IF YOU ARE NOT LOCATED IN OUR VICINITY, YOU DO NOT EXIST… OR DO YOU?

IF YOU ARE NOT LOCATED IN OUR VICINITY,

YOU DO NOT EXIST… OR DO YOU?

Cross-Border Venture Capital and Syndication

in The Netherlands

By

MAXIMILIAN J. DOHLE

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

University of Groningen International Financial Management

&

Uppsala University Business & Economics

July, 2012

s1514431

IF YOU ARE NOT LOCATED IN OUR VICINITY,

YOU DO NOT EXIST… OR DO YOU?

Cross-Border Venture Capital and Syndication

in The Netherlands

By

MAXIMILIAN J. DOHLE

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

University of Groningen International Financial Management

&

Uppsala University Business & Economics

July, 2012

s1514431

If you are not located in our vicinity, you do not exist… or do you?

Cross-Border Venture Capital and Syndication in The Netherlands

Abstract

This research examines how entrepreneurial firms manage the investment process of raising cross-border venture capital and to what extent syndication facilitates the investment process. A two-step research approach is used. First, a novel dataset provides an elementary but complete overview of cross-border venture capital and syndication in the Netherlands. The results found that cross-border venture capital in the Netherlands is uncommon. For the period 2007-2011, around 7% of the total Dutch venture capital market involves cross-border venture capital transactions. Cross-border venture capital and syndication are synonymous for the Netherlands: 95% of all Dutch cross-border venture capital transactions consist of syndication. Second, the analysis of the dataset resulted in the selection of five entrepreneurial firms active in the ICT sector. Based on an exploratory multiple case study methodology, this research proposes a five-stage process model identifying the venture capital investment process for entrepreneurial firms. Furthermore, during the investment process, the entrepreneur proves to be far more active in the formation of a cross-border syndicate than previous research illustrates. In addition, a foreign venture capitalist was actively involved during the pre-investment process but relative hands-off in the post-pre-investment process. During the post-pre-investment process local venture capitalists provides most support. To conclude, this study provides for the first time an exploratory overview of the cross-border venture capital investment process and syndication from an entrepreneurial perspective.

Key words: cross-border, venture capital, investment process, syndication, information asymmetry,

TABLE OF CONTENTS

I INTRODUCTION ... 6

1.1 From local venture capital to cross-border venture capital investments ... 6

1.2 From cross-country comparison towards cross-border research ... 7

1.3 Research objectives / problems ... 8

1.4 Research problem ... 8

1.5 Definition of venture capital ... 9

1.6 Structure of thesis ... 9

II THEORETICAL FRAMEWORK ... 10

2.1 Chapter overview... 10

2.2 Information asymmetry in venture capital investments ... 10

2.3 Venture capital investment process ... 13

2.4 Syndication ... 17

2.5 Concluding ... 19

III CROSS-BORDER VENTURE CAPITAL AND SYNDICATION IN THE NETHERLANDS ... 20

3.1 Chapter overview... 20

3.2 Types of VCs ... 20

3.3 Cross-border venture capital in the Netherlands ... 21

3.4 Cross-border venture capital syndication in the Netherlands ... 24

3.5 Cross-border venture capital investments in different industries. ... 25

IV CASE STUDY APPROACH ... 27

4.1 Chapter overview... 27

4.2 Research strategy ... 27

4.3 Research sample ... 28

4.4 Research execution ... 29

4.5 Research reflection ... 30

V CASE STUDY RESULTS ... 32

5.1 Chapter overview... 32

5.2 Overview of the investment process... 32

5.3 Stage 1: Investment readiness ... 33

5.4 Stage 2: Contacting ... 33

5.5 Stage 3: Pitching ... 34

5.6 Stage 4: Providing information & negotiation ... 35

5.7 Stage 5: Post-investment ... 37

5.8 Concluding ... 38

VI DISCUSSION ... 39

6.1 Chapter overview... 39

6.3 Syndication in cross-border investments ... 42

6.4 Concluding ... 44

VII CONCLUSIONS ... 45

7.1 Research objectives ... 45

7.2 Relevance cross-border venture capital in the Netherlands ... 45

7.3 Investment process from an entrepreneurial perspective ... 45

7.4 The facilitating role of cross-border syndication ... 46

7.5 Limitations and recommendations for further research ... 46

REFERENCES ... 48

APPENDIX A – BACKGROUND DATASET ... 54

APPENDIX B – INTERVIEW PROTOCOL ... 55

List of figures, tables and graphs Figure 1: Types of control mechanisms to reduce information asymmetry ... 11

Figure 2: Mitigating information asymmetry in the venture capital investment process ... 16

Figure 3: Structure of venture capital transactions ... 20

Figure 4: Four types of venture capital investors ... 21

Figure 5: Two perspectives on measuring the venture capital market ... 22

Figure 6: Sequence of the investment process from entrepreneurial perspective ... 32

Figure 7: Steps followed by entrepreneurial firms during the venture capital investment process ... 45

Table 1: Models of the venture capital investment process ... 14

Table 2: Involvement local VCs in cross-border syndication during 2000-2011 ... 25

Table 3: Cross-border venture capital comparison of the ICT, Life Science and Other ... 26

Table 4: Interview schedule and coded VCs names ... 29

Table 5: Background description of entrepreneurial firms ... 29

Table 6: Summary key activities investment process ... 32

Table 7: Comparison of investment models – entrepreneurial vs VCs perspective ... 39

Graph 1: “Official” figures presenting two views on the size of the Dutch venture capital market .... 22

I

INTRODUCTION

Some of the largest multinational companies that exist today were once financed with venture capital. Well-known examples are Apple, Microsoft and more recently Facebook. When searching for venture capital these companies have at least one commonality; during their start-up phase, they obtained financing from venture capitalists (VCs) located close to their premises1. Facebook even moved its office from Boston to San Francisco in order to raise financing from investors. This locality is also observed in the literature: venture capital is portrayed as being quintessential a local industry (Cumming and Dai, 2010; Chen, Gompers, Kovner, Lerner, 2010; Groh, von Liechtenstein, Lieser, 2010).

1.1 From local venture capital to cross-border venture capital investments

Recent research suggests that this picture is radically changing. Since the 1990s there has been an increase in entrepreneurial firms which succeeded in receiving venture capital financing from foreign VCs (Baygan and Freudenberg, 2000; Bottazzi, Da Rin and Hellmann, 2004, Wright et al. 2005). The worldwide share of cross-border private equity and venture capital flows in entrepreneurial firms rose from 15% in the 1990s to over 40% in 2007 (Aizenman and Kendall, 2008). The European Venture Capital Association reports that one third of European venture capital & private equity transactions have been cross-border (Yearbook EVCA 2011). In the Netherlands, the share of cross-border transactions as a percentage of total transactions is approximately 40% as inferred from research on worldwide venture capital flows by Schertler and Tykvova (2010).

The development of cross-border venture capital is of interest to policymakers in the European Commission who would like to stimulate cross-border venture capital investments. Through the overarching program Europe 2020 Strategy, the more focused initiative Innovation Union and the forthcoming Horizon 2020 (second pillar) policymakers are searching for ways to ease barriers within the European Union to facilitate entrepreneurial firms receiving financing from foreign VCs2.

The growth of cross-border venture capital and the increased interest of policymakers in entrepreneurial firms being able to attract foreign investors are both intriguing and puzzling. Even in local venture capital transactions, the entrepreneur-investor relationship is fraught with asymmetrical information. Compared to listed firms, the information asymmetry in venture capital investments is more severe (Meuleman and Wright, 2011, Cumming and Dai, 2010). VCs cannot rely on mandatory publications required by stock market listings, analyst coverage, track records, or exposure in the financial press (Wright and Robbie, 1998). VCs have to base their investment decision on the contact with the entrepreneur and their own knowledge (Cumming and Dai, 2010). Conventional wisdom

holds that this challenge is aggravated when engaging in cross-border investments. An increased geographical and “psychic” distance will make the investment process of distinguishing a good investment from a bad one inherently more difficult (Manigart et al., 2006). The rise in cross-border venture capital investments has attracted scholars and policy makers who have started to investigate the phenomenon of cross-border venture capital transactions more closely.

1.2 From cross-country comparison towards cross-border research

Given the historic local nature of venture capital, previous research has primarily focused on cross-country comparisons (e.g. Jeng and Wells, 2000; Cumming and MacIntosh, 2003) while cross-border venture capital investments has been an unexplored research field (Wright et al 20053, for a review). Although research on cross-border venture capital has evolved rapidly over the past few years, the number of published articles remains quite modest (Guler and Guillen, 2010a; Maula, 2010).

The vast majority of the emergent research on cross-border venture capital has a focus on macro issues. For instance, entrepreneurial firms located in countries with higher GDP growth rates and stock market capitalizations (Tykvova and Schertler, 2008; 2010), stable institutional environments that facilitate innovation (Guler and Guillen, 2010b) such as the number of university students (Aizenman and Kendall, 2008) incline more foreign venture capital investments. The paucity of research has also been present on a micro level (Wright et al. 2005) although the body of literature has developed further in comparison to a macro-level. Main topics deal with cross-border syndication (Makela and Maula, 2005; Makela and Maula, 2006; Guler and McGahan, 2007; Mäkelä and Maula, 2008) the use of international staffing (Manigart et al., 2007; Pruthi, Wright and Meyer, 2009; de Prijcker et al., 2009) and foreign VCs supporting the internationalization process of entrepreneurial firms (Makela and Maula, 2005).

No prior processual research exists into the cross-border venture capital investment process. Research investigation local venture capital transactions resulted in a robust stage model (e.g. Tyebjee and Bruno,1984; Fried and Hisrich, 1994). However, this stage model takes the perspective of the VCs, which involves the supply-side of venture capital. Studies analyzing the steps taken by entrepreneurial firms, which involve the demand-side of venture capital, are scarce. This paper therefore takes a first attempt to examine the complete investment process of attracting foreign venture capital from an entrepreneurial perspective.

1.3 Research objectives / problems

The objective of this research is three-fold. First, given the purportedly growth of the share of cross-border venture capital as part of total venture capital, a specific examination for the Netherlands is undertaken. The Netherlands is ranked 9th (2011) in terms of most attractive country for private equity and venture capital investments (Groh, von Liechtenstein, Lieser, 2012). Despite this high ranking, the paucity of cross-border venture capital data is prominent for the Dutch venture capital market. An examination of the Dutch cross-border venture capital market will provide a novel overview of the scope and relevance of cross-border venture capital in The Netherlands.

Second, the primary objective of this study is to gain in-depth knowledge on how Dutch entrepreneurial firms manage the cross-border investment process, despite venture capital being a local business. Observations in the real world reveal an increase of entrepreneurial firms receiving investments from foreign VCs. Theory about cross-border venture capital is emerging but underdeveloped whereby studies examining the entire investment process of entrepreneurial firms are nonexistent. Therefore, an exploratory multiple case study of the investment process from the perspective of the entrepreneur (demand-side) will bring new insights about this new phenomenon and will result in a model describing the steps taken by entrepreneurs to raise cross-border venture capital. Third, through the analysis of the Dutch venture capital market (objective 1) it has become evident that almost all foreign venture capital investments on the Dutch market comprise cross-border syndication. The third objective is to (i) determine in what manner a cross-border syndicate gets formed during the investment process, distill the (ii) reasons behind cross-border syndication and (iii) determine how entrepreneurial firms benefit from having multiple investors.

This study is relevant for entrepreneurial firms. Recent research from the Vico Project (2011) found that entrepreneurial firms backed by a syndicate of foreign and local venture capital investors perform better, in the short and long term, than other entrepreneurial firms backed by only foreign or local VCs. Attracting foreign venture capital in combination with local investors may thus be a worthwhile strategy for entrepreneurial firms.

1.4 Research problem

1.5 Definition of venture capital

Lack of a common definition may cause research problems, as it will make it problematic to generalize between studies (Farrel, Howorth and Wright, 2008). This is especially relevant for the private equity / venture capital industry as no uniform definition exist (Jeng and Wells, 2000). 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 & Private Equity Association 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, a point in time in the lifecycle of an entrepreneurial firm defines venture capital. This is the definition used in this research. 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. This type of private equity is not part of this research.

Moreover, the venture capital cycle from an industry perspective comprises three stages: fundraising, investing and exiting (Gompers and Lerner, 2001). Venture capital in this research refers to “investing” and involves two parties: the entrepreneurial firm and the venture capital firm. Fundraising and exiting are out of scope.

1.6 Structure of thesis

II

THEORETICAL FRAMEWORK

2.1 Chapter overview

This chapter presents the theoretical framework of this research, which comprises three sections. First, paragraph 2.2 examines agency theory and the resulting information asymmetry to illustrate the relationship between the entrepreneur and the VC. Thereafter, information asymmetry problems and possible solutions arising during cross-border venture capital transactions are discussed. Second, paragraph 2.3 will discuss the generic investment process used by VCs to mitigate and reduce information asymmetry. Third, in paragraph 2.3 the role of syndication to mitigate information asymmetry problems is examined. A differentiation in syndication practices is made between syndicates composed of solely foreign participants and syndicates including local investors.

2.2 Information asymmetry in venture capital investments

The ‘principal-agent’ framework is used to analyze the interaction between the entrepreneur and the VC. The relationship between entrepreneur and VC is created by “a contract under which one or more persons engage another person to perform some service on their behalf which involves some decision making authority to the agent” (qf. Jensen and Meckling, 1976). When the entrepreneur takes on a VC for finance this principal-agent relationship arises. The entrepreneurial firm (the agent) contributes activities and manages the company while the venture capital firm (the principal) contributes money. The entrepreneur and VC are not capable of gathering all information concerning potential decisions. This leads to information asymmetry between entrepreneur and VC (Jensen and Meckling, 1976; Arthurs and Busenitz, 2003).

2.2.1 Two step approach

Figure 1: Types of control mechanisms to reduce information asymmetry

2.2.2 Two types of information asymmetry

Information asymmetry can lead to a situation in which two distinctive types of risk can be identified. First, adverse selection can occur before the contract is signed. The VC (or entrepreneur) does not have full access to information. In theory, the adverse selection problem can lead to the “market for lemons” as described by Akerlof (1970). For example, entrepreneurial firms may attempt to overstate the attractiveness of their firm to venture capital investors in order to secure funding (Arthurs and Busenitz, 2003). When a VC cannot distinguish between “good” and “bad” entrepreneurial firms, the VC will discount the price for all potential investments. The “good” entrepreneurial firms will not accept a discount on their venture and will withdraw from the market. This uncertainty eventually results in market failure.

Secondly, moral hazard can occur after the entrepreneur has secured financing from a VC. A conflict of interest resulting in “hidden actions” may arise between the entrepreneur and VC (Hamberg, 2004). The entrepreneur could act opportunistically and contrary to the best interest of the VC. For example, the entrepreneur could waste the capital received from the VC by investing in activities that have high personal benefits but bring lower returns to the VC. When the entrepreneur shares in the profits but does not bear a large enough share of the losses, excessive risk can occur. For instance, the return on investment for certain activities can be superb while the probability of achieving it can be very low (Tykvova, 2007). Moreover, even when the entrepreneur exerts high effort, the entrepreneurial firm may fail due to other circumstances. In many cases the entrepreneur typically is not eager to disclose that the firm is about to fail and stop it, as long as the VC finances it. This could lead to the continuation of unprofitable ventures.

Adverse selection

The literature offers two control mechanisms that can address problems associated with adverse selection, namely signaling and screening. Signaling in a venture capital setting refers to situations in which the entrepreneur reveals some information that alters the beliefs or conveys information to the VC (Spence, 1973; Seppa, 2003). For example, a reputable third party can recommend the quality of an entrepreneurial firm towards a venture capital firm. A second solution addressed in the literature to reduce adverse selection is screening. In economic terms, screening refers to uninformed parties undertaking actions to induce informed parties to distinguish between themselves (Fitzroy et al, 1998). In a venture capital setting, the VC will get the entrepreneur to reveal information (e.g. a business plan) about the entrepreneurial firm.

A thin line exists between signaling and screening. When information reaches the VC at the entrepreneurial firm’s initiative, this is referred to as signaling. When information is acquired from the entrepreneurial firm at the VCs’ initiative, this is referred to as screening.

Moral hazard

The literature identifies two control mechanisms to address problems associated with moral hazard, namely bonding and monitoring. Bonding refers to aligning the incentives of the entrepreneur with those of the VC. Examples are contractual obligations such as staged financing or legal ramifications that reduce the likelihood of future moral hazard problems (Arthurs and Busenitz, 2003). Another solution is monitoring. Venture capitalists monitor the performance and actions of the entrepreneur (Hamberg, 2004; Arthurs and Busewitz, 2003). Examples are seats on the supervisory board and mandatory monthly disclosures.

The above control mechanisms are not free. Both the VC and the entrepreneur will incur additional costs to reduce information asymmetry. The problems and costs of reducing information asymmetry are aggravated in a cross-border environment as illustrated in the next section.

2.2.4 Adverse selection and moral hazard in cross-border venture capital

How can the entrepreneur signal to a VC located in a different country the potential of the venture and what can the VC do to screen an entrepreneurial firm located at distance? Signals from foreign entrepreneurial firms are more difficult to comprehend in a cross-border setting due to factors such as language and culture. Furthermore, penetrating into the network of VCs is more difficult given the distance. Moreover, screening the entrepreneurial firm may involve around three to eight face-to-face meetings with a VC (Cumming and Dai, 2010). In a cross-border setting, this involves more time, energy and costs.

drafting contracts in a different legal environment poses additional challenges. The entrepreneur may not feel confident closing a deal according different legal systems. Moreover, contractual obligations may be more stringent for entrepreneurial firms located further away from VCs (Bengtsson and Ravid, 2009). Monitoring a venture, which is located near a venture capital firm, provides more comfort then a venture that is located in a distant country. The costs associated with monitoring ventures that are geographically further away could rise in a cross-border environment (Jeng and Wells, 2000). Attending board meetings to monitor distant entrepreneurial firms could involve additional costs. Accounting regulations may differ between countries, which will increase the difficulty of consolidating foreign investments. Moreover, the benefit of foreign VCs may diminish if representatives from the foreign VCs are unable to attend meetings. Telephone and other forms of communication may not be sufficient to sustain the business relationship (Cumming and Dai, 2010). To conclude, investing abroad is fraught with higher information asymmetry problems that need to be mitigated somewhere during the investment process.

2.3 Venture capital investment process

The previous section has illustrated information asymmetry problems surrounding the entrepreneur-venture capital relationship. This section will review the investment process through which entrepreneurial firms obtain venture capital financing. As this section will show, the investment process is structured to reduce information asymmetry problems between the entrepreneur and VC (Admati and Pfleiderer; 1994).

2.3.1 The venture capital investment process

The earliest research on the investment process of VCs dates back from the early 70s. In an unpublished dissertation, Wells established the first sequential model of the venture capital decision-making process in 1974 (Hall and Hofer, 1993). During the past 40 years, this model has been refined and extended as summarized in table 1.

Table 1: Models of the venture capital investment process

Source: modified table based on Hall and Hofer (1993) and Silva (2004) and supplemented with article consultation.

All literature on the venture capital investment process has taken a VC perspective. Nevertheless, the venture capital investment models (as defined in table 1) provide a useful reference point to compare the experiences of entrepreneurs when obtaining venture capital financing. For the purpose of this study the stages involving; origination, screening, evaluation, deal structuring, and post-investment activities (monitoring and value adding) are used to structure and review the investment process.

2.3.2 Stages in the venture capital investment process

Deal origination

The first stage is the deal origination; during this stage, the initial contact between the VC and the entrepreneur is established. For VCs, it is crucial to have consistent access to new opportunities. Selecting the right investments determines the success of VCs. Zacharakis, (2010) has classified the deal origination stage in three broad categories.

First, the entrepreneur may directly send an unsolicited proposal to the VC. This strategy rarely comes to fruition because VCs do not commonly invest in proposals received “cold” (Fried and Hisrich, 1994). A case study by Steier and Greenwood (1995) has pointed out that penetrating the venture capital network is critical for entrepreneurs. This is illustrated by thefollowing quote commonly found on the website of VC; “We believe that real world connections are invaluable; therefore we

recommend having a mutual acquaintance connect us before submitting your business plan via email”.

Second, entrepreneurs may seek warm referrals that arrange an introduction to the VC. This will be someone trustworthy to VCs, such as well-respected informal investors, investment banks, investors in the VCs fund or other VCs. For example, VCs may refer deals that do not fit their own investment philosophy (Fried and Hisrich, 1994). These two categories take the perspective of the entrepreneur who initiates the contact with VCs, directly or indirectly.

We lls (1974) Tyebje e and Bruno

(1984) Silver (1985) Hall (1989)

Frie d and Hisrich (1994)

Boocock and Woods

(1997) Bliss (1999)

Search of investment Deal orgination Search Generating deal flow Deal origination Generating a deal flow Origination Proposal screening Firm-specific screen Initial screening Generic screen Proposal assessment Generic screen First meeting

Second meeting First-phase evalution Board presentation

Due Diligence Second phase evaluation Due diligence Second-phase evalution Deal structuring Deal Structuring Deal Structuring Closing Deal structuring Closing

First phase evaluation

Venture operations Venture operations

Cashing out Cashing out Cashing out Monitor - add value

Due diligence Evaluation of proposals Evaluation Project evalution Post-investment activities

A 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.

Screening

The second stage involves screening; this stage refers to VCs determining if it is worthwhile to continue further evaluation of the investment opportunity. The screening phase frequently contains two parts, a firm-specific screen and a generic screen (Fried and Hisrich, 1994).

During the firm-specific screening, the VC applies specific criteria, based on their investment philosophy, to the potential investment. Examples of these specific criteria are investment size, industries, geographic location or investment stage. Potential investments are quickly rejected if they do not meet the investment philosophy. For example, a venture capital firm receives a proposal from a Biotech company while they are specialized in ICT. If the proposal fits the investment philosophy of the VC, a more generic screen is applied whereby the proposal is analyzed in more detail (Fried and Hisrich, 1994).

Evaluation

Once the proposal has passed the screening stage of the VC, the entrepreneurial firms is examined in detail. The evaluation process can consume a considerable amount of time from the VC. The statements and claims of the entrepreneurs during the screening will be assessed. The management team, the product, the market and the financials are thoroughly scrutinized during in the evaluation stage (Hall and Hofer, 1993).

Deal structuring

Deal structuring is the stage in which the entrepreneur and the VC agree on several details of the deal structure. Several issues have to be dealt with during this stage such as negotiation, valuation, contract provisions, provide protection against agency risks, future staging of investments and board representation (Zacharakis, 2010).

Frequently, the entrepreneur is most affected by the valuation. The valuation is important to the entrepreneur as it determines how large a stake the entrepreneur will give to the venture capital for a certain amount of funding. (Wright and Robby 1998, Kaplan and Stromberg, 2001). Usually during the evaluation phase and due diligence, a VC will establish the basis for a valuation of the company. This stage usually involves extensive negotiation between the entrepreneur and VC.

Post investment activities

Monitoring usually involves frequently a seat on the supervisory board involves mandatory disclosures made by the entrepreneur. These are formal mechanisms used by VCs to monitor their investments. (Cumming and Johan, 2007). Next to monitoring, the VCs may help the entrepreneur building the company. Specific examples are strategic advice, finding relevant business contacts such as suppliers and buyers, mentoring, raising additional capital or expertise by recruiting key personnel (Steier and Greenwood, 1995; Hudson and Evans, 2005).

The aforementioned discussion has provided an overview of the stages found in venture capital investment models. The next section relates the investment process to reducing information asymmetry.

2.3.3 Information asymmetry in the venture capital investment process

Figure 2 illustrates how the venture capital investment process reduces information asymmetry. To illustrate figure 2, consider the following hypothetical situation.

Figure 2: Mitigating information asymmetry in the venture capital investment process

An entrepreneur has decided that he will try to fund his business through venture capital financing. Though an acquaintance, he approaches a VC (deal origination). The VC has a lot of confidence in this person. The referrer of this person is a signal of the potential good quality (“not a lemon”) deal to the VC. Although the VC does not know for sure, he invites the entrepreneur to pitch the business proposition. The VC screens the business proposition of the entrepreneur to determine if it is worthwhile to continue. If the deal is truly of good quality the VC will ensure that the entrepreneur does not run off with his money after the deal is signed so he drafts a contract to bond the entrepreneur. For example by taking only a minority ownership or by staging its investments4. The contract is structured before the deal is signed but it serves as protection for moral hazard afterwards. In the post-investment activities, the VC receives monthly financials, which enables him to monitor the firm.

4 _{Staging refers to upon reaching certain milestones, additional funding is released by the VC)}

Investment process

Adverse-selection

Signalling Deal origination

Screening

Screening Evaluation

Moral hazard

To conclude, the venture capital investment process reduces information asymmetry between the entrepreneurial firms and the VC.

2.4 Syndication

The previous section has described how information asymmetry can be reduced during the investment process. This section will investigate how syndication can facilitate the cross-border investment process. As research will show in chapter 3, almost all cross-border venture capital investments comprise syndication.

2.4.1 Syndication

Syndication is typically defined as multiple VCs5 investing in an entrepreneurial venture during the same investment round (Makela, 2004). The use of syndication is a widespread and enduring practice in the venture capital industry. For example, in Europe roughly one third of all venture capital and private equity investments consists of syndication in the period 2007-2011 (EVCA Yearbook, 2012)6. The widespread use of syndication is reflected in the current body of research, which is well developed (Bygrave, 1987; Lerner, 1994; Brander et al., 2002; Manigart et al., 2006). However, research examining cross-border syndication is underdeveloped (Makela and Maula, 2008). Moreover, another characteristic is that the majority of studies on syndication have taken the VC-perspective. Studies examining syndication through an entrepreneurial angle are scarce (Tian, 2012).

The remainder of this section is organized in two parts. First, the overall advantages and disadvantages of syndication are discussed. The second part will examine cross-border syndication in venture capital transactions.

Advantages of syndication

Syndication may facilitate the pre- and post-investment process in several ways. Entrepreneurial firms may have funding requirements that individual VCs are unable or unwilling to provide (Manigart et al., 2002, Manigart et al., 2006). From a VCs perspective, syndication can enhance the screening (e.g Lerner, 1994; Wright and Lockett, 2003; Brander et al., 2002; Manigart et al., 2006) by accessing information from a larger knowledge base (DeClercq and Dimov, 2004) which results in reducing problems of adverse selection (Cumming, 2006). From a post-investment perspective, syndication may occur because of specific resources needed to add value to the entrepreneurial firm (Bygrave, 1987; Gompers and Lerner, 2001, Brander et al., 2002; DeClercq and Dimov, 2004). These aforementioned

5_{Entrepreneurial firms that receive venture capital from multiple investors may notice different roles between various investors, such as lead}

investor and non-lead investor. The lead investor has typically invested a larger stake and does the monitoring of the investment. The decisions regarding the portfolio firm are made in discussion and consensus with other participants although ultimate power often resides with the lead investor to ensure timely decision making during difficult situations such as bankruptcy or sale of the venture (Wright and Lockett, 2003).

motives can be complementary during the whole investment process as research from Das et al., (2011) has shown. They conclude that venture capital syndicates “uncover diamonds in the rough, and

then polish them to success”. Other advantages described in the literature relate specifically 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).

Drawbacks of syndication

While syndication may have its benefits, it introduces new costs and risks. For VCs, working with more participants has several drawbacks. More investors will involve a dilution of the return on the investment while control of the venture is more limited which may hold off potential investors (Brander et al., 2002; Guler and McGahan, 2007). Trust is paramount as competitors will try to maximize their own interests (Anand & Gelatovic, 2000 qf Guler and McGahan, 2007). More importantly, syndication does relieve agency costs. Agency costs exist in any situation in which parties cooperate and information is not equally distributed (Jensen and Meckling, 1976).

The rationale to syndicate may differ between Europe and the USA. European VCs syndicate primarily for financial motives such as portfolio diversification and access to larger deal flows (Manigart et al., 2002, Manigart et al., 2006). In contrast, US VCs syndicate to access specific expertise and knowledge in return for capital (Gompers and Lerner, 2001).

2.4.2 Cross-border syndication

When an entrepreneurial firm receives venture financing from multiple investors whereby at least one VCs is foreign, a cross-border syndicate arises. A cross-border syndicate can comprise of (i) at least one foreign partner in combination with local partner(s) or (ii) multiple foreign VCs. Numerous authors have contributed to a better understanding of venture capital syndication although only a modest number of articles have examined cross-border syndicates (Makela and Maula, 2008).

Cross-border syndication in the pre-investment stage

The involvement of local investors in a cross-border syndicate can help mitigate these problems (Jaaskelainen and Maula, 2009). Frequently, the local VCs is the initiator of the emergence of a cross-border syndicate whereby they invest first followed by subsequent investments from foreign VCs joining in later investment rounds (Makela and Maula, 2008). The early presence of a local investor provides endorsements to foreign VCs about the quality of the investment (Makala and Maula, 2008). This finding is affirmed by research from Tykvova and Schertler (2011) who found that the presence of an experienced local VC mitigates the distance between the entrepreneurial firms and the foreign VCs. Moreover, investing in an entrepreneurial firm frequently involved investing in a different rule of law. Experience of local investors with the legal environment provides comfort to foreign investors.

Cross-border syndication in the post-investment stage

After the entrepreneurial firm has received venture financing two activities occur; monitoring and value. First, monitoring involves frequent visits to entrepreneurial firms by the VCs (Gorman and Sahlman, 1989 qf Sorendson and Stuart, 2001). Monitoring an entrepreneurial firm in a foreign country is inherently more difficult. Relying on a local VCs can reduce this concern as geographic proximity reduces the cost of monitoring (Sorendson and Stuart, 2001).

Second, during the post-investment VCs are typically involved in value adding activities. The presence of a local VCs investor in a cross-border syndicate could help. For example, hands-on everyday support by advising and counseling the entrepreneurial firm (Makela and Maula, 2008).

2.5 Concluding

This chapter has reviewed the role of information asymmetry in venture capital investments and has discussed how various stages in the venture capital investment process resolve some information asymmetry problems. Moreover, the use of syndication as a plausible control mechanism in cross-border venture capital transactions has been discussed.

The cross-border investment process and syndication will serve as an outline for the empirical section of this research. First, the stages of the investment process will serve as a structure to investigate the steps taken by entrepreneurial firms when securing foreign venture capital. This will facilitate the process of identifying similarities and differences in the empirical part of this research. Second, it will make clear what role syndication plays in securing venture capital and in what way this benefits entrepreneurial firms.

III CROSS-BORDER VENTURE CAPITAL AND SYNDICATION IN

THE NETHERLANDS

3.1 Chapter overview

Cross-border venture capital is becoming an important phenomenon in the European venture capital industry (e.g. Wright et al. 2005; Mäkelä & Maula, 2006; Aizenman and Kendall, 2008; Guler and Guillen, 2010; Meuleman and Wright, 2011). Does this assertion apply to the Netherlands? How important is syndication in Dutch cross-border venture capital transactions? This chapter will answer these questions by presenting an overview of the Dutch cross-border venture capital market. Figure 3 illustrates the scope of this chapter based on several levels of granularity.

Figure 3: Structure of venture capital transactions

Source: Own model. White boxes represent the scope of this research which is compared to the total venture capital market.

Paragraph 3.2 will define venture capital transactions in general. Paragraph 3.3 will identify the share of cross-border transactions as part of the overall Dutch venture capital market based on a unique dataset specifically designed for this research. Paragraph 3.4 will differentiate between single and syndicated cross-border transactions whereby the share of local investors in cross-border syndicates is specified. Paragraph 3.5 will make a comparison between cross-border transactions in different industries followed by an analysis of the ICT-sector.

3.2 Types of VCs

Not all venture capital is the same. The investments in entrepreneurial firms can originate from different types of VCs as categorized by the VICO project7 (2011). Figure 4 illustrates these four categories.

7 _{A project sponsored by the European Commission to assess the impact of venture capital & private equity financing based on data}

Figure 4: Four types of venture capital investors

Source: Based on typology from VICO (2011)

The objectives of these four types of VCs are heterogeneous. For example, public sector investors primarily stimulate the regional economy. Corporate investors predominantly invest in new technologies from a strategic perspective. Bank-controlled VCs typically invest in larger and more mature firms and have a low risk strategy. From this research, independent investors are the ideal type of VCs because they have purely financial objectives. Their governance structure is most similar to US-style limited partnership VCs. Independent VCs are responsible for 55% of all transactions (VICO, 2011).

This research will only investigate the transactions of independent VCs given their purely financial objectives.

3.3 Cross-border venture capital in the Netherlands

3.1.1 Two-step approach

There is no publicly accessible data available about the total number of transactions in the cross-border venture capital market in the Netherlands. Therefore, a two-step approach is used. First, the overall size of the Dutch venture capital market in terms of number of transactions is determined. Second, a unique dataset has been created for the purpose of this research to estimate and map the number of cross-border transactions. These two steps are related to each other to derive the share of cross-border venture capital as part of the overall venture capital market. Appendix A provides the steps taken to comprise the dataset.

3.2.2 Total Dutch venture capital market

Figure 5: Two perspectives on measuring the venture capital market

Source: Own model Industry perspective

The Dutch NVP, which represents the Dutch venture capital industry, publishes statistics of the overall Dutch venture capital market on an annual basis following the industry perspective. The figures of the Dutch NVP show a total number of 875 transactions made by Dutch VCs in the period 2007 - 2011.

Graph 1: “Official” figures presenting two views on the size of the Dutch venture capital market

Source: Own calculations based on NVP Ondernemend Vermogen 2008, 2009, 2010, 2011 / EVCA Yearbook 2010 and 2011.

Market perspective

The European Venture Capital Association (EVCA) publishes the total number of investments made in Dutch portfolio firms. According to the EVCA Yearbook 2011 and 2012, a total number of 849 transactions are reported in Dutch portfolio companies during the period 2007-20118. Other research on worldwide venture capital flows finds a total number of 329 venture capital investments in Dutch portfolio companies in the period 2000-2008 (Schertler and Tykvova, 2010). The research of Schertler and Tykvova relied on the commercial Zephyr database, which is less comprehensive, whereas the EVCA relies on their own PEREP_Analytics9 supported by national and local venture capital

8 _{The difference between the industry and market perspective is 30 transactions in 2009. This implies that Dutch VCs invested more often in}

foreign portfolio firms then foreign VCs in Dutch portfolio firms.

9 _{This platform exists since 2007, and is a joint initiative of EVCA together with 18 national and regional PE and VC organizations across}

Europe. Prior to 2007 only industry statistics where published (EVCA Yearbook, 2010). Appendix A provides an overview.

Market perspective (“EVCA”)

Dutch portfolio compa ny

Foreign venture ca pita l firm

Dutch venture ca pita l firm

Industry perspective (“NVP”)

associations. In addition, the official statistics include all four types of venture capital investors while the research of Schertler and Tykvova exclude corporate- and public-sector controlled venture capital investments.

This research takes the perspective of Dutch portfolio firms. Therefore, the market perspective is more suitable when estimating the size of the Dutch cross-border venture capital. From this point forward, only figures representing the market perspective are used unless specifically mentioned otherwise.

3.2.3 Dutch cross-border venture capital market.

Until now, the focus has been on the overall Dutch venture capital market. This section will focus on estimating the size and relevance of the cross-border venture capital market in the Netherlands. There are no comprehensive details available for the total number of Dutch portfolio companies that have a foreign VCs participating in their investment round. For this research, a unique dataset has been set up. The dataset consists of transactions by at least one foreign independent investor. The findings of this dataset is presented in Graph 2, which illustrates the distribution of 127 foreign venture capital investments in Dutch portfolio companies during the period 2000-2011.

Graph 2: Yearly distribution of investment rounds in Dutch portfolio companies

Source: Own dataset (see appendix A)

investments of around 16% within Europe. The VICO project relies on sampling of various countries and does not refer the numbers back to the “official” statistics.

This section has defined the size of cross-border investments by the criterion that at least one foreign independent VCs invests in a Dutch portfolio firm. As presented later on, most cross-border venture capital transactions deal with multiple investors. The next section will discuss syndication in cross-border transactions.

3.4 Cross-border venture capital syndication in the Netherlands

There are three types of syndicates in the Dutch market. First, a purely local syndicate in which multiple local investors participate. Second, syndicates with solely foreign venture capital investors. Lastly, a local-foreign syndicate in which at least one foreign VCs participates.

In the cross-border dataset created for this research, syndication is defined as investments in Dutch portfolio firms by multiple investors in which at least one foreign VCs without a Dutch branch is present. Based on this definition around 95% of all cross-border investments in Dutch portfolio companies consist of syndication (table 2). Syndication is not unique for cross-border investments. In 2009 and 2010, respectively 30% and 25% of private equity investments10 in Dutch portfolio firms consist of syndication (EVCA Yearbook, 2011).

A key question from the perspective of this research is whether foreign investors investing in the Netherlands syndicate with Dutch investors to overcome the added complexity of investing abroad. Table 6 shows that still 31% of all cross-border transactions involve syndications with only foreign investors, whereas 65% can be classified as a local-foreign syndicate in which at least one foreign VCs participates. The percentage of local-foreign syndicates are lower than those found in research by Tykvova and Schertler (2008) in which 87% of syndicated cross-border deals involve a local investor. Table 3 reveals that foreign VCs primarily come from the USA and from Western countries geographically close the Netherlands such as the UK, Belgium, Germany and France. Moreover, foreign-local syndicates are on average larger in number of participants.

Overall, this section concludes that syndication is very common in cross-border venture capital transactions. It illustrated the size of only-foreign and local-foreign syndicates. The next section will reveal larger differences in syndication practices when comparing industries.

10 _{The EVCA only discloses market industry figures including domestic and foreign private equity transactions. Assuming that all syndicated}

Table 2: Involvement local VCs in cross-border syndication during 2000-2011

Source: Own calculations based on dataset (see appendix A)

3.5 Cross-border venture capital investments in different industries.

3.5.1 Recipients of venture capital financing.

Approximately 80% of European portfolio companies that have received venture financing are active in the Life Science or ICT sector (EVCA, Yearbook 2011). Similar conclusions can be drawn for the Dutch market where VCs invest primarily in these sectors (Ondernemend vermogen NVP, 2011). The cross-border dataset employed in this research reveals a similar pattern with approximately 75% of total investments going to the ICT and Life Science industry, which is shown in table 3. The next section will compare these two industries.

3.5.2 Comparison cross-border venture capital by industry

Both the ICT and Life Science sector are known for being highly innovative although they function differently (Thompson, 2008). Development time in the Life Science industry is relatively lengthy for and capital intensive, and therefore needs large up front funding (Thompson, 2008). Once a product is a success, the barriers for entry are high for competitors. The ICT sector on the other hand is characterized by relatively lower levels of (up front) investments and shorter development times, therefore entry barriers are lower unless a distinctive format or product is established (Thompson, 2008). Table 3 reveals some of the different characteristics among the different industries. For example, the average deal size in the Life Science industry is almost twice the size compared to the

Single

Syndicated only foreign

Syndicated foreign & local

Total transactions Absolute # transactions 6 39 82 127 In percentage 5% 31% 65% 100% M ean (in mln) 0 5,1 7,7 7 M edian ( in mln) 5,8 9,9 9

Table 3: Cross-border venture capital comparison of the ICT, Life Science and Other

Source: Own calculations based on dataset (see appendix A)

3.5.3 Investigating cross-border venture capital by industry

This chapter has provided an overview of the Dutch cross-border venture capital market. The role of cross-border venture capital for Dutch entrepreneurial firms is relatively modest compared to earlier research. Cross-border venture capital as part of the total number of venture capital transaction measured around 7.4% for the period 2007-2011. Around 95% of all cross-border transactions involve syndication. The presence of local investors in a syndicate varies by industry sector.

The remainder of this research will examine the ICT industry in further detail. Several reasons justify this choice. First, around 50% of ICT investments are carried out with solely foreign investors, compared to 13% in the Life Science sector. The lack of local venture capital investors presents an intriguing case on how entrepreneurs manage to raise purely foreign venture capital. Second, ICT consists of almost half the population of all cross-border transactions and therefore presents a larger sample for this research. Third, in the ICT sector around 80% of syndicates have three or fewer investors. In comparison, in the Life Science sector more than 80% of syndicates have three or more partners. A higher number of partners in a syndicate will increase the complexity of this research. Lastly, products from the ICT sector are perhaps better to comprehend for an outsider as it often involves tangible products that can be touched or visualized. Life Science technology is hard to understand and frequently involves long research periods centered on the scientific study of organisms such as plants and human beings and are generally more abstract.

The Dutch entrepreneurial ICT market is the main research topic of this paper, which will serve as the research setting when examining the investment process of raising foreign venture capital.

ICT Life

science Other Total

Number of deals (n=127) 50% 24% 25% 100%

Amount (888 mln) 40% 40% 20% 100%

Avg. deal size (mln) 5,6 11,3 5,6 7,0

No syndication (1 investor) 6% 3% 3% 5%

2 investors 41% 16% 41% 35%

3 investors 30% 29% 28% 29%

4 investors 11% 23% 19% 16%

>5 investors 13% 29% 9% 16%

only foreign investors 47% 13% 29% 34%

inc. local partners 53% 87% 71% 66%

IV

CASE STUDY APPROACH

4.1 Chapter overview

This research paper investigates how Dutch entrepreneurial firms manage the investment process when attracting cross-border venture capital despite the preference of VCs to invest locally. A qualitative research design has been selected. Further substantiation of this approach and the choice thereof will be discussed in this chapter. First, an overview of the research environment is provided. Second, the research setting will be discussed followed by the data sampling. Third, the method of data collection and the analysis of data is clarified. Lastly, a reflection on the quality and reliability is presented.

4.2 Research strategy

A two step research strategy is chosen. First, a dataset has been created (appendix A - chapter 3) to provide an elementary and complete overview of the total Dutch cross-border venture capital market. From this dataset a selection of companies is made for a multiple case study. An exploratory case study approach is used as research strategy because it allows clarifying a “decision or set of decisions,

why they were taken, how they were implemented, and with what result” (Schramm, 1971 qf Yin,

2003). Case studies are suitable if the type of question asked is “how” or “why”, when the researcher has little control over events and when the focus is on a contemporary phenomenon within some real-life context (Yin, 2003). Moreover, it is an appropriate method in the early stages of research (Eisenhardt, 1989).

Furthermore, a case study is seen as suitable research strategy for the following reasons. First of all, a lack of knowledge in the academic field of cross-border venture capital is observed. The venture capital literature has a strong domestic focus, which is not surprising given the local preference of VCs. In practice, the last decade has shown increasing occurrences of foreign venture capital investments, which is not yet understood. An interesting research avenue exists between lacking theory and observations in the real world. Second, venture capital is taking place in a rather secluded area in the private sector that is not easily accessible. VCs are private firms just like the ventures they invest in whereby the private nature of these transactions and the absence of publicly disclosed information make data gathering difficult (Robbie and Wright, 1998; Meuleman, Wright, Manigart and Lockett, 2009). These two elements, (i) the relatively recent emergence of the phenomenon and (ii) the complexity of the research field, provide the key justification for using a case study.

studies may be an addition to or precede the exploratory research. A research does not necessarily have to be predetermined as belonging to one of these categories, but can evolve and change over time (Saunders et al., 2000) as this research shows. This research provides a combination of descriptive research (an overview of the Dutch entrepreneurial cross-border venture capital market) followed by exploratory research to provide more in-depth insight through cases. The exploratory case studies follow a grounded approach (Glaser and Strauss qf. Saunders et al., 2000) whereby the data gathered from the interviews leads to theory building.

When choosing a case study as research design, a distinction needs to be made between single and multiple case studies. For this research a multiple case study design is most plausible as it allows for replication and generalization (Yin 2003). First, the cases are investigated as independent units and later compared to each other.

4.3 Research sample

Table 4: Interview schedule and coded VCs names

Table 5: Background description of entrepreneurial firms

4.4 Research execution

Data collection

The primary data gathering technique consisted of semi-structured interviews. Yin (2003) recommends the development of a case study protocol. In this study, initial interviews were held with an industry expert about the private equity market and with a venture capitalists involved in the cross-border venture capital market. A case-study protocol (appendix B) was created to organize and structure the interviews. Before the interview, publicly available about the transaction was collected through desk research, archival corporate information and the LexisNexis database. A historic storyline was created in preparation for the interviews to improve triangulation.

The primary goal of the interviews was to acquire insight on how the cross-border investment process takes place. Sufficient time was allowed to explore new ideas on the topic. The interviews were semi-structured and tape-recorded, except for a meeting with an investment manager of a venture capital firm and an interview by telephone with an entrepreneur. The notes from these two interviews were

Venture name S ector Interviewee Time Method Foreign Dutch

E1 ICT CEO- co-founder 60 min company visit FVC1 DVC1 E2 ICT CEO- co-founder 80 min company visit FVC2 DVC2 E3 ICT CEO- co-founder 55 min company visit FVC3 DVC3 E4 ICT CEO- co-founder 45 min telephone FVC4 DVC4 E5 ICT CEO- co-founder 80 min company visit FVC5 DVC5 DVC1 Venture capitalist Principal p artner 45 min company visit

DPE1 Private equity Director 60 min company visit

Interview schedule Coded VC name

Dutch entrepreneurial firms E1 E2 E3 E4 E5

Year founded xxxx xxxx xxxx xxxx xxxx Investment Year of funding xxxx xxxx xxxx xxxx xxxx Stage of financing xxxx xxxx xxxx xxxx xxxx Deal size xxxx xxxx xxxx xxxx xxxx Syndication

Local and foreign investors xxxx xxxx xxxx xxxx xxxx

Only foreign investors xxxx xxxx xxxx xxxx xxxx

Origin foreign VC xxxx xxxx xxxx xxxx xxxx

written out directly after the interview. All tape-recorded interviews were transcribed which resulted in 40 pages of (rough) notes.

Data analysis

First, the interviews were transcribed verbatim. The second step involved assigning all data to categories reflecting the sequence of the investment process. The passages of the interview that did not contribute to understanding of the investment process were deleted and specific relevant passages were marked to make the data manageable. The cases were first independently analyzed. After this analysis the cases were compared to distill patterns.

The presentation of the evidence follows a narrative approach (Langley, 1999). This approach is used by other authors (e.g Steier and Greenwood, 1995) investigating the venture capital process. A narrative approach will present a storyline of the contextual evidence found during the examination of the five case companies. According to Langley (1999) almost all process research involves a type of narrative strategy to present the raw data where the focus is on the meaning of the process as experienced by individuals. The evidence presents how entrepreneurs experienced and managed the border investment process. Moreover, during the narrative description the emergence of cross-border syndicates becomes apparent.

4.5 Research reflection

The quality of this research is dependent on the design of the multiple case study. In the following two paragraphs, the reliability and validity will be discussed.

Reliability

Reliability is achieved if another researcher using the same case will arrive at the same findings and conclusions. Two elements improve the reliability of this research. First, a case study protocol and database has been developed. This will increase the likelihood that another researcher following the protocol will derive the same results. Second, the interviews were transcribed and whereby a chain of evidence is established. Publicly available information is investigated to calibrate the interviews as much as possible.

Validity

V

CASE STUDY RESULTS

5.1 Chapter overview

This chapter will present the results of the five interviews with the entrepreneurial firms. Paragraph 5.2 will provide an overview of the most significant activities undertaken by the entrepreneurial firms as distilled from the interviews. The evidence presents how entrepreneurs experienced and managed the cross-border investment process. Moreover, paragraph 5.3 presents a narrative description of the investment process.

5.2 Overview of the investment process

The analysis of the interviews is represented in a stage model, which is depicted in Figure 6. The stages represented in figure 6 are derived from the analysis summarized in table 6. The context behind the five-stage model is presented from paragraph 5.3 onwards. The results indicate that the investment process is sequential. Within certain stages, the process is reiterative and complex. No differentiation is made between local and foreign activities to maintain a model that is able to capture the complexity of venture capital investing.

Figure 6: Sequence of the investment process from entrepreneurial perspective

Table 6: Summary key activities investment process

Investment

readiness Contacting Pitching

Providing information & negotiation Reporting, consulting 1. 2. 3. 4. Signing deal 5.

Activities local vs foreign

Foreign activities Local activities

Investment readiness

(1)

− connect to ecosystem (E5) − Visibility in market (E4)

− Create social proof, positive vibe, noise in market (E5) − Arrange endorsement influential local people (E2, E3, E4) − Prepare teaser - roadshow (E1, E3, E4, E5)

Contacting (2)

− Using foreign investment banks (E1)

Contacting partners in the network of venture capital firms (E4,E5) − Establishing contact with venture capital firm during road show

(E2,E3)

− Contacting local investment bank (E4) − Searching for local investors/informals (E2/E3)

− Penetrating venture capital network through mutual trusted friend (E4)

Pitching (3)

− Roadshow with investment banks through Europe and pitching to VC (E1)

− Pitch to venture capital firms (E1,E2,E4, E5) − Pitch to US firm (E5)

− Pitches in Netherlands during VC roadshow (E3) Foreign venture capital firm used local person (E2, E3) − Searching for local investors/informals (E2, E3) − PPT demo through screensharing and skype. (E2)

Providing information & negotiation (4)

− Negotiation of term sheet(E5)

− Received termsheet before detailed information was requested (E5) − Negotiation of other things not included in term sheet (E5)

− Providing info to venture capital firm (E1,E2,E3,E4)

− Foreign venture capital firms visited entrepreneurial firm few days (E1) − Received list of required information which was shipped in a box to a laywers

firms (E2, E3)

− Negotiation (E1, E2, E3, E4)

− Adding local syndication partners to transaction (E1, E3,E4, E5)

Reporting & consulting

(5)

− Infrequent visit to venture capital firm to discuss strategy (E2, E3) − Opening foreign office in proximity of foreign venture capital firm

(E5)

− Occasionally VC visits entrepreneurial firm during board meeting (E1) − Venture capital firm joins board meeting in call (E1, E5)

− Prepare management reports (E1, E2, E3, E4, E5)

− Discussion of management report at entrepreneurial firm (E1, E2, E3, E4, E5) − Monthly reporting in a conference call, venture capitalist dials in (E4) − Supervisory board (E1, E4)