Introduction to Corporate Finance

20: Entrepreneurial Finance and Venture Capital

elite universities and technical institutes. Crucially, much of India’s growth has been in the information

technology (IT) sector, the traditional target of venture capital investment. For all these reasons, India

should become one of the five leading venture capital markets globally within a few years. According to

the Bain and Company report, India attracted over US$17 billion in PE funding for the year 2010.

7 Why do you think European governments and stock exchanges are so keen to promote a vibrant

entrepreneurial sector? Can you think of any competitive advantages that might accrue to Europe

because of its relatively late start in developing IPO markets?

8 What are some of the competitive strengths and weaknesses of venture capital as practised in

Europe, Japan and Canada when compared with practices in the United States?

9 What type of growth in venture capital funding and investment have China and India experienced

during recent years? What is their future outlook for venture capital growth?

CONCEPT REVIEW QUESTIONS 20-4

SUMMARY

■ Entrepreneurial finance requires specialised

financial management skills because

entrepreneurial growth companies (EGCs)

are unlike other private or publicly traded

companies. In particular, EGCs must finance

much higher asset growth rates than other

companies and tap external financial markets

much more frequently.

■ In addition to providing risk capital to

entrepreneurial growth companies,

professional venture capitalists (VCs) provide

managerial oversight, coupled with technical

and business advice, assistance in developing

and launching new products and valuable help

recruiting experienced management talent.

■ Venture capital investments are often highly

concentrated both geographically and

industrially. Furthermore, the most successful

VC funds are almost always organised as

limited partnerships and follow distinctive

investment strategies (staged investment)

using unique financial instruments

(convertible preferred shares).

■ Venture capitalists endeavour to make

intermediate-term, high-risk investments in

entrepreneurial growth companies and

then to exit these investments, either by

selling the companies they hold to another

company or by executing an initial public

offering. Phenomenal growth in venture

capital fund raising and investment has

occurred since the mid-1990s in the United

States, Western Europe and certain Asian

countries, but not in Japan or most

developing countries. In recent years, the

two largest venture capital markets (the

United States and Europe) have seen

significant convergence in contracting

practices, investment patterns and

returns.

■ The Australian PE market is one of the

largest in the world, outside of the US.

Canada and Israel have had great success

in venture capital funding and investment,

as have China and India – but growth in

venture capital elsewhere in Asia has lagged

behind that in the United States and Western

Europe. Venture capital investment in

developing countries has been growing from

a low base during recent years.

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