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MONEY DOES NOT GROW ON TREES

Attracting Foreign Venture Capital

in the Netherlands

By

DOMINIQUE J. BROUWER

Supervisor: Dr. Hein Vrolijk Co-assessor: Dr. Wim Westerman

University of Groningen International Financial Management

January 2013 Groningen, The Netherlands

Gedempte Zuiderdiep 87a 9711 HD Groningen

+31-612478971 s1765515

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Money does not grow on trees

Attracting  Foreign  Venture  Capital  in  the  Netherlands  

Abstract

 

This research examines what factors are important for entrepreneurs in attracting foreign venture capital and if local investors facilitate this process. A two-step approach is used in this research. First, a unique dataset have been set up to provide an overview of the cross-border venture capital market. The results show that around one third of the total venture capital investments in Dutch entrepreneurial firms are made by foreign investors, which shows the relevance of cross-border venture capital. Second, the analysis of the dataset led to an exploratory multiple case study of five entrepreneurial firms active in the ICT sector. Based on this multiple case study, this research proposes a model that illustrates the factors that influence the likelihood of receiving foreign venture capital. Having an international customer market, expertise VCs being in foreign countries and cross-border investment readiness seem to aid the attraction of foreign venture capital. The international social capital of a local investor and the social capital of the entrepreneurial firm’s management team help to increase the effect of cross-border investment readiness and thus to attract foreign venture capital. To conclude, this study provides the first exploratory overview of the factors that are of importance in attracting cross-border venture capital from an entrepreneurial perspective.

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Table of Content

1. Introduction ... 5 1.1 Research problem ... 5 1.2 Structure of research ... 6 2. Theoretical framework ... 7 2.1 Venture capital ... 7 2.1.1 Types of VCs ... 9 2.2 Syndication ... 9 2.2.1 Advantages of syndication ... 10 2.2.2 Drawbacks of syndication ... 10 2.2.3 Cross-border syndication ... 10 2.3 Investment process ... 11

2.4 An integrated model of the role of a local investor ... 12

3. Cross-border venture capital and syndication in the Netherlands ... 15

3.1 Cross-border venture capital in the Netherlands ... 15

3.1.1 Total Dutch venture capital market ... 15

3.2 Venture capital syndication in the Netherlands ... 19

3.3 Comparison cross-border venture capital by industry ... 21

3.4 Conclusion ... 23

4. Case study approach: Dutch ICT industry ... 24

4.1 Research strategy ... 24

4.2 Research sample ... 24

4.3 Research execution ... 27

4.3.1 Data collection ... 27

4.3.2 Data analysis ... 28

4.4 Reliability and validity ... 28

4.4.1 Reliability ... 28

4.4.2 Validity ... 28

5. Case study results ... 30

5.1 The factors ... 30

5.1.1 Market in foreign country ... 30

5.1.2 Experts in foreign country ... 31

5.2.3 Cross-border investment readiness ... 32

5.2.4 Social capital of local VC ... 34

5.2.5 Social Capital of Entrepreneur ... 34

5.2 Overview of factors that influence the likelihood of foreign venture capital investment .... 35

6. Discussion ... 37

6.1 Relation to literature ... 37

6.1.1 Cross-border investment readiness ... 37

6.1.2 International social capital and role of local investor ... 38

6.1.3 Experts and customer market in foreign country ... 39

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7. Conclusion ... 42

7.1 Research objectives ... 42

7.2 Relevance cross-border venture capital in the Netherlands ... 42

7.3 Factors that help attract foreign venture capital ... 42

8. Reflection ... 44

8.1 Practical advice to entrepreneurial firms ... 44

8.1.1 Cross-border investment ready ... 44

8.1.2 Social capital ... 45

8.2 Recommendations to policy makers ... 45

8.3 Personal reflection ... 46

Acknowledgements ... 47

References ... 48

Appendix ... 53

A. Creation of dataset used in this research ... 53

B. Frequency that firm’s and VCs are listed ... 53

C. Cross-border deal size part of total Dutch VC market ... 54

D. Total deal value of VC investments ... 54

E. Number of transactions in ICT sector ... 55

F. Example Zephus Classification ... 55

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1. Introduction

Cross-border venture capital has become increasingly common in recent years. Aizenman and Kendall (2008) report that of the 280 billion dollar venture capital deals worldwide, the share of cross-border private equity and venture capital flows in entrepreneurial firms rose from 15% in the 1990s to over 40% in 2007. Ernst and Young (2013) reported that Europe has attracted 3,797 cross-border investments in 2012. The Netherlands accounted for 161 of these investments, which places the Netherlands on the 6th place of countries that receive the most cross-border venture capital investments.

The literature on cross-border venture capital investments is expanding. However, there has been no research on how entrepreneurs attract cross-border venture capital investment relations from an entrepreneurial perspective, except for Dohle (2012).

An entrepreneurial perspective uses the insights from the entrepreneurial firm to evaluate the development of cross-border venture capital investment relations. An entrepreneurial perspective includes entrepreneurs in the analysis and acknowledges that top managers and firms can proactively shape and influence their environment (Smith and Cao, 2007).

Dohle (2012) examined how entrepreneurial firms manage the investment process of raising cross-border venture capital and to what extent syndication facilitates the investment process. Syndication arises when venture capitalists (VCs) jointly invest in projects (Brander, Amit and, Antweiler, 2002). Syndication is a widespread and enduring practice in the venture capital industry. For example, in Europe roughly one third of all capital and private equity investments consists of syndication in the period 2007-2012 (EVCA Yearbook, 2013). The extensive use of syndication is mirrored in the current body of research, which is well developed (Bygrave, 1987; Lerner, 1994; Brander et al. 2002; Manigart et al., 2006). Although there is an extensive use of syndication, the literature on cross-border syndication is limited. Very little is known about how entrepreneurs attract foreign syndicated venture capital investments and what factors influence this process.

1.1 Research problem

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Currently Mäkela and Maula (2008) are the only authors that shed some light on syndications with foreign and local investors. They used the literature on international social capital and endorsements in the formation of inter-organizational ties and networks in international settings to invest the role of local investors. But they have only focused on the role of local investors and not on other factors that influence an entrepreneurial firm in attracting foreign venture capital.

My research will use and expand Dohle’s (2012) dataset and use Mäkela and Maula’s (2008) model to answer the following questions:

1. How relevant is cross-border venture capital and syndication in the Netherlands?

2. What factors increase the likelihood that Dutch entrepreneurial firms receive syndicated foreign venture capital investments, whether or not through a Dutch venture capitalist? Policymakers, like the European Commission, are interested in the development of cross-border venture capital, because they try to stimulate cross-border venture capital investments. They are trying to ease barriers and facilitate the process of attracting foreign venture capital through different programs. Examples of these programs are Europe 2020 strategy, Innovation Union and Horizon 20201

Furthermore, this research is beneficial for Dutch entrepreneurial firms that seek foreign capital. Because of this research, Dutch entrepreneurial firms can become aware of those factors that increase the likelihood of receiving foreign venture capital investments. Additionally, this research can help entrepreneurial firms to attract foreign venture capital by taking these factors into consideration.

1.2 Structure of research

This research has the following structure. First, in Chapter 2, the relevant literature on venture capital and syndication will be described. Furthermore, Chapter 2 is used to explain the model created by Mäkela and Maula (2008). This model describes the role of a local investor. Their model will be used to examine if and how local investors can help a Dutch entrepreneurial firm to attract foreign venture capital. Chapter 3 presents the results of a unique dataset that shows the relevance of the Dutch cross-border venture capital market. Chapter 4 describes the methodology that is used during this research. A case study approach is applied to examine which factors are of influence in attracting foreign venture capital. Chapter 5 presents the findings of the in-depth case study analysis of the case studies, whereas Chapter 6 continues with discussing these results. Chapter 7 provides a conclusion in which the research questions will be answered. Finally, Chapter 8 will reflect on this research and provide some practical implications for entrepreneurs and policy makers.

                                                                                                                                       

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2. Theoretical framework

In this chapter I will discuss the relevant literature on cross-border venture capital to provide a theoretical framework. Section 2.1 defines venture capital and differentiates between different types of venture capital. Section 2.2 provides more information on syndication. Section 2.3 continues with discussing the venture capital investment process from an entrepreneurial perspective. This investment process is described, because factors that can improve the likelihood of receiving a foreign investment could be observed in one or more of the stages in this process. Section 2.4 explains the model of Mäkela and Maula (2008). This model will be used as an input to in the case studies to examine if their findings also hold up for Dutch entrepreneurial firms. Finally, Section 2.5 provides an overview of the theoretical framework that is created in this chapter.  

2.1 Venture capital

Technically, venture capital is a subset of the more general term private equity. Venture capital only relates to a specific aspect of private equity. The European Venture Capital Association (EVCA) (2013) defines venture capital as follows;

“Venture capital refers to equity investments made for the launch, early development, or expansion of a business. It has a particular emphasis on entrepreneurial undertakings rather than on mature businesses”

In this definition, which is used in this research, a point in time in the lifecycle of an entrepreneurial firm defines venture capital. For simplicity, private equity refers to all other types of investments in more mature businesses that focus on financial reengineering or changes of control (Aizenman and Kendall, 2008). Examples of private equity are management buy-outs, management buy-ins, leveraged buy-outs, development capital, and turnarounds. These types of private equity are not part of this research.

Entrepreneurs often start with investing their own money in their company. After that, there are usually family, friends and other acquaintances that want to invest. These 3F’s (Family, Friends and Fools) provide capital for, in some cases, a very small part of ownership. Thereafter, there are funds from incubators or accelerators in which the entrepreneurial firm participates. These funds also invest a certain amount of capital for a small percentage of ownership.

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receive funding and to facilitate the process by which any individual can take part in a collective investment (Bureau van Dijk, 2013).

An investment would be categorized an angel investment when a ‘business angel’ invests in a firm. This firm is often a start-up or developing company. A business angel, also known as angel investor, is an individual that invests in companies in much the same way that venture capital companies do. This can occur with business angels acting individually, as a group, or via an angel investment agency. The investment has the same high risk and potential high returns as VC investment and angel investors will often invest alongside VC firms in various rounds to raise funds (Bureau van Dijk, 2013).

This research will only focus on the most common type until now: venture capital. Venture capital is important for entrepreneurs because this type of capital does not have to be paid back within a restricted time frame. It is more acquiescent than other forms of capital and the entrepreneur has no financial obligations concerning the venture capitalist (VC) if the company goes bankrupt.

The industry perspective considers venture capital as an industry that evolves over time. According to this perspective, the venture capital cycle comprises three stages: fundraising, investing and exiting (Gompers and Lerner, 2001). When I talk about venture capital in this research, I refer to “investing” and this comprises two parties: the entrepreneurial firm and the venture capital firm.

Furthermore, this research focuses on cross-border venture capital investments. Mäkela and Maula (2008) define cross-border capital investments as “investments made be venture capital investors in portfolio companies located in other countries than the country from which the investment is managed”. Figure 2.1 illustrates the types of private equity that are discussed. Figure 2.1 also highlights the scope of this research (indicated with blue boxes) as it is discussed until now.

Figure 2.1: Scope of research

 

Source: Own model

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2.1.1 Types of VCs

Not all venture capital is identical. There are different types of VCs that can make investments in entrepreneurial firms. The VICO project (2011) has differentiated VCs into four categories, which are illustrated in Figure 2.2.

Figure 2.2: Four types of venture capital investors

Source: Dohle (2012)

These categories differ in objectives (Dohle, 2012). The public sector investors invest primarily to stimulate the regional economy. Independent investors, on the other hand, mainly invest to meet their financial objectives. Bank-controlled investors pursue a low risk strategy and corporate investors invest in new technologies for strategic reasons.

This research only investigates transactions that involve an independent VC given their purely financial motives. Now that I have provided a framework about what I will consider as venture capital, I will provide a theoretical framework about syndication.

2.2 Syndication

Venture capital investments can include one investor or multiple investors. Syndication is typically defined as multiple VCs investing in an entrepreneurial venture during the same investment round (Mäkela, 2004). Syndication is very common for venture capital transactions. For example, in Europe, around one third of all venture capital transactions is syndicated in the period 2007-2012 (EVCA Yearbook, 2013). Extensive research into syndication is laid down in various literature (Lerner, 1994; Manigart et al., 2006). However, the literature on cross-border syndication is presently not very extensive (Mäkela and Maula, 2008).

Independent investors (e.g. NIB Capital)

Corporate investors (e.g. Intel Capital)

Bank-controlled investors (e.g. ABN Amro Corporate

Investments)

Public sector investors (e.g. regional development

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2.2.1 Advantages of syndication

Syndication can ease the investment process because of multiple reasons. Entrepreneurial firms might have capital requirements that individual VCs are unable or unwilling to provide (Manigart et al., 2002). Furthermore, syndication may occur because of specific resources needed to add value to the entrepreneurial firm (Gompers and Lerner, 2001; Brander et al., 2002).

These motives can be complementary during the whole investment process (Das, Jo and Kim, 2011). Other advantages described in the literature are related to the overall portfolio of a venture capital fund, not the specific individual investments. Examples of portfolio advantages are risk spreading through portfolio diversification (Manigart et al., 2002), securing future deal flow (Hochberg, Ljungqvist and Lu, 2007) or improvement of the reputation through “window dressing” practices (Lerner, 1994).

2.2.2 Drawbacks of syndication

Of course syndication also has its drawbacks. The involvement of multiple VCs can be time consuming for the entrepreneur (Denis, 2004), but also for individual VC’s. Furthermore, VC financing is associated with a significant reduction in the entrepreneur’s decision and control rights (Denis, 2004). Moreover, syndication introduces agency costs. Agency costs arise in any situation involving cooperation between two or more parties (Jensen and Meckling, 1976). These costs are related to moderating the problems of agency (or management) risk (Wright and Lockett, 2003). As already indicated, this research will focus on cross-border venture capital. Therefore the following subsection will define what type of syndications can exist in cross-border venture capital investments. 2.2.3 Cross-border syndication

A cross-border syndicate can exist out of (i) at least one foreign partner in combination with local partner(s) or (ii) multiple foreign VCs. These combinations are illustrated in Figure 2.3. There are many authors that have examined the syndication of investments, but only a few authors have contributed to a better understanding of cross-border syndicates and cross-border venture capital investments (Mäkela and Maula, 2008). For example, Meuleman and Wright (2011) have found that institutional context and organizational learning are significantly related to the use of cross-border syndicates. Another example is the research of Tykvova and Schertler (2011), which found that local ties are significantly related with more intensive ties to foreign investors. However, all the previous studies are macro-economic and do not provide an entrepreneurial perspective.

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local and foreign investors. And third, there are syndicated investments of only local investors. As earlier indicated, the focus of this research is on cross-border investments. This is illustrated in Figure 2.3.

Figure 2.3:Typology of venture capital transactions

Source: Own model

2.3 Investment process

Before describing the model of Mäkela and Maula (2008), I will first describe the capital venture investment process from an entrepreneurial perspective. Dohle (2012) has been the only one who documented the investments stage from an entrepreneurial perspective. These stages are now briefly described.

Stage 1: Investment readiness

An entrepreneurial firm will need to do extensive preparation to secure access to the venture capitalist (VC). This normally goes by raising exposure in the ecosystem of their industry. Additionally, entrepreneurial firms connect to trusted persons, such as successful businesspersons and business partners, achieving endorsement for the entrepreneurs.

Stage 2: Contacting

During this stage the initial contact between the VC and the entrepreneur is established. Zacharakis (2010) has classified the stage in which a deal originates in three broad categories. The first category is one where the entrepreneur directly sends an unsolicited proposal to the VC. The second one is where entrepreneurs seek warm referrals that arrange an introduction to the VC. And the third category can be a VC who is actively prospecting by attending networking events, visiting new venture contests or calling existing opportunities and approaching entrepreneurs.

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Stage 3: Pitching

When the entrepreneur is making his pitch, the VC conducts its generic screening (Fried and Hisrich, 1994). During the pitching stage, the entrepreneur controls and selects the information to convince the VCs.

Stage 4: Providing information & negotiation

In this stage the entrepreneur provides information to the VC and the negotiations begin. In addition to providing information through meetings, conference calls etc., the more formal activity consists of due diligence. Through negations the entrepreneur attempts to secure the best possible conditions. During the investment readiness stage, the entrepreneurial firm can prepare for the negotiation.

Stage 5: Reporting and consulting

The fifth stage consists of reporting to the VCs and consulting the VCs. Entrepreneurs report on monthly, quarterly and yearly basis to the VCs. The level of consulting depends on the maturity of the entrepreneurial firm. More mature entrepreneurial firms will consult their VCs less often.

2.4 An integrated model of the role of a local investor

Although the literature on cross-border venture capital is expanding, there is only little research on what factors influence this process. Mäkela and Maula (2008) used the literature on international social capital and endorsements in the formation of inter-organizational ties and networks in international settings to invest the role of local investors. Their findings are summarized in Figure 2.4, which illustrates an integrated model of the role of a local investor in the creation of cross-border venture capital syndicates. Their model provides insights in the factors that influence the likelihood of receiving foreign venture capital, in particular the role of a local investor. Mäkela and Maula (2008) are the only authors that have shed light on the role of a local investor. Therefore I will use their model as a basis for this research to investigate if and how a local investor is of importance for Dutch entrepreneurial firms in attracting cross-border venture capital. I will continue this section with describing the factors that Mäkela and Maula (2008) identified.

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foreign investors as opposed to readiness to receive an investment from local investors (Mäkela and Maula, 2008). I will now describe the factors in the model:

Figure 2.4: Model of Mäkela and Maula (2008)

Source:Mäkela and Maula (2008)

First, the existence of a high quality local VC will increase the venture’s cross-border investment readiness, because of value-added contributions and the simple existence of a local investor (Makäla and Maula, 2008). These value-added contributions can consist of helping in the investment selection of cross-border investors. The simple existence of a local investor could be beneficial because this can send a positive signal that endorses the quality of the venture.

Second, a key contribution of a local venture capitalist is giving advice in the numerous operative decisions of a general nature for venture capital financed firms. This need for this day-to-day contribution will decrease when the management team of the entrepreneurial firm is experienced as entrepreneur.

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Furthermore, this entrepreneurial experience directly affects the cross-border readiness of the venture because the benefit is already gained via ‘in-house’ resources (Mäkela and Maula, 2008).

Finally, cross-border investment readiness increases the likelihood of receiving a cross-border investment (Mäkela and Maula, 2008). The effect of cross-border investment readiness rises when the local venture’s social capital includes connections to international investors. This finding has captured the active role of an entrepreneurial firm in contrast to other literature, which is based on the assumption that VCs are primarily influencing the investment process.

2.5 Conclusion

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3. Cross-border venture capital and syndication in the Netherlands

Cross-border venture capital is developing into an important financing method in the European venture capital industry (e.g. Wright et al., 2005; Mäkela and Maula, 2006; Aizenman and Kendall, 2008). This chapter presents an overview of the Dutch cross-border venture capital market in order to get an understanding of the importance of cross-border venture capital in the Netherlands. Figure 3.1 illustrates the scope of this chapter. I will focus on single cross-border investments, syndications with both foreign and Dutch VCs and syndication with only foreign VCs. I will start by providing an overview of all the venture capital investments in the Netherlands. After that the cross-border transactions are compared against all the VC transactions. Subsequently, I will describe the type of cross-border investments. Finally, the cross-border venture capital transactions are illustrated per industry and type of cross-border investment per industry.

Figure 3.1: Focus of chapter

Source: Own model

3.1 Cross-border venture capital in the Netherlands

No publicly accessible data is available on the total number of cross-border venture capital transactions in the Netherlands. Hence, I will use a two-step approach. First, the overall size of the Dutch venture capital market in terms of number of transactions is determined. Second, an overview is provided based on a unique database that is created from both Dohle’s (2012) database and from information from the Zephyr database. Both databases are based on modifications in the structure of basic ownership. Appendix A shows how this dataset came about.

3.1.1 Total Dutch venture capital market

Two approaches can be used to get an overview of transactions in the Dutch venture capital market (Baygan and Freudenberg, 2000); the industry approach and the market approach. The industry

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approach shows the activity of venture capitalists in a particular country. In contrast, the market approach shows the activity in a particular country, regardless of the origin or location of the venture capitalists. Obviously, this typology will only lead to different outcomes if cross-border transactions take place. These two approaches are illustrated in Figure 3.2. The results of the use of these approaches are illustrated in Graph 3.1.

Figure 3.2: Two approaches on size of VC market

Industry Approach (NVP) Market Approach (EVCA)

Source: Dohle (2012)

Industry approach

The “Nederlandse Vereniging van Participatiemaatschapijen (NVP)” (2013), which represents the Dutch venture capital industry, publishes quarterly statistics of the overall Dutch venture capital market based on the industry approach. These statistics show a total number of 1496 transactions in the period 2007 – 2012 made by Dutch VCs.

Graph 3.1: Development of the Dutch VC market

Source: Own calculations based on EVCA Yearbook 2013

Market approach

The EVCA (2013) publishes the total number of investments made in Dutch entrepreneurial firms on a yearly basis. Based on these statistics, a total number of 1402 transactions have been made in Dutch entrepreneurial firms during the period 2007-2012.

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Graph 3.1 shows that the financial crisis had hardly any impact on the number of VC transactions when using both the market and the industry approach. The number of transactions did decline in 2008 at the start of the crisis, but the number of transactions stabilized the years after. However, the graph only shows the number of transactions and not the deal size of the transactions. Therefore, it cannot be concluded that the financial crisis had no impact at all.

This research describes the venture capital market based on Dutch entrepreneurial firms. Consequently, the market perspective will be used. All the figures in the following sections are based on the market approach, unless mentioned otherwise.

3.1.2 Dutch cross-border venture capital market.

The previous sections have focused on the overall Dutch venture capital market. In this section the size and relevance of the cross-border venture capital market in the Netherland over the period 2000-2012 is estimated. A complete overview of the syndication structure of cross-border investments in this period is unfortunately missing. Therefore I have set up a unique database to determine the number of cross-border investments that involve (i) only a single foreign investor, (ii) a syndicate of only foreign investors or (iii) a syndicate of both Dutch and foreign investors. Figure 3.1 illustrates these types of syndications.

The findings of this dataset are presented in Graph 3.2, which illustrates the distribution of 124 foreign venture capital investments and a total of 347 venture capital investments in Dutch entrepreneurial firms during the period 2000-2012.

Graph 3.2 uses the market approach and is therefore not comparable to the figure illustrating the industry approach in Graph 3.1. The large differences in numbers between Graph 3.1 and Graph 3.2 can be explained as follows. First, in Graph 3.2 a single transaction can involve multiple companies if an investment is syndicated. In Graph 3.1 these investments are numbered separately. For example, venture capitalists VC1, VC2 and VC3 invest together in entrepreneurial firm EF1. In Graph 3.1 this situation is illustrated as 3 investments, whereas Graph 3.2 illustrates this as one investment.

Second, differences arise because the venture capital dataset created for this research relies on the commercial Zephyr database, which is less comprehensive, whereas the Netherlands AS Trend Report 2007-2012 relies on data from the EVCA, which is gathered through their own PEREP_Analytics2

supported by national and local venture capital associations.

                                                                                                                                       

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Graph 3.2: Number of transactions per year

Source: Own dataset (see appendix A)

Finally, the official statistics include all four types of venture capital investors while Graph 3.2 only shows the investments from independent venture capital investors.

Because this database is based on the number of transactions, some entrepreneurial firms are listed multiple times, because of multiple investment rounds. 24% of all the entrepreneurial firms are listed more than once, whereas 26% of the VCs are listed more than once. Most of the VCs that are listed multiple times are located in a foreign country. Appendix B provides an overview of the frequency that entrepreneurial firms and VCs are listed in the dataset.

As can be seen in Graph 3.2, the development of cross-border venture capital follows the same pattern as the development of all the venture capital investments in the Netherlands. An overview of the proportion of cross-border deal size in comparison to the total venture capital deal size can be found in the Appendix C. Three trends can be identified from Graph 3.2. First, what is instantly clear is that after 2001, the number of transactions decreased significantly. This happened because of the dot.com crash, which made VCs more careful in selecting entrepreneurial firms (Bottazzi, Da Rin and Hellman, 2004). The second period that can be identified from the data is 2002 to 2006 when there is a little activity. The third period that can be derived from the graph is the period from 2007 – 2011. Here the number of transactions seems to stabilize. In 2012 there were remarkable few cross-border transactions. This low number of cross-border transactions in 2012 is particularly striking, because the European Union has put a lot of effort in reducing cross-border investment barriers the last couple of years (NVP, 2013). Graph 3.2 also shows the relevance of the cross-border venture capital market in the Netherlands. On average the Dutch Cross-border venture capital market contains 33% of the total number venture capital transactions. Measured in deal size, the cross-border venture capital market

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even contains 85% of the total number of venture capital transactions. Appendix D shows the total value of venture capital investments made in Dutch entrepreneurial firms. A note has to be made when interpreting this result, because the deal size from 53% of the transactions is missing in the dataset. This section shows the relevance of border venture capital through the high number of cross-border transactions that is illustrated in Graph 3.2.

The use of cross-border venture capital by entrepreneurial firms could be explained by three motives: First, there could be a shortage of Dutch venture capital. Second, many entrepreneurs might have strategic motives to attract a foreign venture capitalist, because they operate in an international market. And third, Dutch entrepreneurial firms might seek foreign venture capital, because they think they are better than Dutch VCs. A key question from the perspective of this research is whether these motives influence the decision to attract a local investor.

3.2 Venture capital syndication in the Netherlands

The three types of cross-border investments, which are illustrated in Figure 3.1, are also found in the Netherlands. To recap, these types are single investments from a foreign VCs, syndicated investments from both local VC and foreign VC, and syndicated investments from only foreign VCs.

In the cross-border dataset created for this research, syndication is defined as investments in Dutch entrepreneurial firms by multiple investors in which at least one foreign VCs without a Dutch branch is present. Based on this definition around 82% of all cross-border investments in Dutch entrepreneurial companies are syndicated (Table 3.1). Syndication is not unique for cross-border investments. More than 50% of all private equity investments in the Netherlands are syndicated (NVP, 2013).

Table 3.1 shows that 18% of all cross-border transactions over the period 2000-2012 involve syndications with only foreign investors, whereas 64% of the transactions includes both foreign and local investors. Furthermore, Table 3.1 shows that syndicated transactions usually involve a local investor. Only 22 % of the 101 syndicated cross-border transactions solely involved foreign VCs. It is therefore relevant to investigate if local investors contribute to the acquisition of foreign venture capital and what factors are important if there is no local investor. The exact development of the type of syndication based on the cross-border dataset over the years 2000-2012 can be found in Appendix E.

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Moskowitch, 1999, 2001; Grinblatt and Keloharju, 2001; Huberman, 2001). This could explain the high investment level of the UK, Belgium, Germany and France. All of these countries are neighboring are very close to the Netherlands. Moreover, foreign-local syndicates are on average larger in number of participants. On the other hand, foreign syndicates are on average larger in deal size. This could indicate that Dutch VCs are not as willing as foreign VCs to invest large financial amounts. If this is true, than entrepreneurs should seek foreign capital when their capital requirements are high.

Table 3.1: VCs in cross-border syndication

Single Investment NL Foreign + Only Foreign

Deal Absolute 23 79 22

Distribution In Percentage 19% 64% 18%

Deal Size Average Deal size 6.970,82 15.176,12 15.999,89

Mean (in mln) 6970,82 15176,12 15999,89

Investors # of investors involved 23 305 65

Involved Avg syndicate # participants 1 3,86 2,95

Country of NL 0% 100% 0% origin US 30% 43% 68% investors GB 22% 28% 36% DE 13% 22% 27% BE 9% 23% 14% FR 4% 20% 9% CH 4% 9% 5% Other 13% 16% 32%

Table 3.2 shows the type of syndication per country. It shows that the US, the UK and Germany invest more in Dutch entrepreneurial firms without a Dutch investor than other countries, like Belgium, France or China. This supports the resource-based theory, which views syndication as a means of accessing a competitor’s firm-specific resources (Lockett and Wright, 2001). The US, the UK and Germany have more developed venture capital markets and would therefore need less access to a competitor’s firm-specific resources. However, in this research the why of these patterns is not pursued. Further research is necessary for an explanation of this observation.

Table 3.2: Syndication type per country

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3.3 Comparison cross-border venture capital by industry

Up to now the focus was on the total venture capital market. At the beginning of this chapter the total Dutch venture capital market was described based on the figures of the NVP (2013), which is illustrated in Graph 3.1. These include both cross-border and domestic transactions. After that I described the dataset used in this study (Graph 3.2), where I compared the cross-border venture capital transactions against the total venture capital transactions in Dutch entrepreneurial firms. These VC transactions are a subset of the transactions described in Graph 3.1. However, Graph 3.2 also provides the development of the VC market from 2000-2006. Table 3.1 only focuses on the cross-border transactions that are illustrated in Graph 3.2. It provides information on the type of cross-border investments that were made during this period.

This section provides information on the industries that received these cross-border venture capital investments. First, I will provide an overview of the different industries that receive cross-border venture capital. And second, these cross-border investments are described by type (single, syndicated with foreign investors or syndicated with both foreign and Dutch investors). The Zephus industry classification will be used for differentiating between industries. The Zephus classification is an indication of a company activity classified by Zephus that uses a combination of the appropriate United States (US) Standard International Classification (SIC) and European NACE codes relating to the sector heading. An example can be found in Appendix F. Some entrepreneurial firms are categorized in multiple industries. Therefore, the total sum of transactions per industry is higher than the actual transactions over the years 2000-2012.

The Netherlands Annual Statistics (AS) Trend Report 2007-2012 (NVP, 2013) shows that on average, over the years 2007-2012, 67% of all the venture capital investments go to entrepreneurial firms in the biotechnology, pharmaceuticals and life sciences industry, computer and consumer electronics industry, and communications industry. These industries are characterized by a high level of innovation (Chesbrough and Crowther, 2006) and therefore, a large percentage investments in high level innovation is not surprising.

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Graph 3.3: VC recipients by industry

Source: Own dataset (see appendix A)

Graph 3.4 shows the deviation between the different types of foreign venture capital investments per industry. Almost 80% of all the cross-border investments in the biotechnology, pharmaceuticals and life sciences industry are syndicated with a Dutch investor. In contrast, only 62 % of all the cross-border investments in the Computer, IT and Internet Services (from now on referred to as the “ICT-industry”) are syndicated with a Dutch investor. This might be explained by industry differences. Information asymmetries might by higher in the biotechnology, pharmaceuticals and life sciences industry than in the ICT-industry. This could be the reason why there is a greater need for syndication in the biotechnology, pharmaceuticals and life sciences industry, since syndication seems to reduce information asymmetries (Megginson and Weiss, 1991).

Graph 3.4: Type of syndication per industry

Source: Own dataset (see appendix A)

12%   29%   23%   2%   1%   14%   3%   3%   2%   2%   6%   1%   1%   1%  1%  

1%   Industrial, Electric & Electronic Machinery Computer, IT and Internet Services Personal, Leisure & Business services Retailing

Transport, Freight, Storage & Travel services

Biotechnology, Pharmaceuticals and Life sciences

Communications

Chemicals, Petroleum, Rubber & Plastic

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The following sections look closer at the ICT industry because of this high number of investments without a local investor. The nonexistence of local investors provides an interesting opportunity to investigate the role of the (non-) existence of a local partner. Table 3.3 provides a detailed description of cross-border venture capital investments in the different industries over the period 2000-2012. Table 3.3 shows that the ICT industry comprises the largest number of investments of all industries and has the largest average deal value, which is another reason for focusing on the ICT industry. Table 3.3 also shows that the ICT industry, the personal, leisure and business service industry, and the biotechnology, pharmaceuticals & life sciences industry are most popular among foreign investors. A further look at the ICT industry is done in this research because the products of this industry are found to be more tangible, easier to understand and visualize than products of the other industries.

Table 3.3: Overview of deal value data

Industry Total Deal Value

(in th EUR) #Transactions #Unknown Deal Values Average Deal Value (in th EUR) Industrial, Electronic & Electronic Machinery 109.678,14 22 7 7.311,88 ICT 642.616,13 51 8 14.944,56

Personal, Leisure & Business Services 334.900,61 41 11 11.163,36 Biotechnology, Pharmaceuticals & Life Sciences 240.335,28 25 6 12.649,23 Wholesaling 93.368,70 11 2 10.374,30 Other 284.155,21 27 11 17.759,70

3.4 Conclusion

In this chapter I provided an overview of the Dutch venture capital market. This overview is based on my own dataset that is created from Dohle’s (2012) dataset and the Zephyr database (Bureau van Dijk, 2013). Section 3.1 shows the relevance of the Dutch cross-border venture capital market. Furthermore, the financial crisis was found to have little impact on the venture capital market. Besides, it was striking that there were very few cross-border venture capital transactions in 2012, especially considering the high effort of the European Union to reduce cross-border barriers. This also shows the relevance of this research for the European Union to get a better understanding what factors are of importance in attracting foreign venture capital. Section 3.2 shows the relevance of syndication, as 82% of all cross-border venture capital transactions are syndicated. Section 3.2 also shows that most of the cross-border transactions include a Dutch investor. Therefore it is important to investigate if and how this Dutch investor influences the investment process. Finally, section 3.3 provided an overview of the type of syndication per industry. It justified the choice for the ICT industry serving as a research setting for the remaining part of this research to investigate what factors are of importance when

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4. Case study approach: Dutch ICT industry

4.1 Research strategy

The first part of this thesis consists of descriptive research, namely an overview of the Dutch venture capital market. The remainder of this thesis is concerned with a comprehensive study of a particular case. For this reason, I will use an exploratory approach building on case studies. This approach is befitting, because of a lack of prior research on how entrepreneurs can attract foreign venture capital (Eisenhardt, 1989). A secondary reason for choosing a case study approach is the difficulty of gaining access to the often highly and sensitive data on deal structuring in venture capital (Meuleman, Wright, Manigart and, Lockett, 2009).

I will use multiple case studies, because of ‘replication logic’ (Eisenhardt, 1989). This is done by first studying the cases as independent cases and finally move to cross-case analysis to compare cases.

4.2 Research sample

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Table 4.1: VCs in cross-border ICT transactions

Single Investment NL + Foreign Only Foreign Total

Deal Absolute 8 32 12 52

Distribution In percentage 15% 62% 23% 100

Deal Size Average 6.925,48 17.326,70 13.282,30

Median 6.301,79 6.725,00 11.500,00 9.000,00 Investors # of investors 8 125 35 180 involved Average # of investor per syndicate 1 3,91 2,92 3,4 Country of NLD 0% 100% 0% Origin of USA 25% 50% 67% investor DEU 25% 25% 42% GBR 13% 19% 33% BEL 0% 25% 8% IRL 25% 0% 8% FRA 0% 6% 0% Other 13% 13% 33%

Table 4.2 shows that most of the cross-border ICT investments stem from the U.S. Also, almost all of these investments are syndicated. The high number of investments from the U.S. can have multiple reasons. First, the VCs from the U.S. could be more value-adding. Second, the venture capital market in the U.S. is more mature. Therefore, more is capital available. Third, many entrepreneurs might have American VCs for strategic reasons, like expanding their market to the U.S. Fourth and finally, American VCs might be more willing to invest. Table 4.2 also shows that German VCs invest relatively often without a Dutch investor. Additional research is needed to find the cause of this observation.

Table 4.2: Syndication type in ICT industry

Single Investment NL + Foreign Only Foreign Total

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Only the transactions from 2007-2012 were selected in the research sample. Additionally, the transactions that were made in 2013 are included3. However the lack of a complete overview of transactions in 2013 has excluded them from the previously described Dutch venture capital market. This described selection resulted in an initial sample size of 22 entrepreneurial firms out of the 52 that are summarized in Table 4.1. First, desk research was performed to collect background data. Afterwards all companies were contacted by telephone or e-mail to determine whether they were willing to participate in this research.

This resulted in the cooperation of five entrepreneurs out of initial sample size of 22 entrepreneurial firms. Six entrepreneurs did not want to participate, mostly because of availability reasons. Two entrepreneurial firms were not suitable for this research because their contact information was incorrect. The nine remaining entrepreneurs did not respond to my attempts to contact them. The five entrepreneurial firms that wanted to cooperate lead to five case studies, which is within the range that Eisenhardt (1989) suggests. She says that “between 4 and 10 cases usually works well” (Eisenhardt, 1989, p.545). Table 4.3 provides details on the mentioned five interviews with the entrepreneurs. The names of the entrepreneurial firms and their investors are not disclosed to guarantee the requested confidentiality from the entrepreneurs and are therefore coded (see Table 4.4). Also, Table 4.3 provides details on the pilot interviews and those with a venture capitalist and private equity advisor. Table 4.5 provides background information on the investigated entrepreneurs.

Table 4.3: Interview details4

Company Code Sector Interviewee Time Method

P1 ICT CEO and Founder 45 minutes Company Visit P2 Life science Director Business Development 45 minutes Company Visit

E1 ICT CFO 45 minutes Company Visit

E2 ICT VP Operations 35 minutes Skype Meeting

E3a ICT CEO 25 minutes Telephone

E3b ICT Founder 15 minutes Telephone E4 ICT CEO and Co-Founder 30 minutes Telephone E5 ICT CEO and Co-Founder 30 minutes Telephone VC1 Venture Capitalist Partner 25 minutes Skype Meeting APE1 Advisor Private Equity Project Manager 45 minutes Company Visit

Table 4.4 provides the coded entrepreneurial firms and VC names. The letters “FVC” indicate that this is a foreign VC. The letters “DVC” indicate that this is a Dutch VC. For example, Table 4.4 shows that two foreign VCs and one Dutch VC invested in entrepreneurial firm E4. Table 4.5 shows when these investments were made to provide background information on the case studies. For example, it

                                                                                                                                       

3  The transactions of 2013 were added, because this research relies on the recalling of memories from the entrepreneurs. The

recall of recent investments will be more accurate.    

4 A “P” in the company code indicates that this company was used as a pilot test. An “E” indicates that this company is an

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shows that entrepreneurial firms E2 received investments from three foreign investors in 2012. Two of these investors are VCs and the other comes from an informal investor. An informal investor can be an investment from an individual, like an angel investor.

Table 4.4: Coded entrepreneur and VC names

Company Code Foreign VC Code Dutch VC Code

E1 FVC1, FVC2, FVC3, FVC4 E2 FVC5, FVC6, FVC7

E3 FVC8 DVC1

E4 FVC9, FVC10 DVC2

E5 FVC11 DVC3, DVC4

Table 4.5: Case background information5

Company Code Founded In Financing Stage Number of Dutch VCs Number of Foreign Investor Origin of Foreign Investor Type of Foreign investor Year of Funding Amount of Funding E1 2004 Round-A 3 GB, US, BE VC 2006 4,2 Mil Round-B 4 GB, US, BE, DE VC 2009 5,9 Mil E2 2012 Round-A 3 US 2 VC and 1 Informal 2012 7,8 Mil E3 2007 Round A 1 1 BE VC 2010 0,6 Mil

E4 2011 Round A 1 2012 0,8 Mil

Round B 2 US, GB VC 2013 n.a. E5 2012 Round A 2 1 US VC 2013 0,8 Mil

4.3 Research execution

4.3.1 Data collection

The data sources include interviews and archival data, interviews being the primary source. The interviews were semi-structured, in order to explore new issues and information during the interview. Appendix G provides a case-study protocol that I created to structure the interviews. As Table 4.3 shows, all entrepreneurial respondents were members of the management team of the firm. The interviews were focused on the round in which the entrepreneur first received foreign venture capital6.

In this research, the first two interviews were used as a pilot study, after which the interview questions were revised. The pilot studies are documented as P1 and P2. After some interviews, the questions were adapted to deal with issues raised in the previous interview. Because of this, I could benefit from triangulation. Triangulation is used to indicate that multiple methods are used in order to check results. Possible biases, like biases caused by potential post-hoc rationalization, can be reduced by such triangulation (Jick, 1979). The interviews were tape-recorded and were later transcribed. This resulted

                                                                                                                                       

5 For example, Entrepreneurial firm E4 had multiple investment rounds. In the first round, there was only a Dutch VC

involved. The second round of entrepreneurial firm E4 involved two foreign VCs; one from the U.S. and one from the U.K.

6 For example, Entrepreneurial firms had two rounds. The interview focused on Round B, because this was the investment

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in notes comprising more than 35 pages. The average interview lasted for just over half an hour, with the shortest taking 15 minutes. In addition to the interview, a number of respondents were emailed later on to supplement the data.

As my secondary sources I used databases like LexisNexis, company websites and press releases. With some of the questions this information allowed for an effective use of data triangulation and helped to increase the reliability and validity of the data (Miles and Huberman, 1994). Before every interview, I familiarized myself with the secondary data by producing an initial version of the venture’s event timeline. In every interview, the accuracy of this timeline was checked.

4.3.2 Data analysis

The analysis started with a within-case analysis. The timelines built for the cases were checked and supplemented when warranted. Concepts were identified by writing comments in the transcribed interviews, which eventually allowed for comparison of the cases. In this cross-case analysis I tried to find similarities and differences. Furthermore, I tried to find striking observations. These concepts were divided among categories. I often returned to the notes and literature to verify these classifications. Eisenhardt (1989) and Strauss and Corbin (1994) state in their guidelines that this rotation between literature, data and emerging insights is an essential ingredient of grounded theory research.

4.4 Reliability and validity

The quality of this research is dependent on the design of the multiple case study. I will now discuss the reliability and validity of this research

4.4.1 Reliability

Reliability is the extent to which the results I will arrive at will be consistent with the results of another researcher using the same case. To improve the reliability of this research, a case study protocol and database has been developed. Because of this it is more likely that another research using the same approach will derive at the same results.

4.4.2 Validity

Internal validity addresses how valid it is to make causal assumptions about the interference in the study. Everyone from the initial sample was contacted; therefore selection bias did not occur. This improves the internal validity. Moreover, the use of multiple secondary sources allowed for an effective use of data triangulation, which increases internal validity

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cross-border venture capital from at least one foreign investor in the ICT industry. A differentiation was made between syndicated investments that consist of only foreign investors and syndicated venture capital investments in Dutch entrepreneurial firms that consist of both local and foreign investors. Therefore the results are valid for Dutch entrepreneurial ICT firms that want to receive cross-border investments. Although the case studies only included syndicated investments, I expect that the same results uphold in single investments. This is because the interviews are focused on how entrepreneurs attracted capital from their first foreign VC. When the investment is syndicated with multiple foreign investors the first foreign investment can be seen as a single investment, because there were no other investors yet that could facilitate the process of attracting the investment To increase external validity, a multiple case study has been used to compare cases. Further research is needed to determine the validity of the results in other industries and countries.

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5. Case study results

This chapter presents the results of the five interviews with the entrepreneurial firms. Section 5.1 describes the factors that resulted from the analysis and lists the quotes that lead to these factors. Section 5.2 presents a model, which includes the factors that influence the likelihood of having a foreign investor as derived by the interviews. Section 5.2 concludes with comparing this model to the model of Mäkela and Maula (2008).

5.1 The factors

The following subsections will describe in detail how the data lead to the emergence of the factors that influence the likelihood of receiving foreign venture capital investments. I will provide illustrative statements and Table 5.1 covers systematically descriptive data of the cases.  

Table 5.1: Systematical description of data based on interviews 7

Firm Location of

Primary Market Importance of home market International Business Plan Expertise VCs in foreign country Entrepreneurial Experience of Management team Foreign VC was approached by

E1 Global Not important Yes Yes Yes Firm’s social capital E2 Global Not important Yes Yes Yes Firm’s social capital E3 The Netherlands Important Yes No No VC’s social capital E4 The Netherlands Important Yes Yes Yes Firm’s social capital E5 U.S. Not important Yes Yes Yes VC’s social capital

Source: Own classification  

5.1.1 Market in foreign country

The market of the entrepreneur E1, E2 and E5 was observed to be international. An international market refers to the customer market of the entrepreneurial firm being primarily in a foreign country. For those entrepreneurs the home market is not of much importance. They name this to be one of the primary reasons for having foreign venture capital, which is illustrated by the following quotations:

1. “A very small part of our total turnover stems from the Netherlands. We are basically a pure international business. It is just a coincidence that we are located in the Netherlands” (Entrepreneur E1)

2. “It has always been a deliberate choice. We are a typical Silicon Valley company and more importantly: our target customers are developers. Silicon Valley has got most developers and

                                                                                                                                       

7  The classification necessarily has to be based on intuitive logic. The “importance of the home market refers to the portion of

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those are the most progressive. They are willing to try new tools and adapt to new platforms” (Entrepreneur E5)

Moreover, the secondary data show entrepreneur E2 is a global startup as well. Entrepreneur E2 has its customers all over the world, with only a small share in the Netherlands. Additionally, entrepreneur E1 explained the relevance of having a VC in your target market in relation to the the post-investment phase:

3. “When being financed with venture capital, you know that one thing is going to happen: an exit. . . . It is very useful to have a foreign venture capitalist on board, because they have a lot of contacts, which can be useful for both an exit and to expand our customer base. . . In theory, there are a lot of potential buyers of our company. However, the biggest chance is that this buyer is going to be American and therefore it is useful to have an American VC on board.” (Entrepreneur E1)

The cases show that having an international market for one’s product seems to be of great importance in seeking cross-border investors. The entrepreneurs had strategic motives to attract foreign venture capital. This implies that not all venture capital is the same to entrepreneurs and that entrepreneurs should think about where their venture capital should come from. When the entrepreneur’s market was located in a foreign country, a local venture capitalist was of less importance. Therefore the following is asserted:

Proposition 1: Having an international market increases the likelihood that entrepreneurs receive investments of foreign venture capitalists.

5.1.2 Experts in foreign country

In most of the cases the entrepreneur deliberately sought foreign capital, because the VCs with the most expertise in their business were located in a foreign country. The analysis shows that this serves as a criterion that influences the choice of the entrepreneurs for an investor. The following statements illustrate this:

4. “All the mayor influences, in our sector, stem from the Netherlands, like Wi-Fi and Bluetooth. . . . However, the private equity investors have never been very strong. In our sector, you should go the America, especially the West-Coast, where you can find lots of investors that our specialized in technology” (Entrepreneur E1)

5. “We went for the best people in the world that know our business . . . they were based in the UK and the Valley” (Entrepreneur E2)

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Netherlands and therefore it is interesting to look at foreign investors that do have experience with entrepreneurs that undergo this rapid growth“ (Entrepreneur E4)

The following proposition synthesizes this evidence:

Proposition 2: Expertise VCs being in a foreign country increases the likelihood that entrepreneurs receive investments of foreign venture capitalists.

This expertise is especially important when the motive of the entrepreneur is to seek strategic advice and make use of the network of the VC in that particular country. The analysis brought an interesting observation to light. This observation includes how the VCs created value for the entrepreneur following the investment round. The following remarks illustrate this:

7. “They are in for the long run. They really help build up an organization and they do have their contacts. We are really convinced that they understand the business” (Entrepreneur E1) 8. “The real value is those folks sitting on your board, giving you guidance; daily, weekly,

monthly board meetings. That is the best of the valuation. They are highly strategic. . . . These guys can really look at the strategic directions and can ask really nice questions” (Entrepreneur E2)

9. “FVC9 organizes an entire program. They offer us office space in London, they connect us to mentors who can coach us, they connect us to investors, they really perform work for us”(Entrepreneur E4)

As these quotes show, the entrepreneurs that deliberately sought a VCs expertise actually experienced the active involvement of the foreign VC.

5.2.3 Cross-border investment readiness

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10. “Make sure that you have a good start-up. Make sure that your plan is internationally scalable and that it works in every way…. It is very important that your business has got international potential” (Entrepreneur E4)

Moreover, the entrepreneurs created visibility before actual contacting the foreign VCs. The following citation exemplifies how the entrepreneurs created awareness before contacting the foreign VCs of their preference:

11. “I have been in and out of the States since 2005. At least, I have been busy building up a network and that takes a lot of time. In Silicon Valley they are certainly willing to make some introductions for you, but the problem is that after 2/3 weeks they do not know you anymore. You have got to have a continued presence.” (Entrepreneur E5)

Other activities that relate to the cross-border investment readiness of the entrepreneur include participating in an accelerator program in a foreign country, raising money in the Netherlands and visiting VCs in foreign countries to sharpen the pitch. The following statements illustrate the activities that contributed to the investment readiness of the entrepreneurs:

12. “We made a round, because during the process, the VCs are going to have a lot of questions. They offer a lot of challenges and viewpoints to a business. It helps you think through your business model and sharpen your business model and think about how you present to others VCs as well. Secondly, when you take funds from a VC, the terms at what you get your fund at are pretty critical. What was the price of the equity we were getting up? You do not want to do that in isolation” (Entrepreneur E2)

13. “We went trough the process in the U.S. to refine our pitch” (Entrepreneur E2)

14. “We often went to conferences and things like that, where we could meet investors and other people that could be of importance” (Entrepreneur E3b)

These observations make clear that it is important for an entrepreneur to be investment ready before approaching foreign VCs. This includes that the entrepreneur should perform activities that increase its cross-border investment readiness before even contacting the target VC (the VC the entrepreneur prefers). This strategy can particularly be observed in the case of entrepreneurial firm E2. They used other VCs to optimize their investment readiness for their target VC. This all leads to the following proposition:

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5.2.4 Social capital of local VC

A key observation from the cases is that local venture capitalists typically first invest in a venture, and then are followed by co-investments from foreign venture capital. The entrepreneurs mentioned a rather passive role of the local venture capitalist when attracting foreign capital. Most of them explicitly mentioned that there was no help of the local VC to get investment ready, facilitate the pitching stage or provide help in the “providing information and negotiation” stage. However, the international social capital of the local VCs played an important role in making the foreign investment happen. DVC3 was not actively involved in the investment process. On the other hand, the local VCs with international capital, DVC1 and DVC4, introduced entrepreneur E3 and E5 to foreign VCs, as the following quotes illustrate:

15. “ DVC1 was actively seeking for another investment party. That is how they have introduced us to FVC8 “ (Entrepreneur E3)

16. “The founder of that company is a friend of mine. He said I should go talk to DVC4. That is what I did, and he introduced me to FVC11” (Entrepreneur E5)

Cross-border investment readiness does not guarantee receiving foreign venture capital. The above shows that the international social capital of the local investors played in important role in making the investment happen. It seems that the more extensive the international social capital of the local investors is, the higher the probability that they will find an international investor that is willing to invest in the entrepreneurial firm.

The following assertion was developed:

Proposition 4: A local venture capitalist’s international social capital, which is related to international investors, increases the effect of cross-border investment readiness and thus the likelihood of receiving a cross-border investment.

5.2.5 Social Capital of Entrepreneur

Although the reasons for attracting foreign capital seem important, the management’s team social capital played a role as well for entrepreneur E1 and E2. Entrepreneurial firm E1 included foreign venture capital, because of the international network of CEO. Entrepreneur E2 deliberately approached the foreign connections in the personal network of its management team to attract foreign venture capital. The following quotes illustrate this:

17. “It was all done trough recommendations and personal contacts from the CEO” (Entrepreneur E2)

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