematic sourcing to the advantage of spot sourcing. There are three maindifferent types of electronic marketplaces: public, private and consortium-backed e-marketplaces.57 A public e-marketplace is opened to all interested buyers and sellers, e.g.FreeMarkets. Private e-marketplaces are closed marketplaces opened to only selectedtrading partners. Consortium-backed e-marketplaces are owned, created and organized byone or more large organizations, e.g. Convisint, e2Open, Transora and Exostar.The benefits of B2B e-Business are indubitably quite large. It improves efficiency alongsupply chain pipelines, decreases stock-outs, and lowers distribution costs by indirectlyincreasing profitability, improving customer satisfaction and market share.2.2.2.3. Business-to-Government (B2G)B2G e-Business is sometimes called business meets government. Businesses are the valuegenerators and government value receivers. Consummate B2G transactions are gearedaround government and public e-procurement. The huge economic success of B2B e-procurement prompted government in industrialized nations to imitate and transfer theconcept to public administration. Public e-Procurement refers to contracts awarded forpecuniary interest by a public purchaser (contracting authority) or a utility (entities operat-ing in the water, energy and postal services) to a supplier, contractor or service providervia an extranet, intranet or internet.58 It is the new process that government uses in pur-chasing goods, supplies and services such as office machinery, computer equipment, facil-ities management, construction work, street lighting materials, medical products, utilities,etc. Public procurement is strictly governed by laws and ordinances. The contracting au-thority, which is the awarding authority, can be a national, state, regional or local gov-ernment body. It can also be universities, colleges, schools, hospitals, churches, correc-tional facilities, fire and police departments, etc. In public e-procurement, contracts areawarded through a tender invitation process on an electronic marketplace. A tender invita-tion process is a request for proposal (RFP) which government bodies create to elicit bids57 Cp. Chesher, Michael/Kaura, Ricky/Linton, Peter (2003), p. 189.58 Cp. EU Procurement Directive (2008): European Union: Public procurement definitions,http://ec.europa.eu/internal_market/publicprocurement/guidelines_en.htm, 05.05.2008, online. 35
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsfrom interested businesses.59 The tender document or RFP contains a full description ofthe goods and services that the government plans to buy. It also entails the minimum qual-ifications and pre-conditions that interested businesses must fulfill to participate in thebidding process. At the end of the bidding process, the contracting authority issues thecontract to the bidder whom it deems most suitable to supply the goods. e-Procurement inpublic administration efficiently facilitates trade between government and business. Itespouses huge cost saving potential because it gives public administration a transparentand faster market overview; the prices and conditions of numerous potential suppliers canbe compared within a few minutes. In many countries, changes in the B2G e-Businessmarket reflect in huge impact on overall GDP growth since government generates a bigshare of the gross national product. For example in the EU, the annual value amounts toaround $775 billion, estimated at approximately 11.5% of EU gross national product. Itsimportance varies significantly between member countries ranging between 11% and20%.60 The U.S. federal government each year spends about $500 billion to buy goodsand services, including $240 billion for Medicare, $150 billion for defense and $100 bil-lion for non-defense items.61 In Germany, public administration spends on average annu-ally $325 billion for the procurement of goods and services and accounts for circa 13% ofthe GDP.622.2.3. Government as Value Generator: G2C, G2B, G2GIn the 1980s high-level government discussions began in the United States on fundamen-tal modernization of the lethargic public administration sector set off by enormous budgetpressure that federal, state, county and local government bodies faced.63 The managementparadigm which emerged out of academia to catalyze the reform is New Public Manage-ment (NPM). The notion behind NPM is to foster a performance-oriented culture in thepublic sector. The set of common themes includes providing high-quality services thatcitizens value; demanding, measuring, and rewarding improved organizational and indi-vidual performance; advocating managerial autonomy, particularly by reducing central59 Cp. Lock, Dennis (1998): The Gower Handbook of Management, Surrey 1998, p. 141.60 Cp. EU Public Procurement (2004): Functioning of Public Procurement in the EU,http://ec.europa.eu/internal_market/publicprocurement/docs/public-proc-market-final-report_en.pdf,12.04.2008, online.61 EU Public Procurement (2004), online.62 Cp. EU Public Procurement (2004), online.63 Cp. Borins, Stanford (2002): New Public Management, North American Style, in: McLaughlin, Kate/Osborne, Stephen/Ferlie, Erwan (Ed.): The New Public Management: Current Trends and Future Prospects,London 2002, pp. 181-189. 36
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsagency controls; recognizing the importance of providing the technological resources pub-lic employees need to meet their performance targets; maintaining receptiveness to com-petition and open-mindedness about which public tasks should be performed by publicservants as opposed to outsourcing to the private sector.64 Bill Clinton used the NPMagenda in 1992 to gain more votes and made a personal commitment to tackle it in theWhite House. As a consequence, NPM ranked very high on Bill Clintons agenda. In 1993Clinton personally assigned Vice President Al Gore the responsibility of devising a prac-tical blueprint for public administration reform in all federal government entities. Goreassembled a team National Performance Review featuring outstanding NPM experts suchas David Osborne. In 1993, it released its report titled Creating a Government that WorksBetter and Costs Less.65 The report realized at that time the potential of informationtechnology and the internet as a tool to unleash the changes needed. It recommended thefull deployment of information technology and internet services in all federal governmentoffices.All the different disciplines in academia have a specific focus concerning e-Governmentresearch. While public administration theory examines the inferences between e-Government and modernization of the public sector; business administration theory eval-uates e-Government business models and the financing of e-Government start-ups; com-puter science considers the technical implementation of e-Government solutions and thehigh level of data security required in public administration.66 e-Government has spreadoutward through all industrialized nations. In essence, it has led to the creation of nationale-Government agendas; in Singapore, an island-wide broadband-initiative, publicizedthrough the use of online consensus returns; the UK online portal designed around thestages in a citizens life; Swedens 24/7 plan for automated and permanently available e-Government services; the e-Europe agenda launched at the Lisbon EU summit in 2000;FirstGov and Project QuickSilver in the United States.6764 Cp. Curthoys, Noah/Eckersley, Peter/Jackson (2003): e-Government, in: Jackson, Harris, Eckersley,(Ed.): e-Business Fundamentals, London 2003, p. 229.65 Cp. Gore, Al (1993): Creating a Government that Works Better and Costs Less: Report of the NationalPerformance Review, New York 1993, p. 1 et seq.66 Cp. Goals of eGovernment (2003): eGovernment, http://www.teialehrbuch.de/Kostenlose-Kurse/eGovernment/20594-Ziele-von-eGovernment.html, 01.01.2009, online.67 Cp. The World Bank e-Government (2005): Implementations of e-Government,http://jolis.worldbankimflib.org, 01.01.2008, online. 37
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsThe e-Business categories G2C, G2B and G2G form together digital government or elec-tronic government (e-Government). e-Government is the use of information and commu-nication technology in public administration to improve the efficiency of internal process-es in delivering public services.68 It refers to the use of the internet to transform publicadministration relations with citizens, businesses, and other arms of government. Tradi-tionally, the interaction between a citizen or business and a government agency alwaystook place in a government office location. e-Government makes it possible for citizens,businesses and other government agencies to transact over the internet.Government-to-Consumer transactions are very popular and frequently used by citizensonline. An example of G2C portal is the official city and county Website of the city ofSan Francisco, where citizens can apply for official documents and a wide range of publicservices.69 Government-to-Business is pertinent to B2G, e.g. the electronic marketplaceson which government publish new RFPs for businesses to bid on contracts. The City ofDenver, Colorado offers businesses a single online platform where they can download allbusiness applications and forms they need.702.3. e-Business Model2.3.1. Definition and Components of an e-Business ModelDefinitions of what constitutes an e-Business model vary in business administration litera-ture. The definitions by Magretta; Timmers; Rappa, Amit and Zott; Ostenwalder, Pigneur,and Tucci are the most common. Magretta contends that an e-Business model explainswho an organizations customers are and how it plans to make money by providing themwith value — a good business model is essential to every organization, whether it is aninternet or non-internet based company.71 Timmers portends an e-Business model as or-ganization or architecture of product, service and information flows, and the sources ofrevenues and benefits for suppliers and customers.72 Weill and Vitale propose a similardefinition; an e-Business model is a description of the roles and relationships among a68 Cp. The World Bank Definition of e-Government (2005): Definition of e-Government,http://go.worldbank.org/M1JHE0Z280,online.69 Cp. City and County of San Francisco, Online Services (2008): SFGov, http://www6.sfgov.org/index.aspx?page=6, 01.01.2008, online.70 Cp. City and County of Denver, Online Business Services (2008): Business, http://www.denvergov.org/TabId/37910/TopicId/907/default.aspx, 01.06.2008, online.71 Cp. Magretta, Joan. (2002): Why Business Models Matter, Boston 2002, p. 2.72 Cp. Timmers, Paul (1998): Business Models for Electronic Markets, in: Electronic Markets, Vol. 8,(1998), No. 2, pp. 3-8, p. 5. 38
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsfirms consumers, customers and suppliers that identifies the major flows of product, in-formation and money.73 Afuah and Tucci define an e-Business model as how a firm plansto make money in the long-term using the internet.74 Rappa claims that an e-Businessmodel is a method of doing business by which a company can sustain itself, that is beprofitable.75 Amit and Zott assert that an e-Business model depicts the design of transac-tion content, structure and governance so as to create value through the exploitation ofbusiness opportunities.76 They propose that a firms e-Business model is an important lo-cus of innovation and a crucial source of value creation for suppliers, partners and cus-tomers. This dissertation paper adopts the definition from Osterwalder, Pigneur and Tucciby reason of its general acceptance and comprehensiveness; an e-Business model is aconceptual tool that contains a set of elements and their relationships and expresses thebusiness logic of a specific firm.77 It gives a succinct and cogent description of the value afirm offers its customers, architectural structure of a firm, employees and network of sup-pliers. Hence, an e-Business model of a firm espouses the intrinsic value proposition thata firm delivers to its customers — it determines its long-term competitive advantage. Customer Connected Value Scope Activities Implementation Business Model Price Architecture Capabilities Sustainability Revenue SourcesFigure VI: e-Business Model Architecture7873 Cp. Weill, Peter/Vitale, Michael Ross (2001): Place to Space: Migrating to eBusiness Models, Cambridge2001, p. 34.74 Cp. Afuah, Allan/Tucci, Christopher (2001): Internet Business Models and Strategies, Boston 2001, p. 45.75 Cp. Rappa, Michael (2000): Business Models on the Web, http://digitalenterprise.org/models/models.html, 01.07.2008, online.76 Cp. Amit, Raphael/Zott, Christoph (2000): Value Creation in E-Commerce Business Models, Presenta-tion: Wharton Conference of Winners and Losers in the E-Commerce Shakeout, (2002), p. I.77 Cp. Osterwalder, A./Pigneur, Y./Tucci, C. L. (2005): Clarifying Business Models: Origins, Present, and Future of the Concept, in: Communications of the Association for Information Systems, Vol. 15,(2005), May, p. 13 et seq.78 Cp. Afuah, Allan/Tucci. Christopher (2001), p. 49. 39
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsAs displayed in Fig. VII, an e-Business model architecture encompasses eight elementsknitted seamlessly to create a unique competitive advantage; customer value, scope, price,revenue sources, connected activities, implementation, capabilities and sustainability.Customer value stems from the perception of customers as to what an organization manu-factures or provides that is of high value to them and cannot be offered by competitors,i.e. the reason why customers buy from an organization and not its competitors. Scope isabout precisely defining a specific target market segment, target customers, target prod-ucts and geographic region where the firm wants to operate. A firm must clearly definethe market segment in which it intends to do business, e.g. niche or mass market. It is es-sential for a firm to understand the demographics and characteristics of a target set of cus-tomers it intends to pursue — B2B or B2C customers; kids, teenagers or adults; schoolpupils or college students.The price of a product or service an organization offers is critical in determining price-value relation. Price is an element in the profit equation and thus also determines the fi-nancial viability of a firm. Value-based pricing should be employed to determine the effi-cient price of a product offered to customers — efficient price is the price that is veryclose to the maximum a customer is prepared to pay.79 So the basic question a firm mustask is how much a customer values a product. Revenue source refers to the analysis of therevenue model of a firm to determine how it makes money — commission, sale of goodsor provision of services. Connected activities have an operational focus and describe theset of related processes and tasks a firm undertakes from sourcing to manufacturing aproduct or delivering a service. Tab. I illustrates the criteria a firm must follow in decid-ing which activities to perform and when.Which Activities to Perform and WhenIn choosing which activities to perform, management should consider whether the activi-ties: • Are consistent with customer value and the scope of customers served? • Reinforce each other? • Take advantage of market success drivers? • Are consistent with any distinctive capabilities that the firm has or wants to build? • Make the market more attractive for the firm?79 Cp. More information on value-based pricing can be found in Nagle, Thomas/Hogan, John. (2005): TheStrategy and Tactics of Pricing. 4th Ed., Englewood Cliffs NJ 2005. 40
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsIn determining when to perform the activities, management should ask: • What are the characteristics of the market at this stage of the life cycle? • What are existing competitors doing and what are potential ones likely to do? • Are the activities consistent timewise?Table I: Continued Activities80Implementation as an element of a business model means realization of a production pro-cess. It is preceded by designing the organizational structure and systems, creating thebusiness environment, and hiring the right employees. The coordination of activities andlinkages in an e-Business model can be organized in two major ways; functional or pro-ject organizational structure.81 In a functional organizational structure, employees aregrouped according to functions in the firm, i.e. marketing, IT, logistics, operations, humanresources and R&D. In contrast, in a project organizational structure, employees with dif-ferent skill sets are assigned to project teams and therefore committed to its success. Itcreates an innovative, dynamic and interdisciplinary unit of employees from marketing,IT, logistics, operations, human resources and R&D. In relation to the Resource-Based-View theory, capability is the ability of a firm to turn its core competencies and resourcesinto unique customer value and profits.82 Resources include physical assets (buildings,plants and equipment), financial assets (bank account balance, securities and loans), in-tangible assets (brand name, reputation), intellectual property (copyrights, patents),knowledge assets and human resource assets. The Resource-Based-View theory suggeststhat the efficiency and uniqueness of the core strategic resources of a firm induce its com-petitive advantage, the firms performance in a market. The strategic resource profile of afirm encompasses its core competencies, routines and capabilities. They are valuable,scarce, not perfectly mobile, not substitutable, and serve as the source of competitive ad-vantage and sustainable firm performance. Capabilities describe the codified i.e. written orvisualized and non-codified knowledge (tacit knowledge) in a firm that the employeeshave. Routines are organizationally embedded capabilities. Core competencies are not80 Cp. Afuah, Allan/Tucci, Christopher (2001), p. 58.81 Cp. Robbins, Stephen (1987): Organizational Theory: Structure, Design and Applications, EnglewoodCliffs NJ 1987, pp. 1-37.82 Cp. Hamel, Garry/Prahalad, C. K. (1992): "Letter", in: Harvard Business Review, (1992), May-June, pp.164-165. 41
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upstradable because there are no or only imperfect external markets.83 Material and strategicresources are different in a sense that the former depletes when utilized but the later arefurther upgraded. RBV argues that firms have an incentive to enter into cooperations tocopy and steadily internalize best practices, core competencies, routines and capabilitiesof the other partner.84 Sustainability relates to how a firm can keep and defend its compet-itive advantage in the long-run. It measures how rare, valuable and inimitable a competi-tive advantage is.2.4. e-Business and Entrepreneurship Theories2.4.1. Creative Destruction TheoryThe creative destruction theory was written by Joseph Alois Schumpeter from 1931-1934.He was born in Austria to Jewish parents in 1883 and was a student of Friedrich von Wie-ser and Eugen von Böhm-Bawerk.85 In 1911 Schumpeter took a professorship in econom-ics at the University of Graz. He later became the Austrian Minister of Finance in 1919and taught economics at the University of Bonn, Germany from 1925 to 1932. Due tolooming danger of the potential rise of Adolf Hitler in Germany, Schumpeter prescientlyaccepted a professor of economics position at Harvard University in 1932.Schumpeter published in 1911 at the age of twenty-eight the scientific paper Theory ofEconomic Development in which his theory of entrepreneurship was outlined.86 The theo-ry of economic development which is popular among policy wonks is a detailed inquiryinto profits, capital, credit, interest and business cycles in an economy.87 He postulatesthat the evolution of economic systems or factors of economic development are inherentlydynamic as opposed to being static. By Schumpeter, capitalism is a natural form or meth-od of economic change and can never be stationary.88 The systematic impetus that perpet-ually keeps the capitalist engine in motion is the existence of creative destructors in theeconomy. At the lynchpin of the creative destruction theory is the role of the entrepreneur83 Cp. Amit, Raphael/Schoemaker, Paul (1993): Strategic Assets and Organizational Rent, in: StrategicManagement Journal, Vol. 14, (1993), No. 1, pp. 33-46.84 Cp. Barney, Jay (1991): Firm Resources and Sustained Competitive Advantage, in: Journal ofManagement, Vol. 17, (1991), No. 1, pp. 99-120.85 Cp. Campbell, Rita./Campbell, Glenn (2000): Personal Reminiscences, in: Leube, Kurt (Ed.):The Essence of Joseph Alois Schumpeter, Vienna 2000, p. 9.86 Cp. Schumpeter, Joseph Alois (1911): The Theory of Economic Development, Harvard University Press,Cambridge 1911, p. 1.87 Cp. Schumpeter, Joseph Alois (1911), p. 7 et seq.88 Cp. Schumpeter, Joseph Alois (1928): The Instability of Capitalism, in: Economic Journal, Vol. 38,(1928), pp. 361-386. 42
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsin the economy — Schumpeter argues that innovation and technological changes in theeconomy come from the entrepreneurs or wild spirits; people with Unternehmergeist,meaning entrepreneurial spirit.89 In the creative destruction theory, the entrepreneur isviewed as a constant innovator and his function lies in the discovery of new economicopportunities to establish new innovative firms. Creative destruction occurs when an en-trepreneur establishes a new firm that uses an innovation to enter an existing market, de-stroying an established enterprise and yielding a new one. The entrepreneur is a disequili-brating force that brings the economy out of equilibrium. The creative destruction theoryis built upon dynamic, deliberate entrepreneurship efforts to disrupt market structures.The newcomer in the market grows quickly by shifting market shares from large firms toachieve critical mass, destroys existing market structures and re-distributes wealth. Thenew firm grows through two intertwined processes: (1) increasing overall demand forproducts or services (2) taking market share from existing suppliers.According to Schumpeter, there are five potential types of entrepreneurial opportunities:(1) introduction of new goods (2) introduction of a new method of production (3) openingof a new market (4) utilization of a new source of supply for raw materials (5) new distri-bution channels.The sources of these five Schumpeterian entrepreneurship opportunities could be political,technological or socio-demographic changes.90 Political and regulatory changes such asnew laws, change of government, constitutional reforms, turmoil, deregulation and privat-ization reallocate resources to new uses that are more economically efficient, e.g. the U.S.governments deregulation of the electricity, telecommunications, airline, trucking, rail-road and banking industries led to emergence of a plethora of new firms. Technologicalinnovations in new methods of communication, production or organization induce disrup-tive changes in an economy, e.g. the advent of internet technology. Socio-demographicchanges relate to changes in population dynamics such as age and urbanization.Schumpeter predicted that every 50 years or so technological revolutions would causegales of creative destruction in which old industries would be swept away and replaced by89 Cp. Schumpeter, Joseph Alois (1911), pp. 10-45.90 Cp. Schumpeter, Joseph Alois (1942): Capitalism, Socialism and Democracy, London 1942, pp. 40-66and Shane, Scott (2003): A General Theory of Entrepreneurship, Cheltenham UK and North Hampton MA2003, p. 20. 43
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsnew ones.91 In reference to the creative destruction theory from Schumpeter, e-Businesscan be construed as a disruptive technological mode of doing business. e-Business modelsare market disruptors because they destroy the way traditional business is done — the oldgiving way to the superior new model.92 e-Business reduces the transaction costs ofsearching for sellers and buyers, collecting information on products, negotiating, writing,monitoring, and enforcing contracts. e-Business has the potential of generating tremen-dous new wealth, mostly through entrepreneurial start-ups and corporate ventures. It isalso transforming the rules of competition for established businesses in unprecedentedways.93 e-Business firms like Google, Yahoo, eBay, Skype, MySpace, YouTube, Face-book, Bebo and StudiVZ highlight the importance and maturity of e-Business as a crea-tive disruptor.2.4.2. Entrepreneurial Discovery and Competitive Market ProcessIsrael Meir Kirzner, a leading economist in the Austrian school developed the entrepre-neurial discovery and competitive market process theory.94 He was born in London in1930 and went to college in Cape Town and New York. Kirzner taught as a professoreconomics at New York University and is a leading authority on Ludwig von Misesthinking and methodology in economics.The Kirznerian entrepreneurial theory is a concept of entrepreneurship that postulates thevitality of entrepreneurial discovery (entrepreneurial alertness) for the economy and com-petition among entrepreneurs as an automatic market equilibrating force.95 Entrepreneur-ial alertness refers to an attitude of receptiveness to available entrepreneurship opportuni-ties.96 The Kirznerian entrepreneur portrays a strong tendency for profit opportunities tobe discovered. Such an individual is routine-resisting and corrects market imperfections,flawed supply and demand deviations. Kirzner assails neoclassical microeconomic theo-ries as highly abstract models of thinking, where almost all uncertain variables are frozen:(1) The constrained maximization output pattern is naively imposed upon all individuals,91 Cp. Schumpeter, Joseph Alois (1911), p. 64 et seq.92 Cp. Velde te Robbin (2001): Schumpeter’s Theory of Economic Development Revised, Presentation:Eindhoven Conference - The Future of Innovation Studies, (2001), September, p. 22.93 Sinkevits, Igor (2004): E-Business Value and Investment Analysis, http://dspace.utlib.ee/dspace/bitstream/10062/869/5/Sinkevits.PDF, 10.10.2009, p. 4 online.94 Cp. Kirzner, Israel Meir (2008): Israel M. Kirzner NYU, http://www.econ.nyu.edu/user/kirzner/,01.08.2008, online.95 Cp. Kirzner, Israel Meir (1973): Competition and Entrepreneurship, Chicago and London 1973, p. 31.96 Kirzner, Israel Meir (1973), p. 67. 44
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsbut in reality not all individuals pursue a goal of maximizing production output (2) Firmsare in a perfect competition — under perfect competition all firms in an industry make noprofit, produce the same goods, sell it for the same price, have access to the same rawmaterials and production technologies. In reality, firms in an economy pursue maximizingprofit (3) Profit-seeking entrepreneurial activity is not possible.97 For neoclassical microe-conomic theory each decision, whether by a consumer or firm is made within a definitive-ly known framework of a given objective function, a given set of resource constraints, anda given set of technologically or economically feasible ways of transforming resourcesinto desired objectives. According to Kirzner, neo-classical economic theories explaincause-effect relations in simple monotic models that, gauged against reality could notstand the water test; perfect competition does not exist in an economy and hence is rela-tively unimportant in economic theories. Scott Shane defines entrepreneurial opportunityas a situation in which a person creates a new means-end framework (firm) for recombin-ing resources that the entrepreneur believes will yield a profit.98 In contrast to the neo-classical entrepreneur, a Kirzerian entrepreneur operates with the sole goal of makingprofit under uncertain and risky market conditions by causing changes in price and output.Boldness, imagination and drive to make profit out of a potential opportunity are im-portant characteristics of the latter.The foundation of the Kirzerian entrepreneurship theory encompasses three cornerstones:(1) entrepreneurial role (2) role of entrepreneurial discovery (3) rivalrous competition.99The role of the entrepreneur in an economy is to constantly drive the ever-changing price-output data to fill market shortages, whittle away surpluses and eliminate quantity gapsthereby bringing the market toward equilibrium. Each market is characterized by oppor-tunities for pure entrepreneurial profit. These opportunities are created by earlier entre-preneurial errors which have resulted in shortages, surpluses and misallocated resources.The daring alert entrepreneur discovers these earlier errors, buys where prices are nudgedhigher; high prices are then nudged lower; price discrepancies are finally narrowed in theequilibrative direction (arbitrage = 0).100 Discovery is what empowers an individual toidentify existing entrepreneurial opportunities. By Kirzner, discovery is distinguishedfrom a successful search in that the former evokes a surprise which accompanies the reali-97 Cp. Kirzner, Israel Meir. (1979): Perception, Opportunity, and Profit, Chicago 1979, pp. 38-39 and 171-172.98 Cp Shane, Scott (2003), p. 18.99 Cp. Kirzner, Israel Meir (1979), p. 172.100 Kirzner, Israel Meir (1973), pp. 70-71 and Kirzner, Israel Meir (1967), pp. 787-780. 45
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upszation that the individual overlooked something; it was actually right under my very noseand I couldnt see it (hunch). Without knowing what to look for, without deploying anydeliberate search technique, the entrepreneur is at all times scanning the horizon ready tomake discoveries.101 A Kirznerian entrepreneurial attitude is one which is bold and imag-inative to implement an entrepreneurial idea after a discovery. Rivalrous competitionmeans the competition among entrepreneurs who try to outpace each other in offeringbetter products, services and technologies, hence engendering an innovation spirit in themarket.Schumpeter and Kirzner disagree over the causes, sources and characteristics of entrepre-neurial opportunities. Tab. II makes a comparison of Schumpterian and Kirznerian entre-preneurial opportunities: Schumpterian versus Kirznerian Start-up Opportunities Schumpterian Start-up Opportunities Kirznerian Start-up Opportunities Disequilibrating Equilibrating Requires new information Does not require new information Very innovative Less innovative Rare Common Involves creation Limited to discoveryTable II: Schumpterian versus Kirznerian Entrepreneurship102101 Cp. Kirzner, Israel Meir (1973), p. 35.102 Cp. Shane, Scott (2003), p. 21. 46
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-ups3. Venture Capital Financing of Start-ups in Business Administration Theory3.1. Equity Financing: Venture Capital FinancingA start-up requires capital during the formative stages in the lifecycle of the firm. One ofthe main problems start-ups face is raising capital to finance an entrepreneurial venture.The capital constraints that start-ups face arise from the unique characteristics of theirfinancing needs. Start-ups need venture capital to finance cash flow needs long beforedemand and revenue materialize.103 Typical characteristics of the financing needs of start-ups can be described as following:104 ƒ Start-ups have no long business history and thus possess no fundamental financial data or reliable financial valuation ƒ Start-ups are characterized by a high level of uncertainty and risk: man- agement team risk, product development risk, market risk, exit risk ƒ Start-ups are more likely to fail in the market than established businesses ƒ They do business in dynamic and perpetually evolving markets with huge growth rates ƒ Their financial, material and personnel resources are limited ƒ They earn a negative cash flow, have cash flow gaps and make no profits ƒ Business decisions are profoundly made by founders ƒ The start-up is provided equity funding by investors who in return receive equity share, voting and control rights ƒ Start-ups have a strong technology orientationThese underlying challenges in the financing of start-ups require creativity and tenacity toconquer the hurdles in the early stage financing of a start-up. Capital formation is expen-sive and a time-consuming process; it means start-ups must have highly skilled and con-nected professional advisors who have active working relationships with capital sources,can make strategic introductions and properly advise on suitable structure for a transac-tion.105 It implies that start-ups must be patient, prepared and persistent in their quest forcapital. With no or limited operating history, missing hard-knock financial data and no103 Cp. Sherman, Andrew (2005): Raising Capital, New York 2005, p. 65.104 Cp. Hack, Andreas (2005): Startuperfolg und die Wahl von Risikokapitalgebern, Vallendar 2005, p. 49and Nathusius, Klaus (2001): Grundlage der Gründungsfinanzierung, Wiesbaden 2001, pp. 1-50.105 Cp. Sherman, Andrew. (2005), p. xi. 47
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upscollaterals, start-ups cannot raise funds by taking loans or issuing debt securities. Start-upsrely mainly on equity capital in financing an entrepreneurial venture.Any form of equity invested in a start-up represents venture capital.106 Venture capital is asynonym for equity — another term for venture capital financing is equity financing. Eq-uity as a source of financing is different from debt in that investors become owners byallocation of an equity share and have full recourse up to the total amount of money in-vested in a start-up; the money invested can be kept permanently by the firm — no timelimitation, the start-up has no monthly repayment obligation to investors, no collateral isrequired, equity is entitled to dividend payments if profit is realized, and finally equity isassociated with voting and control rights.As a result, investors make the decision whether to fund a project based on the perceivedstrength of an idea, capabilities, skills and quality of the management team. Because start-ups have no or limited access to debt financing, venture capital financing is the most suit-able source of financing.There is no common definition of the term venture capital in business administrationliterature, hence, numerous researchers in the field have come up with their own defini-tions. Venture capital is a segment of the private equity industry, which focuses on invest-ing in nascent young firms with high growth rates.107 Private equity comprises all equityinvested in companies that are not listed on stock exchanges.108 Venture capital is a pri-vate or institutional investment in relatively early-stage companies.109 Mason and Harrisonpostulate that venture capital is a specific form of industrial finance — part of a morebroadly based private equity market; that is, investments made by institutions, firms andwealthy individuals in ventures that are not quoted on stock markets, and which have thepotential to grow and become significant players in international markets.110 The U.S.National Venture Capital Association (NVCA) defines venture capital as money provid-ed by professionals who invest alongside management in young, rapidly growing compa-106 Cp. Own definition.107 Cp. Haemmig, Martin (2003): The Globalization of Venture Capital, Berne 2003, p. 25.108 Cp. Arundale, Keith (2007): Raising, Venture Capital Finance in Europe, Philadelphia 2007, p. 4.109 Cp. Arundale, Keith (2007), p. 4.110 Cp. Mason, Colin/Harrison, Richard (1999): Venture Capital: Rationale, Aims and Scope, in: VentureCapital, Vol. 1, No. 1, (1999), pp. 1-46, pp. 1-2. 48
    • U.S., UK, Germany, France: Differences in Venture Capital Financing of Start-upsnies that have the potential to develop into significant economic contributors.111 Wrightand Robbie define venture capital as investment by professional investors of long-term,unquoted, risk equity finance in new firms where the primary reward is capital gain sup-plemented by dividend yield.112 Gompers and Lerner describe venture capital as inde-pendently managed, dedicated pools of capital that focus on equity or equity-linked in-vestments in privately held high-growth companies.113The European Investment Bank in Luxembourg defines venture capital as — a specifictype of finance well-suited to the requirements of a new technology-based firm, whichaddresses the financing gap through equity participation.114 The combination of researchand development, intangible assets, negative earnings, uncertain prospects and absence ofa proven track record all characteristic of a start-up leads to a high perception of risk forconventional financial institutions. Start-up Financing Equity Financing: Venture Capital Financing Debt Financing Institutional Venture Capital Non-Institutional Venture Capital Public Venture Capital Corporate Venture Capital Independent Venture Capital Founders, Family, Friends, Fools Angel InvestorsFigure VII: Categories of Venture Capital115As illustrated in Fig. VIII, venture capital takes two main forms: institutional and non-institutional venture capital, sometimes termed formal and informal venture capital.116There are two types of non-institutional venture capital: founders, families, friends andfools on the one hand and business angels or angel investors on the other hand. Institu-tional venture capital consists of three main sub-segments: independent venture capital,corporate venture capital and public venture capital. The sources of funds, legal status,investment motives and deal structure vary across the different forms of venture capital.3.1.1. Institutional Venture Capital Financing111 NVCA (2007): Venture Capital Definition, http://www.nvca.org, 10.04.2008, online.112 Cp. Wright, Mike/Robbie, Ken (1998): Venture Capital and Private Equity: A Review and Synthesis,in: Journal of Business Finance & Accounting, Vol. 25 (1998), May/June, p. 522.113 Cp. Gompers, Paul/Lerner, Joshua (1999): The Venture Capital Cycle, Cambridge MA 1999, pp. 1-6.114 Cp. European Investment Bank (2008): Definition of Venture Capital, http://www.eib.org/,01.03.2008, online.115 Cp. Own illustration of the types of venture capital.116 Cp. Landström, Hans (2007): Handbook of Research on Venture Capital, Cheltenham 2007, p. 9. 49