Differences in Venture Capital Financing of Start-ups in the U.S., UK, Germany and France

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

Acknowledgement
I hereby first and foremost express great gratitude to my primary academic supervisor
Prof. Dr. Klaus Nathusius for all the academic consultation and structural support from
April 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 the
written 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 their
research 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 doctoral
candidates 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; University
Library, University of Cologne. I am obliged to the following venture capital associations
for 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 France
that 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, Munich
and Berlin that participated in the face-to-face 30 minutes expert interviews, which were
instrumental in designing the underlying research framework model of the doctoral disser-
tation.

I


II


Contents
List of Tables ..................................................................................................................... VII
List of Figures ...................................................................................................................VIII
List of Abbreviations .......................................................................................................... IX
1. Introduction .....................................................................................................10
1.1. Topic .......................................................................................................................... 10
1.2. Research Objectives ...................................................................................................14
1.3. Research Design ........................................................................................................17
1.4. Structure ..................................................................................................................... 17
2. 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 .............................44
3. Venture Capital Financing of Start-ups in Business Administration
Theory ..................................................................................................................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


3.2.1. Definitions and Characteristics of Independent Venture Capital Financing....... 51
3.2.2. Stages in the Financing Life Cycle of a Start-up ................................................54
3.2.3. Structure of Independent Venture Capital Firms ................................................63
3.2.4. Role of Independent Venture Capital Firms in Start-ups.................................... 64
3.2.5. Theoretical Foundation for Explanation of the Behavior of Venture
Capital 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 ......................................................................... 69
3.2.6. Typical Venture Capital Investment Process: VC Investment Cycle .................71
3.2.6.1. Contact Phase ................................................................................................... 72
3.2.6.2. Initial Screening Phase ..................................................................................... 75
3.2.6.3. 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 ...................................................97
3.2.6.5. Management Phase — Value Adding Services .............................................110
3.2.6.6. Exit Phase....................................................................................................... 112
3.2.6.7. Venture Capital Investment Syndication ....................................................... 115
3.2.6.8. Staged Financing of Start-ups ........................................................................118

IV


4. Macroeconomic Environment of the Venture Capital Industry in the
U.S., UK, Germany and France .......................................................................120
5. Previous Empirical Research: Differences in Venture Capital Financing
of 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 .................................................................. 124
6. 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 .............................................................................................................. 153
7. Empirical Research Design ..........................................................................156
7.1. Research Method .....................................................................................................156
7.2. Data Sample Collection Method .............................................................................. 160
8. 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


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 .....................................217
9. Comparison of Key Findings of the Dissertation with Results
of 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 ......................................252
10. Implications for Future Research on Differences in Venture Capital
Financing of U.S., UK, German and French Start-ups .................................260
Appendix: Online Questionnaires ...................................................................... X
Appendix: Expert Interview Questionaire ...................................................... XI
References .......................................................................................................................... XII

VI


List of Tables

Table I: Continued Activities ................................................................................................ 41
Table II: Schumpterian versus Kirznerian Entrepreneurship................................................ 46
Table III: Forms of Institutional Venture Capital ................................................................. 54
Table IV: Summary of the Stages in the Life Cycle of a Start-up ........................................ 62
Table V: Numerical Example of Dilution Effects ............................................................... 85
Table VI: Funding Clauses ................................................................................................... 95
Table VII: Corporate Governance Clauses ........................................................................... 96
Table VIII: Liquidation Clauses ........................................................................................... 96
Table IX: Numerical Example Equity Math .................................................................... 98
Table X: Distribution of Liquidation Proceeds ................................................................... 109
Table XI: Macroeconomic Framework ............................................................................... 121
Table XII: Venture Capital Financing — U.S. and Europe ................................................ 124
Table XIII: Venture Capital Financing — Europe ............................................................. 132
Table XIV: Integrated Research Framework Model .......................................................... 135
Table XV: Preliminary Expert Interviews .......................................................................... 157
Table XVI: VC Participants in Expert Interview ................................................................ 157
Table XVII: U.S. Federal Reserve Average Exchange Rates 2002-2008 .......................... 161
Table XVIII: Information on Sample Size of the Personalized Online Survey .................. 162
Table XIX: Geographic Dispersion of Respondent VCs .................................................... 163
Table XX: Hypotheses HA: Raw Data ($ million) ............................................................. 166
Table XXI: Hypotheses HB: Raw Data ($ million) ............................................................ 171
Table XXII: Hypotheses HC: Raw Data ($ million) .......................................................... 175
Table XXIII: Hypotheses HD: Raw Data (%) .................................................................... 181
Table XXIV: Hypotheses HE: Raw Data (%) .................................................................... 185
Table XXV: Hypotheses HF: Raw Data (%) ...................................................................... 189
Table XXVI: Hypotheses HG: Raw Data (%) .................................................................... 193
Table XXVII: Hypotheses HH: Raw Data.......................................................................... 197
Table XXVIII: Hypotheses HI: Raw Data .......................................................................... 201
Table XXIX: Hypotheses HJ: Raw Data (%) ..................................................................... 205
Table XXX: Hypotheses HK: Raw Data ............................................................................ 209
Table XXXI: Hypotheses HL: Raw Data ........................................................................... 213
Table XXXII: Hypotheses HM: Raw Data ......................................................................... 217
Table XXXIII: Valuation 2 ................................................................................................. 225
Table XXXIV: Average Size of Investment 1 .................................................................... 227
Table XXXV: Average Size of Investment 3 ..................................................................... 227
Table XXXVI: VC Investment Risk Strategy 2 ................................................................. 230
Table XXXVII: VC Investment Risk Strategy 3 ................................................................ 231
Table XXXVIII: VC Investment Risk Strategy 4 ............................................................... 231
Table XXXIX: Market Analysis Due Diligence 1 .............................................................. 234
Table XL: Investment Committee 1 ................................................................................... 234
Table XLI: Investment Committee 2 .................................................................................. 235
Table XLII: Investment Committee 3 ................................................................................. 236
Table XLIII: Deal Structuring 1 ......................................................................................... 237
Table XLIV: Deal Structuring 2 ......................................................................................... 238
Table XLV: Investment Syndication 1 ............................................................................... 239
Table XLVI: Investment Syndication 2 .............................................................................. 240
Table XLVII: Investment Syndication 4............................................................................. 240
Table XLVIII: Investment Syndication 3 ........................................................................... 241
VII


Table XLIX: Milestone Financing 1 ................................................................................... 244
Table L: Investment Committee 4 ...................................................................................... 246
Table LI: Management Phase 1 .......................................................................................... 247
Table LII: Management Phase 2 ......................................................................................... 247
Table LIII: Management Phase 3........................................................................................ 248
Table LIV: Management Phase 4 ....................................................................................... 248
Table LV: Investment Committee 5 ................................................................................... 248
Table LVI: Average Size of Investment 4 .......................................................................... 251
Table LVII: Exit Phase 4 .................................................................................................... 251
Table LVIII: Valuation 1 .................................................................................................... 252
Table LIX: VC Investment Risk Strategy 6 ........................................................................ 252
Table LX: Management Team Due Diligence 3 ................................................................. 252
Table LXI: Management Team Due Diligence 4 ............................................................... 253
Table LXII: Management Team Due Diligence 2 .............................................................. 254
Table LXIII: Management Team Due Diligence 5 ............................................................. 255
Table LXIV: Management Team Due Diligence 6............................................................. 256
Table LXV: Product Due Diligence ................................................................................... 257
Table LXVI: Exit Phase 1 ................................................................................................... 258
Table LXVII: Corporate Development Meetings ............................................................... 258
Table LXVIII: VC Celebrity Status .................................................................................... 259
Table LXIX: Theoretical Research Framework - Expert Interview .................................... IX

List of Figures

Figure I: Link between e-Commerce and e-Business ........................................................... 23
Figure II: Applications in e-Business ................................................................................... 25
Figure III: Market and Transaction Categories in e-Business .............................................. 26
Figure IV: Customer Chain — Stages of a B2C e-Commerce Transaction ......................... 32
Figure V: Disintermediation in B2C e-Commerce ............................................................... 33
Figure VII: e-Business Model Architecture .......................................................................... 39
Figure VIII: Categories of Venture Capital .......................................................................... 49
Figure IX: Venture Capital Firms as Financial Intermediaries ............................................. 51
Figure X: Stages in the Life Cycle of a Start-up ................................................................... 55
Figure XI: Categorization of Venture Capital Firms by Investment Stage .......................... 63
Figure XII: Venture Capital Investment Process .................................................................. 71
Figure XIII: The Four Pillars of Deal Negotiation ............................................................... 93
Figure XIV: Research Design ............................................................................................. 156

VIII


List of Abbreviations

AFIC Association Française des Investisseurs en Capital
AR&D American Research & Development
BVCA British Venture Capital Association
BVK Bundesverband Deutscher Kapitalbeteiligungsgesellschaften
CAGR Compound Annual Growth Rate
CMV Common Method Variance Problem
Cp. Compare or see
CVC Corporate Venture Capital
DtA Deutsche Ausgleichsbank
EBITDA Earnings before Interest Taxation Depreciation and Amortization
Et seq. Et Sequence: and the next page or following pages
ET Entrepreneurial Team
FCF Free Cash Flow
IBM International Business Machines Corporation
IPO Initial Public Offering
IRR Internal Rate of Return
IVA Israeli Venture Capital Association
IVC Independent Venture Capital
KfW Kreditanstalt für Wiederaufbau
NASDAQ National Association of Securities Dealers Automated Quotations
NDA Non-Disclosure Agreement
NPM New Public Management
NVCA National Venture Capital Association
PVC Public Venture Capital
PwC PricewaterhouseCoopers
R&D Research & Development
S&P Standard & Poor's
SBA Small Business Administration
SBIC Small Business Investment Companies
SBIR Small Business Innovation Research
SME Small and Medium Enterprises

IX


1. Introduction
1.1. Topic
Venture 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 financing
for information technology start-ups. The U.S. venture capital industry first emerged in
the 1960s in Boston, Massachusetts investing in young technology firms.1 The European
venture 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 the
conducive environment for the information technology industry to furl and is the major
driving force in its outstanding trajectory growth. Venture capital firms do not only pro-
vide innovative information technology start-ups with financial capital but also human
and 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 all
stages of development of a portfolio firm. Since most venture capitalists have operational
or entrepreneurial experience prior to joining a venture capital firm, they understand the
needs and problems of start-ups very well. Hence, venture capital is an important vehicle
in stimulating innovations, promoting entrepreneurship and nurturing young entrepre-
neurs. Internet giants like Google, Yahoo and eBay would not exist today if they had not
received 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, Right
Media, 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 2007
such as Skype, Xing, Last.fm, GumTree, StudiVZ, Tradera, Loquo and Kijiji were all
financed 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 technology
start-up industry. There are relatively few large global information technology companies
in 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, Cambridge
MA 2008, p. 1 et seq.

10


Fried and Manigart suggests that the rate of success of venture capital backed start-ups in
Europe is far less than that of the U.S.2 The scope and sophistication of the venture capital
industry 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 capital
industry 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 propensity
and 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 the
U.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. Only
a 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 regarding
the differences in venture capital financing of U.S., UK, German and French information
technology start-ups. The venture capital financing studies completed hitherto felt short to
research the differences in venture capital financing of U.S., UK, German and French
information technology start-ups over the whole venture capital investment process and to
study the four countries simultaneously. Jessen published in 2002 at the University of
Frankfurt (Oder) the doctoral dissertation 'Venture Capital in Germany and USA —
Method of Post-investment Management of Innovative Start-ups.'3 First, Jessen's 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 in
2007 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 USA

2
Cp. Jeng, Leslie/Well, Philippe (2000): The Determinants of Venture Capital Funding: Evidence Across
Countries, 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 the
Worldwide 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 innovativen
Frühphasenunternehmen, Doctoral Dissertation at University of Frankfurt (Oder) 2002.

11


and Germany'.4 Unlike Jessen's study, Ortgiese's empirical research work examined the
start-up's perspective, i.e. start-ups in lieu of venture capital firms participated in the
online survey.

This research study deals specifically with the described research gap: 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.

It compares the approach of U.S., UK, German and French independent venture capital
firms in the financing of information technology start-ups over the entire venture capital
investment 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 are
intentionally disregarded in this study. Information technology start-ups are start-ups in
one 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 technology
industry is commonly abbreviated as IT, TIMES or TMT. IT stands for information tech-
nology; TIMES represents telecommunications, information, media, entertainment and
security; 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 computer
hardware and computer system. Programming software usually provides tools to assist a
programmer in writing computer program. Application software allows end users to ac-
complish one or more specific not directly computer development related tasks."5

Communication technology: "The communications technology industry is responsible
for closed-circuit and cable television equipment; studio audio and video equipment; light

4
Cp. Ortgiese, Jens. (2007): Value Added by Venture Capital Firms, Doctoral Dissertation at University of
Kassel 2007, p. 1 et seq.
5
Software Industry (2008): Dictionary.com Website, http://dictionary.reference.com/browse/software,
03.04.2008, online.
12


communications equipment; transmitters, transceivers, and receivers (except household
and automotive); cellular radio telephones; fiber optics equipment; communication anten-
nas; receivers; RF power amplifiers; satellite communications systems (space and ground
segments); fixed and mobile radio systems."6

M-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-
ual's ability to have permanent access to information and services independent of place
and 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 ubiquity
of mobile phones (pervasive mobile business); personalization and identification; and
localization. Localization enables a precise determination of the geographic position of a
connected 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 used
in data centers.9 "Computer networks allow computers to communicate with each other
and share resources and information. They can be classified according to the hardware
and software technology that is used to interconnect individual devices in the network,
such as optical fiber, Ethernet, Wireless LAN, HomePNA, Power line communication or
G.hn."10

Semi-conductor: "This is the generic name for discrete devices and integrated circuits
that can control the flow of electrical signals. Silicon is the basic material from which

6
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.html
09.05.2008, 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): Mobile
Business 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


semi-conductors are fabricated. The semi-conductor industry is the aggregate collection of
companies engaged in the design and fabrication of semi-conductor devices."11

e-Business: The e-Business sector is broadly illustrated as an exemplary case study in the
theory section.

1.2. Research Objectives
Although there are certainly differences in the venture capital financing of start-ups within
one 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-ups
indisputably 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 Lyon
way. 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 country
and views each country as a homogeneous cluster. Therefore, the implicit assumptions of
this 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-ups

That means in the empirical analysis, there are four clusters to be compared with each
other, 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 between
the 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 this
empirical research work is not to conduct factor or cluster analysis to determine success
factors (success factors research).

11
Semi-conductor Industry Association Factsheet (2009), Semi-conductor, http://www.sia
online.org/cs/industry_resources/industry_fact_sheet, 20.04.2008), online.

14


The differences are to be 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. In regard to the whole ven-
ture capital investment process, this empirical research aspires to answer the following
main 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


• 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


1.3. Research Design
Relevant theoretical literature on start-ups and venture capital financing of start-ups in
business 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, the
corollaries, data sample and research method of prior empirical studies on differences in
venture capital financing of start-ups in the U.S., UK, Germany and France are portrayed
and elaborated. The theoretical research framework is herein constructed from the
knowledge 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 Bay
Area, London, Paris, Hamburg, Munich and Berlin. It is aimed at gathering possible ques-
tions (aspects, factors, criteria, phenomena) for the online questionnaire and garnering
practical feedback from venture capital firms in the four countries. Based on the inputs
and information from the face-to-face expert interview with venture capital firms in the
San Francisco Bay Area, London, Paris, Hamburg, Munich and Berlin, the theoretical
research framework is modified to obtain a revised research framework, which functions
as 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 of
the venture capital market in each country. The hypotheses are subsequently construed out
of the revised research framework (microeconomic environment) and macroeconomic
research framework. The questions of the empirical scientific online survey are deduced
from the formulated hypotheses. The scientific online survey is conducted nationwide
with 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. Structure
The following dissertation paper is organized in nine main chapters. Chapter 2 elaborates
business 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 with
basic 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


presents components of e-Business models and their potential taxonomies. The last part of
chapter 2 discusses linkages between e-Business and the creative destruction theory from
Joseph 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 a
huge start-up innovation potential.

Chapter 3 is focused on venture capital financing of start-ups in business administration
theory: 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 and
independent 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 independent
venture capital firms is given. Chapter 3 also shows the stages in the financing life cycle
of 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 the
behavior of venture capital firms. The negative external effects of a principal agency rela-
tionship, such as asymmetric information, moral hazard and adverse selection between
venture capital firms and entrepreneurial teams are modeled and illustrated. Guidelines on
mitigating these malignant agency risk problems are provided. Chapter 3 analyzes the key
investment decision criteria in venture capital financing and outlines 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 four main venture capital investment decision criteria management, market,
product and potential exit channel are considered. Deal structuring and negotiation deals
with the typical provisions and clauses in venture capital term sheets — funding clauses,
corporate governance clauses and liquidation clauses. Chapter 3 concludes with concepts
of 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 and France. Chapter 4 depicts the essential macroeconomic factors
that 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 of
information technology start-ups in the U.S., UK, Germany and France. It looks at both
empirical research work that studied the differences between the U.S. and Europe, and
within 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 elements
which 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 and
data 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 for
significance based on two-sample parametric and non-parametric statistics. Chapter 9 is
dedicated to the comparison of the key findings of the study to results of the expert inter-
views and previous comparative research studies.

19


2. e-Business in Business Administration Theory
2.1. Definitions, Characteristics and Concept of e-Business
2.1.1. Definitions of the Term e-Business
There 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', 'internet
economy', '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 CEO
Louis V. Gerstner, Jr., who is largely credited with turning around IBM.12 Louis Gerstner
embraced the internet as a business phenomenon and made it a core part of his turnaround
strategy 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 resources
into developing and augmenting IBM 's electronic business solutions. At IBM, e-Business
is 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 IBM's
definition of e-Business is therefore not confined to the 'internet' alone but encapsulates
'intranet' and 'extranet' as well. Briefly, an intranet can be understood as a private version
of an internet accessible only to members within an organization; intranet differs from
extranet in that the former is restricted to the employees of an organization while the latter
can also be accessed by customers, suppliers and other approved parties.

Chaffey describes e-Business as all electronically mediated information exchanges, both
within an organization and with external stakeholders supporting the range of business
processes.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 exchanges
within an organization. He uses e-Business as an adjective to delineate 'pure play firms'
such 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 physical
bricks-and-mortar presence. Mesenbourg explains that e-Business is any process that a

12
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


business organization conducts over a computer-mediated network.15 Mesenbourg's defi-
nition is not very useful because it is too broad. Following Mesenbourg's definition every
business will be considered as e-Business in that computers are used in almost every
company 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 by
primarily focusing on architectural design and integration of computer hard- and software
that form a firm's e-Business IT infrastructure. It represents the value chain that delivers
products and services to customers and clients. Using the definition, any organization that
uses IT applications will be characterized as an e-Business firm. Kalakota's definition is
not very useful because it does not help in drawing a clear distinction between e-Business
and non-e-Business organizations.
PricewaterhouseCoopers (PwC) defined e-Business in 1999 as application of information
technologies to facilitate buying and selling of products, services, and information over
public standard-based networks.17 This definition has a strong focus on electronic com-
merce. Hartley defines e-Business as electronic connection of general business operations
to customers, suppliers, partners and employees.18 Hartley's understanding of e-Business
encompasses product marketing, lead identification, order entry, inventory tracking, order
fulfillment and post-sales support.

Zwanziger and Herden define e-Business as integrated transformation and execution of
the 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.19
Zwanziger and Herden's 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, Hoboken
2000, 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 Applied
Enterprise Science (International Symposium on Business Informatics), Santa Clara 2004, pp. 354-367.
21


For the purpose of this study, e-Business is defined as an organization that connects its
critical business systems directly to customers, employees, partners and suppliers via in-
ternet, intranet or an extranet.

2.1.2. Contrasting e-Business and e-Commerce
The 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 of
the many applications in e-Business like e-mailing, e-banking, e-learning. e-Commerce is
sometimes 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 information
technologies for marketing, buying and selling of products and services to a business or
consumer.20 McKay describes e-Commerce as commercial transactions mediated via the
internet, 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 purchasing
transaction to take place. Kalakota and Whinston characterize e-Commerce as buying and
selling 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 involves
the transfer of ownership or rights to use goods or services.''23 Mesenbourg's definition
emphasizes 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 commerce
over intranet or extranet. According to Clark, e-Commerce is the conduct of commerce in
goods and services, with the assistance of telecommunications and telecommunication-
based tools.25 Clark's 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 Manager's Guide, Reading MA
1997, 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


tional 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-Business

Figure I: Link between e-Commerce and e-Business26

e-Commerce has revolutionalized retailing by altering the traditional sales model and
egregiously redesigning the value chain in commerce. Prior to the internet age, commerce
was 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 do
not always display all their merchandise. Internet shops like Amazon.com have no stock
limitations on the number of products they offer. For example, Amazon.com offers more
than five million books and products. The physical distance between a store and the house
of a potential customer can hinder the customer from going to the store. Consumers like
shopping online because it is much more convenient and time-saving.

e-Commerce has reinvented the dynamics of commerce by shifting bargaining power
from the sell-side that is manufacturers and suppliers to the buy-side, which can stand for
a consumer, business or government. The internet eliminates paucity of information and
transaction costs. It gives consumers, businesses and government full access to all rele-
vant product or service information like price, quality, reputation, delivery duration and
seller rating at no significant costs. In light of the fact that consumers, businesses and
government are effectively harnessing the bargaining power of e-Commerce, they are
today 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


The 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 an
online customer.28
e-Commerce firms can be generally classified into two categories: 'brick-and-clicks' and
'pure play' firms. Examples of bricks-and-clicks are Barnes & Noble, Wal-Mart, Dillard's,
BestBuy, Circuit City, Macy's, Marks & Spencer, Kaufhof, Karstadt, C&A, etc. A pure
play e-Commerce firm operates only through an online platform, e.g. Amazon.com, Otto,
Neckarmann, etc.

2.1.3. Applications in e-Business
An e-Business application defines an activity for which the internet, intranet or extranet is
used by a consumer, business or government.29 Although e-Commerce is very popular in
e-Business, there are many more e-Business applications as the mnemonic in Fig. II
shows: 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 usage
and rapid adoption of e-Business applications have led to continuous development of new
e-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-reservation
are very successful among all three groups. Consumers also use the internet for activities
such 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


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-Calling

Figure II: Applications in e-Business30

Government 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-Business
A transaction represents an exchange of goods or services between economic partners. As
portrayed in Fig. III, e-Business transactions can be grouped in nine categories based on
the type of transaction partners between whom a transaction takes place. The transaction
partner in e-Business can be a consumer (C), business (B) or government (G).31

Each of these transaction partners can function at one time as a value generator at another
as 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


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 institutions

Figure III: Market and Transaction Categories in e-Business32

In the 3×3 matrix in Fig. III, value generators are represented in the vertical and value
receivers in the horizontal axis. The denotation of each e-Business transaction begins with
the value generator followed by the receiver, e.g. if a consumer delivers a service to a
business, the transaction is called Consumer-to-Business (C2B).

2.2.1. Consumer as Value Generator: C2C, C2B, C2G
2.2.1.1. Consumer-to-Consumer (C2C)
C2C e-Business is the most radical form of e-Business transaction. There are different
forms of C2C e-Business transactions: C2C e-Commerce, C2C e-banking, C2C social
networking, 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
26


Freeadscity, Gumtree, Loot, Vivastreet, Avis, Dhd24, Quoka, and Kalaydo all represent
C2C 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 for
new and second-hand goods, pictures and videos can be included with each ad. Interested
buying consumers then contact the vendors by e-mail or telephone.

eBay, QXL and Ricardo are epitomes of C2C e-auction. eBay was founded by Pierre
Omidyar in September 1995. Today eBay conducts business in more than 30 countries
including Brazilian, China, India and Turkey realizing total annual revenue of $8.5 billion
with 16,000 employees in 2008.33 Consumers trade over one million different items on
eBay everyday ranging from collectibles, books, appliances, electronics, jewelry, comput-
ers, software, furniture, vehicles, etc. The success of electronic auctions among consumers
can 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 which
obviates the need to travel from one place to the bidding location. Electronic auctions
save time, millions of bidders can take part in the auction, and they offer an opportunity to
review 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 old
people socialize and communicate with friends. These platforms nowadays serve as the
preferred mode of communication over mobile phones and landlines among young peo-
ple. The first Web 2.0 social networking site Friendster was launched by Jonathan
Abrams in 2002 in Mountain View, California; Friendster became very popular in a short
time 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


tures on Friendster and opening it to all interested users including musicians and artists.35
Many Friendster users neglected the platform and created new accounts on MySpace. Due
to 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 wasn't distracted with typical start-up issues.36 It was managed by
Chris DeWolfe, Josh Berman and Tom Anderson. MySpace was acquired by Murdoch's
News Corporation for $580 million in 2005.37 After the huge success of MySpace many
start-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 surpassed
my Myspace to emerge as the largest social networking site in the world with 350 million
users as of January 29, 2010 (3.10 pm PST). Facebook is currently valued at a market
capitalization of $6.5 billion.38 Friends Reunited, the UK social networking site, was
bought by ITV1 for $208 million in 2005.39 StudiVZ, a social networking site which is
similar 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 trade
publisher Holtzbrinck Group, headquartered in Stuttgart, Germany.40 Bebo, the British
social 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.41

C2C e-lending platforms like Zopa, Lending Club, Prosper, PPDai, Virgin Money, Wonga
and Smava offer an alternative to traditional lending intermediaries like banks. The peer-
to-peer lending marketplace matches peer-lenders with peer-borrowers offering loans with

35
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


interest rates lower than those of traditional banks. The growth of C2C e-lending has been
encumbered 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 do
exist 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 for
organizations. It reduces time and cost of job application for applicants as well. Firms
have their own online recruiting sections on their Websites and also use web recruiting
services like Monster.com, Careerbuilder.com and Stepstone.com. It saves companies
time 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 a
recruiting 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 experience
or grade point average. Monster.com is the largest job search engine and career Website
in the world with approximately 5000 employees and operations in over 25 countries. It
was 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.42
Monster provides online career search services for more than 10,000 partners. Mon-
ster.com's annual revenue declined from $1.4 billion in 2007 to $1.34 billion in 2008.43

The 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 L'Oréal represent C2B transactions. All
these research firms organize consumer online panels and surveys to periodically collect

42
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


data on consumer buying habits — consumers' perception of new products, how often
they buy a certain product, where they go grocery shopping, why they buy a specific
product, 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 online
filing 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 increase
efficiency in tax filing by offering tech-savvy taxpayers an alternative — an electronic tax
preparation and filing solution. Tax-payers are lured into filing tax papers online knowing
that their documents will be processed expediently. In regard to huge tax administration
cost that the IRS amounts annually, e-filing is a viable and practical solution in saving
tax-payers' money.

Online voting is a consumer-to-government e-Business transaction that is going to play an
important role in the way elections are organized in industrialized nations with fully de-
veloped internet infrastructure. Although online voting is currently legally nefarious in the
United States, Europe and Asia due to lingering security flaws, online voting will become
the dominant mode of organizing elections in the next 15 years. When consumers as legal
citizens take part in elections by voting online instead of going to a polling booth, they
exercise 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 technological
solutions to upend security problems that flounder e-voting as a legally accepted mode of
election. Electronic voting will increase election participation rate because it is convenient
and less time-consuming; citizens take part in elections right from their homes. Currently
an 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.44
The 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 finally
44
Cp. Encarta (2007): Election, http://encarta.msn.com/encyclopedia_761569491/election.html,
03.03.2008, online.
30


national level for general elections when the majority of voters are familiar with it and the
current opaque security flaws are obsolete. ''Thousands of people voted online in the
Democratic 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 Baltic
republic Estonia broke new ground in e-voting in 2005 when it became the first country in
the world to hold a nationwide election allowing voters to choose their representatives in
municipal elections over the internet; a Linux-based voting system coupled with a special
ID card and device that reads the card were used as a technology solution in the online
election.46 This technology solution incurred no additional costs for Estonians because
about 80 percent of Estonian voters already had the ID card and reader, which have been
used since 2002 for online access to bank accounts and tax records.

2.2.2. Business as Value Generator: B2C, B2B, B2G
2.2.2.1. Business-to-Consumer (B2C)
A B2C e-Business transaction is a transaction between a business and a consumer. The
transaction volume in B2C is far less than that of B2B, but transaction frequency in B2C
is 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 include
information seeking and communication, marketing and providing online catalogs. Busi-
nesses use the internet to gather information about potential and existing online customers
to know who their customers are, what they are purchasing online, how satisfied they are
and what they want in terms of future services and products. Online stores use numerous
marketing techniques to acquire new online customers, e.g. banners and search engines.

45
Ruth, Steve/Mercer, David. (2008): Voting from the Home or Office? Don't Hold Your Breath,
http://doi.ieeecomputersociety.org/10.1109/MIC.2007.94, 04.09.2009, online.
46
Cp. Theregister.com (2005): Estonia's Local Elections to be Settled Online, http://www.thereg
ister.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


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 catalog

Figure IV: Customer Chain — Stages of a B2C e-Commerce Transaction48

and 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 different
electronic marketplaces and enables product comparison between online shops. The sale
execution 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 integration
of 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 activities
and techniques used to actively maintain relationships with customers to turn them into
loyal repeat customers. Customer extension on the other hand is aimed at increasing the
level of involvement of a customer with an online store.

B2C e-Commerce alters the traditional sales channel model by eliminating certain or all
intermediaries between a consumer and manufacturer. The partial or total elimination of
intermediaries 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


a) Producer Wholesaler Retailer Consumer

b) Producer Wholesaler Retailer Consumer

c) Producer Wholesaler Retailer Consumer

d) Producer Wholesaler Retailer Consumer

Figure V: Disintermediation in B2C e-Commerce49

The 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 pure
play e-Commerce companies such as Amazon envision it as a completely new business
model.

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 typically
tenfold the value of B2C.51 B2B e-Business is germane to e-procurement, supply chain
management, Just-in-Time sourcing, e-collaboration and electronic marketplaces. e-
Procurement is synonymous to online sourcing and refers to the execution and automation
of procurement processes for raw materials, basic supplies and components via intranet,
extranet or the internet; it is the electronic integration and management of all procurement
49
50
Cp. Cunningham, Michael (2002): B2B: How to Build a Profitable E-Commerce Strategy, Cambridge
2002, 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


activities including purchase request, authorization, ordering, delivery, and payment be-
tween a purchaser and a supplier.52 e-Procurement is directed at improving performance
of the six areas of sourcing; price, time, quality, quantity, source and place of delivery.53
All the raw materials, components, basic supplies and equipment that companies buy can
be grouped into two broad categories; production and non-production related goods. Often
identical materials and supplies are purchased repeatedly, 'straight re-buy' or with some
slight changes, 'modified re-buy'. e-Procurement systems are more likely to be employed
in 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 with
regular suppliers, typically in long-term relationships. Spot sourcing — fulfillment of an
immediate need, typically of a commoditized item for which it is less important to know
the credibility of the supplier.''54

Development of B2B e-Business can be divided into three stages: electronic data inter-
change (EDI), internet catalogs and electronic exchanges (marketplaces).55 EDI has been
used by firms since the 1980s. It enables exchange of standardized business information
such as orders, contracts or product requests via a private value-added network (VAN).
EDI accelerates business processes and reduces manual errors. The infrastructure of EDI
is very expensive, only big firms deploy EDI. One other disadvantage of EDI is the fact
that 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 B2B
electronic trading: 'internet and intranet catalogs'. Due to the open and single document
standard that the internet and intranet uses, many businesses started trading via internet or
extranet 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-like
marketplaces for goods and services. An electronic marketplace (e-Market) is an efficient
market which brings buyers and sellers together to trade raw materials, basic supplies and
components in real-time.56 As on a stock exchange the prices fluctuate based on demand
and 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


Through the use of reverse auctions buyers benefit from lower prices and a wide selection
of potential suppliers. e-Markets in B2B enable simultaneous interaction between all mar-
ket participants. It has erased sourcing frictions in supply chain networks and gradually
repressed systematic sourcing to the advantage of spot sourcing. There are three main
different 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 selected
trading partners. Consortium-backed e-marketplaces are owned, created and organized by
one or more large organizations, e.g. Convisint, e2Open, Transora and Exostar.

The benefits of B2B e-Business are indubitably quite large. It improves efficiency along
supply chain pipelines, decreases stock-outs, and lowers distribution costs by indirectly
increasing 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 value
generators and government value receivers. Consummate B2G transactions are geared
around government and public e-procurement. The huge economic success of B2B e-
procurement prompted government in industrialized nations to imitate and transfer the
concept to public administration. Public e-Procurement refers to contracts awarded for
pecuniary 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 provider
via 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 are
awarded 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 bids

57
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


from interested businesses.59 The tender document or RFP contains a full description of
the 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 the
bidding process. At the end of the bidding process, the contracting authority issues the
contract to the bidder whom it deems most suitable to supply the goods. e-Procurement in
public administration efficiently facilitates trade between government and business. It
espouses huge cost saving potential because it gives public administration a transparent
and faster market overview; the prices and conditions of numerous potential suppliers can
be compared within a few minutes. In many countries, changes in the B2G e-Business
market reflect in huge impact on overall GDP growth since government generates a big
share of the gross national product. For example in the EU, the annual value amounts to
around $775 billion, estimated at approximately 11.5% of EU gross national product. Its
importance varies significantly between member countries ranging between 11% and
20%.60 ''The U.S. federal government each year spends about $500 billion to buy goods
and 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% of
the GDP.62

2.2.3. Government as Value Generator: G2C, G2B, G2G
In 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 budget
pressure that federal, state, county and local government bodies faced.63 The management
paradigm 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 the
public sector. The set of common themes includes providing high-quality services that
citizens value; demanding, measuring, and rewarding improved organizational and indi-
vidual performance; advocating managerial autonomy, particularly by reducing central

59
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

Differences in Venture Capital Financing of Start-ups in the U.S., UK, Germany and France

Differences in Venture Capital Financing of Start-ups in the U.S., UK, Germany and France

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (11)

Similar to Differences in Venture Capital Financing of Start-ups in the U.S., UK, Germany and France

Similar to Differences in Venture Capital Financing of Start-ups in the U.S., UK, Germany and France (20)

Recently uploaded

Recently uploaded (20)

Differences in Venture Capital Financing of Start-ups in the U.S., UK, Germany and France