FSR Forum 15-05 Venture Capital

15th Volume August 2013 Issue #5

Venture Capital Interview B. Mintjes

Column J. Block

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Founder of Maxwell Group

Venture capital firms as smart investors

Column J. F. Slijkerman

Tafelzilver; ABN AMRO

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fsrforum • volume 15 • issue #5

Venture Capital

Preface

Dear reader, In front of you lies the fifth and final edition of the FSR Forum of this year. The theme of this edition is Venture Capital. Venture capital is money provided by investors (venture capitalists) to startup firms and small businesses with perceived long-term growth potential. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership. In this edition we will further discuss how a venture capitalist exits a company and the future of venture capital.

In this edition we have three articles that will give you a better insight into venture capital. The first article is written by Joseph McCahery and Erik Vermeulen. This article starts with a helicopter view of the recent trends and developments in the venture capital industry. A few developments are immediately noteworthy, such as the revival of corporate venture capital and venture capital firms’ focus on investments in later stage startup companies. They then examine the role of venture capitalists in the implementation of innovation strategies in listed corporations. At the end they observe the growing importance of venture capitalists on the board of listed corporations, which arguably has a positive effect on their operating performance and innovation outcomes.

The second article is based on the research of Douglas Cumming and Jeffrey MacIntosh. In this article they discuss their research on the complete class of venture capital exit vehicles and the associated selection effects for measuring risk and return on venture capital investing. They distinguish between full and partial venture capital exits over the complete class of exits and provide evidence that the risk and return on venture investing differs by the extent of exit for each exit vehicle.

The last article is written by Bernard Black and Ronald Gilson. In this article they extend the debate about the relative efficiency of bank- and stock market centered capital markets by explaining a systematic difference between the two systems: the existence of a much stronger venture capital industry in stock market-centered systems.

As for every edition we have interviewed an expert on the related theme. This time we have interviewed Bernd Mintjes. Mister Mintjes started as an assistant-professor where he got the feedback from his students that he should start a company instead of just lecturing about new firms. He then started a company and invested in his students companies. Years later he started Investormatch. Investormatch is a platform where investors and entrepreneurs can meet. In the interview, mister Mintjes talks about the importancy of a good elevator pitch, about the future of new firms and about his company Investormatch. At the end he also gives some advice to students that are interested in venture capital.

The professor column is written by professor Block. His column ‘Venture capital firms as smart investors’ explains why venture capital firms are smart investors. In this column professor Block writes about how venture capital firms can assist start-ups by providing human capital and social capital.

2 • Preface

Mister Groeneveld talks about the situation at ABN AMRO in his column. He talks about the value of the shares of ABN AMRO, but also about the value for the citizens of the Netherlands.

After this column you can find the news update about venture capital. The news update explains the effect of the debt crisis on venture capital.

The last edition of this year’s FSR members column is written by Chris Wouterlood and the FSR Former Board member column by Bjorn Waltmans. They talk about their time at the FSR and their jobs. After these colums you will find activity reports about the European Finance Tour, International Research Project, Bachelor Accountancy Day and the Asset Management Tour and a letter from the Alumni Association.

The final edition also means that the next f.t. board has been announced. The f.t. board consists of Gijs Romer, Karen Wiersma, Justin Toet, Floris Mathol, Martine Nieuwenhuijzen Kruseman and Gert-Jan Breukink. On page 44 they will introduce themselves with a some information about themselves. The Editor in Chief of the 16th volume of the FSR Forum is going to be ­Martine Nieuwenhuijzen Kruseman. From now on she is going to start looking for new editors to make the next volume a great success. If you are interested, please do not hesitate to contact us by sending an email to info@fsr.nl or visit us at H14-06.

The introduction of the new FSR Board means that our year has come to an end. I am looking back at a great year and I would like to thank everyone that has helped with the 15th volume of the FSR Forum. Special thanks goes to the editorial committee, Petra van den Akker and Roija Rasuli, because of their hard work and contribution to every edition.

For now I hope you will enjoy reading the last edition of the 15th volume and I wish you all the best in your future career.

Sincerely, Maaike Lanphen Editor in Chief FSR Forum FSR board 2012-2013

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fsrforum • volume 15 • issue #5

Venture Capital

Table of contents

Venture Capital, IPOs and Corporate Innovation Joseph A. McCahery and Erik P.M. Vermeulen

This article starts with a helicopter view of the recent trends and developments in the venture capital industry. A few developments are immediately noteworthy, such as the revival of corporate venture capital and venture capital firms’ focus on investments in later stage start-up companies. They then examine the role of venture capitalists in the implementation of innovation strategies in listed corporations. At the end they observe the growing importance of venture capitalists on the board of listed corporations, which arguably has a positive effect on their 6 operating performance and innovation outcomes.

A Cross-Country Comparison of Full and Partial Venture Capital Exit Douglas J. Cumming and Jeffrey G. MacIntosh

In this article they discuss their research on the complete class of venture capital exit vehicles and the associated selection effects for measuring risk and return to venture capital investing.

They distinguish between full and partial venture capital exits over the complete class of exits, and provide evidence that the risk and return to venture investing differs by the extent of exit for each exit vehicle.

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Does Venture Capital Require an Active Stock Market?

Bernard S. Black and Ronald J. Gilson

In this paper they extend the debate about the relative efficiency of bank- and stock market centered capital markets by explaining a second systematic difference between the two systems: the existence of a much stronger venture capital industry in stock market-centered systems.

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Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 15th volume, number 5, circulation 1900 copies

4 • Table of contents

Editor in chief Maaike Lanphen Editorial department Petra van den Akker Roija Rasuli Editorial advisory Dr. M.B.J. Schauten Dr. W.F.C. Verschoor Drs. R. Van der Wal RA

With the cooperation of S. Black J. Block D. J. Cumming R. Gilson Drs. J.G. Groeneveld RA RV J.G. MacIntosh J.A. McCahery E.P.M. Vermeulen B. Waltmans C. Wouterlood

Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

Interview B. Mintjes

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Founder Investormatch Column professor

Baker Tilly Berk www.werkenbijbakertillyberk.nl Ernst & Young www.ey.nl/carriere NIBC www.careeratnibc.com PwC www.werkenbijpwc.nl Rijksoverheid www.werkenvoornederland.nl

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J. Block Column Joost Groeneveld PhD

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‘Tafelzilver; ABN AMRO’?

FSR News Word of the Chairman

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News Update

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FSR former board member

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FSR member

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Activity reports

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Introduction XVIth board

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FSR Activity Calendar

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Company Presentations KPMG www.gaaan.nu SNS Reaal www.snsreaal.nl

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Table of contents • 5

fsrforum • volume 15 • issue #5

Venture Capital, IPOs and Corporate Innovation

By Joseph A. McCahery & Erik P.M. Vermeulen 1. Introduction How should policymakers and regulators stimulate initial public offerings (IPOs) of high growth companies? If fast growing companies are subject to less stringent listing requirements, will this shift result in more listings? Consider the introduction of the Jumpstart Our Business Startups Act (JOBS Act) in the United States on 5 April 2012. The Act introduces the ‘Emerging Growth Company’ (EGC) status.

Companies that are able to avail themselves of the EGC-status will be offered a transition period – or on-ramp period – during which they are exempted from a number of regulatory requirements associated with going public. Inspired by the JOBS Act, we see similar initiatives already in Europe. The NYSE Euronext, for example, has established EnterNext, the new pan-European exchange with lighter rules and regulations tailored to the needs of high growth companies. Policymakers in the United Kingdom see the relaxation of listing rules as the key to reversing the trend of emerging growth companies being reluctant to entering the bureaucratic and overregulated world of listed companies.

Much of the academic literature has focused on the costly and time-consuming legal and regulatory compliance regulations that are seen as a partial barrier to IPOs and the growth potential of non-listed (high potential growth) companies (Kamar, Karaca-Mandic and Talley, 2006). At the same time, the decline in the number of listed companies is naturally focusing academic attention on the emergence of a new generation of securities markets and the introduction of new

6 • Venture Capital, IPOs and Corporate Innovation

alternative listing venues and deregulatory measures (Pollman, 2012; Mendoza and Vermeulen, 2011). By the same token, the dream of a successful IPO is still considered to be one of the most important drivers for innovative entrepreneurs to start their own companies. A strong and accessible IPO market is important to attract venture capital and other start-up and growth capital investors, since it provides them with the opportunity to exit their investments and, more importantly, realize strong positive returns. Thus, the point is simply that IPOs are accepted as essential to sustain a robust venture capital industry, which in turn is necessary to accelerate innovation, entrepreneurial activities and job ­creation.

In this short essay, we offer a different view. Clearly, recent trends and developments in the venture capital industry make it timely to take stock of the primacy of traditional IPO exit strategies. This is especially true, given that the sluggish IPO market has led many venture capitalists to access other exit routes. For instance, trade sales have become the preferred exit option for most investments in growth companies. They offer, in contrast to an IPO exit, immediate liquidity without onerous lockup periods and disclosure requirements (Mendoza and Vermeulen, 2011). What is perhaps more important is that emerging growth companies and their venture capitalists increasingly believe that it is in their best interest to remain private as long as possible. Their belief appears to be correct.

In most sectors, it is no longer necessary to go public to get access to large investments, high profiles and liquidity.

In most sectors, it is no longer necessary to go public to get access to large investments, high profiles and liquidity

There is little doubt, however, that the best performing companies and companies in highly capital-intensive sectors (such as biotechnology and medical) will eventually pursue an IPO to find capital that is needed to continue stellar growth and success. But even then technology entrepreneurs and their venture capitalists, particularly if there has been a lot of hype surrounding their possible IPOs (which has been the case for companies in the area of social media), increasingly establish structures that allow them a tight post-IPO grip on control (as if they run private companies).

Interestingly, controversial Silicon Valley venture capital firms, such as Andreessen Horowitz, have openly heralded the move towards such structures (Lublin and Ante, 2012).

In their view, successful entrepreneurs should protect themselves against indifferent boards and investors that have no real interest in the company, do not care about the sector it operates in nor understand its technical and long-term prospects.

If these trends continue, policymakers’ efforts to spur economic growth and create jobs by unveiling measures to relax rules and regulations governing IPOs of high growth companies will most likely be in vein. The JOBS Act in the United States is a prominent example of a recent failed attempt. To be sure, many observers believe that a relatively high number of venture-backed companies have confidentially filed for IPO with the Securities and Exchange Commission under the JOBS Act. However, the first empirical results indicate that the special pre-IPO and post-IPO arrangements are not persuasive enough to lure a significant number of ‘emerging growth companies’ to consider going public (Economist, 2013; McCahery and Vermeulen, 2013a; WilmerHale, 2013).

That said, this essay starts with a helicopter view of the recent trends and developments in the venture capital industry. A few developments are immediately noteworthy, such as the revival of corporate venture capital and venture capital firms’ focus on investments in later stage start-up companies. We then examine the role of venture capitalists in the implementation of innovation strategies in listed corporations. Surprisingly, we find that venture capitalists show an increased interest in mature listed corporations, which arguably paves the way to more trade sales with higher exit values in the future. They progressively partner with these corporations to form a variety of new venture capital models (Iannazzo, McCahery and Vermeulen, 2013). Furthermore, we observe

the growing importance of venture capitalists on the board of listed corporations (McCahery and Vermeulen, 2013b), which arguably has a positive effect on their operating performance and innovation outcomes (Celikyurt, Sevilir and Shivdasani, 2012). Section 4 concludes.

2. Venture Capitalists and Exit Strategies In this Part, we highlight the influence that a poorly performing IPO market has on the policy options of lawmakers.

We also analyze the degree to which the uninspired returns has led venture capitalists to adopt new exit strategies. In particular, we discuss the higher number of trade sales and the increasingly dominant presence of corporations in the venture capital industry

2.1 The Preferred Exit Strategy: Trade Sales In the aftermath of the financial crisis, policymakers introduce measures to stimulate entrepreneurship and innovation in order to boost economic growth and job creation. To this end, they have sought to modernize and simplify their corporate law statutes in order to offer corporate forms in which small and medium-sized (non-listed) firms can be simply started and nurtured into bigger listed ones (McCahery, Vermeulen and Priydershini, 2013). This thinking fits well with the traditional life cycle concept of a company. It typically starts with turning an idea into a start-up company. The start-up attempts to raise capital from both private investors and venture capital funds. These investors support the start-up by contributing money and services, which brings the company to the next stage of its development. Ideally, this continues until the moment that the private investors and venture capital funds decide to exit the portfolio company by floating its shares on a stock exchange. Beyond the initial public offering (IPO), the company usually gradually looses its ‘start-up’ feel, becomes less responsive to disruptive innovation and will eventually disappear.

What is worth mentioning is that the IPO brings about changes in the mindset of policymakers. The distinction between start-up ventures and ‘IPO firms’ matters for regulatory design purposes. Deregulation is the principal strategy for governments to facilitate an innovative and entrepreneurial business environment. The IPO triggers a regulatory response from policymakers which presumably will enhance investor confidence in financial markets. Of course, there is something

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Does the post-crisis position of many venture capital funds suggest that the model is broken?

to the regulatory ‘post-IPO’ approach. Since shareholders in listed companies are often unable to monitor their investments closely, the IPO provides executive directors and managers ample opportunity to act self-interestedly at the expense of investors and other stakeholders. Arguably, strict mandatory company law and listing rules as well as ‘comply-or-explain’ corporate governance codes can help to reduce the information asymmetries between shareholders and stakeholders on the one hand and the directors and managers on the other.

Indeed, it is widely acknowledged among regulators and academics that principal-agency based regulation matters for the development of robust financial markets, which, in turn, make IPOs an attractive financing means for fast-growing non-listed companies. Still, there are problems with pushing the so-called principal-agency based view of regulation too far. For instance, strict corporate governance rules and regulations have induced fast-growing companies and their venture capital investors to rethink their IPO intentions, which arguably hampers the growth potential of promising start-up companies (McCahery and Vermeulen, 2006).

There is little question that the sluggish IPO market could explain why venture capital over the last decade has, as an investment class, failed to live up to its expectations. Traditional venture capital firms have (with a few notable exceptions) delivered uninspiring returns which some entrepreneurs attribute to the venture capitalists failing to deliver sufficient strategic advantage and acceleration capability (Mulcahy, 2013). The evidence is that, since the burst of the dot-com bubble in 2000-01, more venture capital has been invested in start-up companies than returned to the investors in venture capital funds, making it a relatively unattractive asset class for institutional investors (Mulcahy, Weeks and Bradley, 2012). The fact that payouts to venture capital fund investors show an 80% drop in the first half of 2011 compared with the same period in 2000 is a good example of the underperformance of the venture capital industry. The upshot is that the underperformance has resulted in a decrease in the number of venture capital funds in Europe and the United States (Vermeulen and Nunes, 2012).

Thus, institutional and other investors are pouring money in fewer, high quality funds. The financial crisis and the uncertain economic outlook have caused many managers to close offices or shut down completely. Does the post-crisis position

8 • Venture Capital, IPOs and Corporate Innovation

of many venture capital funds suggest that the model is broken? Set against this background, it might look that way.

Still, the actual answer is that venture capitalists are slowly but surely adapting a different strategy. Venture capitalists have generally become more conservative and risk-averse.

Evidence indicates that conservatism may have moved many of them towards the financing of already profitable ‘later stage’ companies or companies founded by so-called serial entrepreneurs with considerable track records (Jordan, 2013). Furthermore, in order to increase the track record of the funds and attract the interest of institutional and other investors, venture capitalists started to realize that they should focus on preparing their portfolio companies for an acquisition by a strategic corporate investor, thereby increasing the probability of a successful exit. Clearly, by immediately focusing on a trade sale, portfolio companies will be ready for an exit scenario earlier than in the event of an IPO (see Figure 1). It is thus not surprising that the ratio of IPOs to trade sales is increasing from 1 to 1 in 1997 to 1 to 10 in the United States in 2011 and 2012. In Europe, this ratio was 1 to 9 in 2012. Moreover, as expected, IPOs are currently particularly used by entrepreneurs and venture capitalists in highly capital-intensive sections. According to the National Venture Capital Association (www.nvca.org), the second quarter of 2013 showed the highest number of biotechnology venture-backed IPOs since 2000: 13 of the 21 reported IPOs were completed by companies that are active in either the biotechnology or medical sector.

Figure 1: Median Time From Initial Equity Funding to Exit

(IPO versus Trade Sale)

Source: Dow Jones VentureSource

2.2 The Partial Exit Strategy: IPOs For policymakers the question arises, can we foresee a revival in IPOs when the equity market rebounds? Alas, it is difficult to provide an easy answer. What is remarkable in this respect, however, is that even if venture capitalists and high tech entrepreneurs decide to float the company’s shares on a stock exchange, the IPO is completed with a relatively low median free float of 23% in the United States and 27% in Europe in 2011 and the first half of 2012, indicating that they only gradually give up their ‘private company’ status (this is also due to onerous lock-up provisions which prevent venture capitalists to pursue an immediately exit). More generally, the pace with which the companies are willing to give up this status depends on the hype surrounding the IPO. If the IPO has attracted significant media and (retail) investors’ attention, the technology entrepreneurs/founders in consultation with their lead venture capitalists tend to structure their future listed companies in such a way that investors and board members are not able to unseat them.

One example is LinkedIn that went public on 18 May 2011.

Similar to other social media companies, the most controversial part of LinkedIn’s governance structure is the use of dual class shares. Following its IPO, co-founder Reid Hoffman together with the key venture capital investors held Class B shares, which gave them 10 votes per share. Class A shares with 1 vote a piece were offered to the public. As it turns out, Reid Hoffman, who is also the chairman of the board of directors of LinkedIn (and part-time partner at a venture capital firm in Silicon Valley), held (directly or indirectly) a minority stake of approximately 16.3 percent of the outstanding Class A and Class B shares, but controlled approximately 61.5 percent of the voting power on 31 December 2012 (McCahery, Vermeulen and Hisatake, 2013). Indeed, Reid Hoffman’s Class B shares, which gave him controlling voting power in excess of the cash flow rights attached to the minority stake, allowed him to resist immediate pressures from public investors to produce short-term results and forego investments in new products and services.

It follows from this example that venture capitalists do not always perceive IPOs as being in the best interest of their portfolio companies. Consider, moreover, that venture capitalists increasingly induce entrepreneurs to sell their companies to a strategic investor (Broughman and Fried, 2013).

What is probably more important in this respect is the increasingly dominant role of mature corporations in the venture capital industry. Here it should be noted that corporations do not only provide a possible exit opportunity in the event of they being interested in acquiring a venture capital backed technology (McCahery and Vermeulen, 2010). Corporate investors are also viewed as one of the new ‘breeds’ of active as well as patient investors that show an increased interest in investing in both early and later stage start-up companies (together with family offices and micro-venture capital funds) (Vermeulen and Nunes, 2012).

There is substantial evidence that mature corporations have progressively established dedicated corporate venture capital arms or structures, seeking competitively advantageous innovations, whilst capitalizing on their own ability to provide a broad range of strategic benefits from industry partnerships, distribution opportunities and product development insights. However, these corporate venture capital units also experience challenges with tenure (and often exist at the whim of prevailing executives’/CEO’s sentiment), access to appropriate deal flow, and a perceptions that their focus on ‘strategic’ benefits is not always comport with the start-up companies’ aspirations of becoming a profitable and respected industry player. Yet it is here where the venture capitalists’ interest in corporate venturing is triggered. We spell out the details of their interest in corporate venture capital activities below.

3. Venture Capitalists and Strategic Corporate Investors The involvement of corporations in the venture capital industry is not new. First, corporations already introduced venture capital initiatives in the eighties and nineties.

Second, Figure 2, which contains information about the number of deals with direct corporate involvement in the United States from 1995 to 2012, shows that corporate initiatives gained momentum at the turn of the century. This is not surprising given the excessive returns in the venture capital industry at that time. Third, multinational corporations, through their corporate venture capital divisions and subsidiaries, mostly made co-investments in portfolio companies of renowned venture capital funds by entering into syndication arrangements with these funds. Fourth, this strategy obviously reduced the risks involved in being engaged in venture capital financing. Fifth, corporate venture capital organizations further

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increased the probability of a successful and profitable investment by focusing on later, and less risky, rounds of investments.

Perhaps it is not surprising that the corporate involvement in the venture capital industry significantly declined after the Internet bubble burst in 2000. Still corporate venture capital persisted and never disappeared. After the financial crisis, corporations appear to increase their involvement and investments in innovative technology companies again, thereby slowly but surely regaining market share (see Figure 2). There are many explanations for the ‘revival’ of corporate venture capital initiatives. For instance, setting up corporate venture capital units provides the corporations with a window to the fast-moving and innovative start-up market.

They need this window in order to find the ‘next big thing’ in other companies/markets.

Figure 2: Deals with Direct Corporate Venture Capital Involvement in the United States

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Despite the prospect of real gains, Figure 2 also seems to indicate that there are reasons to be skeptical of the aggressive claims made about corporate venture capital. As was already mentioned above, corporate venturing initiatives are not without challenges. First, the scope of corporate venture capital divisions is often unclear. Second, corporations often lack the experience and expertise that is needed to succeed in the venture capital industry. Third, the corporate venture capital divisions often employ an ineffective governance structure and compensation system (Dushnitsky and Saphira, 2008). It is therefore unsurprising that new venture models are beginning to emerge. In particular, venture capi-

10 • Venture Capital, IPOs and Corporate Innovation

talists are increasingly establishing partnerships with mature corporations. Empirical research shows that 64% of the 134 reported announcements of corporate venture capital initiatives in 2012 and the first quarter of 2013 can be characterized as ‘joint venture capital models’ (data derived from www. globalcorporateventuring).

3.1 Joint Venture Capital Models It has been known for some time that the joint venture capital model may provide a mix of strategies that may offer a more effective basis for funding projects.

An example of a corporation that has already a longer experience with the ‘joint venture capital model’ is Unilever. For instance, in 2002, Unilever took, besides investments in its own ‘independent’ venture capital funds, a position as sponsor and lead investor in Langholm Capital Partners Fund to target investments in the consumer-facing business in Europe. In 2007, Unilever expanded this idea even further by divesting one of its ‘independent’ corporate venture capital arms, Unilever Technology Ventures, which was at that time structured as a limited partnership with Unilever as its sole limited partner.

It replaced this structure by the tested model in which Unilever became an anchor investor in Physic Ventures, an early stage venture capital fund based in San Francisco, which was set to invest in consumer-driven health, wellness and sustainable living.

This example explains quickly why these relationships between corporations and venture capitalists have the potential to lead to ‘win-win’ situation. On the one hand, Unilever can benefit from the experience and expertise of the fund managers, whereas on the other hand Langholm Capital and Physic Ventures can profit from an active corporate investor that may not only prove helpful in selecting the right portfolio companies, but may also provide the necessary support to the development of these start-up businesses. Perhaps more importantly, Unilever provides a possible exit opportunity in the event of it being interested in acquiring the venture capital backed technology. Moreover, working closely with multinationals could also create real investment options to spin-out or spin-off companies. Finally, this strategy is targeted to opening doors to innovative technology companies in emerging markets with strong growth potential.

listed corporations often start losing their entrepreneurial spirit beyond the IPO.

The Unilever-Physic model is a clear example of an ‘outsourced venture model’. Presently, this model often evolves towards a ‘minority corporate venture model’. Consider Steamboat Ventures which was established in 2000 as an independent VC firm to invest in tech startups on behalf of The Walt Disney Co. Its early funds were raised exclusively from Disney, including a $200m North America Fund (Steamboat Ventures III) and a $175m Asia fund (Steamboat Asia). But, Steamboat Ventures has shifted from a dedicated outsourced strategy to a ‘minority’ corporate venture model.

For instance, Disney was reported to have committed $42.5m to its Steamboat Ventures V fund, which is ‘only’ 50% of its total. Here it should be noted that Steamboat raised $85m from 13 investors in December 2012.

We also observe other joint venture capital models. For instance the partnership between Index Ventures and two competing pharmaceutical companies, GlaxoSmithKline and Johnson & Johnson, could be categorized as a ‘multicorporate venture model’. The €150 million fund mainly invests in single assets that have the potential to become leading products in the future, the so-called asset-centric investment model. The corporate investors provide advice to Index Ventures by appointing their representatives on a ­scientific advisory committee. In order to avoid potential conflicts of interest, however, the two multinationals have not obtained any preferential rights (of first refusal) to promising drugs that could emerge from this partnership. If they are interested in acquiring an ‘asset’, they will have to engage in an open competitive bidding process. Index Ventures hopes through a supportive, but at the same time independent attitude of its corporate investors to establish a partnership that can lead to a joint development of new drugs and medicines.

Finally, the Glass Collective, a program set up by venture capitalists Kleiner Perkins Caufield & Byers, and Andreessen Horowitz in conjunction with Google Ventures in 2013, is a new twist on the joint venture capital model. Although the venture capitalists (and Google Ventures) make independent investments (without setting up a new fund), they leverage their relationships to identify and accelerate the emerging glass technologies. We call this the ‘corporate collaboration venture model’. Figure 3 gives an overview of the ‘joint venture capital models’ that were announced in the first quarter of 2013.

Figure 3: Corporate Venture Capital Announcements in Q1 2013 (n=50)

Source: Adapted from Claudia Innazzo, Joseph A. McCahery and Erik P.M. Vermeulen, Corporate Innovations and Venture Capital, Working Paper, forthcoming 2013.

A refocus of independent corporate venturing capital to joint venture models leads to a valuable set of contracting arrangements between venture capitalist and corporations. The refocused interest in corporate venture capital is particularly welcome in light of the decline in traditional venture capital fund raising efforts and corresponding weaknesses in the IPO market. Whether the joint venture capital model will substantially improve the venture capital practice remains to be seen. Yet, it is only to be expected that the new models will only develop further in the future. In this respect, it is noteworthy that venture capitalists start playing a key (and ­collaborative) role in the innovation strategies of mature corporations. The next Section provides two examples of this trend.

3.2 Venture Capitalists in Corporate Organizations In practice, venture capitalists do not only establish partnerships with large corporations. Increasingly, we find venture capitalists becoming part of the corporate organization itself.

There can be little doubt that venture capitalists could add value to corporate units. Their experience and skills undoubtedly enhance a corporation’s innovation potential.

But there is more. Previous work on the presence and role of venture capitalists in boards of directors of listed corporations have typically viewed this association as a mechanisms for better post-IPO performance and better corporate governance (Baker and Gompers, 2003). Along the same lines, recent empirical work has examined the extent to which venture capitalists as board members in mature public corporations have a positive effect on operating performance and innovation outcomes (Celikyurt, Sevilir and Shivdasani, 2013). From

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this perspective, the appointment of ‘venture capital directors’ on the boards of listed firms can be understood as an important mechanism in promoting innovation and growth. Indeed, as mentioned above, listed corporations often start losing their entrepreneurial spirit beyond the IPO. They may become less responsive to disruptive innovations and see talented employees leave for hotter start-up companies. In this context, the recruitment of experienced venture capitalists on the board could provide a solution. As such, they could assist a mature corporate’s executive management with initiating joint venture capital models and other open innovation strategies through which the corporation partners with (or acquires) smaller start-ups.

the direction of a sluggish IPO market, many venture capitalists are more and more accessing other exit routes. We see that trade sales have become the preferred exit option for most investments in high potential growth companies since they offer, in contrast to an IPO exit, immediate liquidity without onerous lockup periods and disclosure requirements. Worse

Certainly, these open innovation strategies, which are increasingly viewed as a successful ‘healthy aging’ model in the life cycle of companies, provide an explanation for the decision to appoint venture capitalists as independent directors in the boards of mature listed companies (McCahery and Vermeulen, 2013b). Table 1 provides an overview of the board composition of the top 40 of the FT-500 2012 corporations (excluding companies that operate in the oil and gas industry and the financial sector). Interestingly, these corporations are considered to have established corporate venturing organizations that belong to the most influential units in their sectors.

First, mature corporations are now playing an increasingly dominant role in the venture capital industry. Corporations not only provide a possible exit opportunity in the event of they being interested in acquiring a venture capital backed technology, but are themselves viewed as one of the new breed of active as well as patient investors that show an increased interest in investing in both early and later stage start-up companies.

Table 1: Venture Capitalists on Boards of Corporations Active in the Venture Capital Industry Diversity Indicators

Average

Median

Max.

Number of Directors (total)

13

12

20

Min. 7

Number of Independent Directors

9

10

16

0

Women on the Board

3

3

5

0

General Expertise

4

4

9

0

Financial Expertise

2

2

4

0

Business Expertise

2

2

7

0

Investors/VCs

1

1

4

0

Source: Adapted from Joseph A. McCahery and Erik P.M. Vermeulen, Understanding the Role of the Board of Directors of Listed Companies after the Financial Crisis: From Managerial Oversight and Insulation to Value Creation, Working Paper 2013.

4. Conclusion Some theoretical and policy papers have argued that new alternative exchanges and deregulatory measures are essential to creating a strong and accessible IPO market which is considered important to attract venture capital and other start-up and growth capital investors.

The evidence indicates that despite these efforts to reverse

12 • Venture Capital, IPOs and Corporate Innovation

for the IPO view is that there are no indications that this trend will reverse any time soon (particularly since emerging growth companies and their venture capitalists believe that it is in their best interest to remain private as long as possible).

Indeed, there are strong arguments to suggest that venture capital backed acquisitions will only become a more important exit strategy in the future.

Second, because traditional corporate venture capital divisions suffer from some limitations as investors, venture capitalists increasingly establish partnerships with mature corporations.

There is evidence that new these joint venture capital models may provide an effective basis for funding innovative projects.

One of the features of these new models is that corporations have become anchor investors in early stage venture capital funds that invest in related industries. Recent evidence also point to the emergence of an outsourced venture model or minority corporate venture model. In these models, venture capital funds, which are managed by independent venture capitalists with outstanding track records, make investments in start up firms on behalf of large corporations.

Finally, venture capitalists not only establish partnerships with large corporations, but they are increasingly becoming part of the corporate organization. Recent evidence indicates that venture capitalists as board members in mature public companies have had a positive effect on operating performance and innovation.

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A Cross-Country Comparison of Full and Partial Venture Capital Exit

By Douglas J. Cumming & Jeffrey G. MacIntosh

A Cross-Country Comparison of Full and Partial Venture Capital Exit • 13

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In an initial public offering (IPO)

the firm sells shares to members of the public for the first time

1. Introduction Much theoretical research has focused on the role of venture capital financial contracts in mitigating agency costs and informational asymmetries between venture capitalists and entrepreneurial firms (e.g., Sahlman, 1990; Cornelli and Yosha, 1997; Trester, 1998; Marx, 1998; Hellmann, 1998; Bergmann and Hege, 1998; Trester, 1998; and Kirilenko, 2001). Empirical research along these lines may be classified into one of two categories: studies that use industry data with many observations (e.g., Gompers and Lerner, 1999a), and studies that use more detailed hand-collected data with up to 200 observations (e.g., Gompers, 1997; Trester, 1998; Kaplan and Strömberg, 2000, 2001; Hellmann and Puri, 2002).

A second type of research in venture capital focuses on mitigating agency problems between entrepreneurial firms and their new owners upon venture capital exit. The ability to make a profitable exit lies at the heart of venture capital [“VC”] investing (Sahlman, 1990; Gompers and Lerner, 1999a). There are 5 principle types of VC exits (MacIntosh, 1997): an initial public offerings [“IPO”], in which a significant portion of the firm is sold into the public market; an acquisition exit, in which the entire firm is bought by a third party; a secondary sale, in which only the VC’s shares are sold to a third party (again, typically a strategic acquiror); a buyback, in which the VC’s shares are repurchased by the entrepreneurial firm; and a write-off, in which the VC walks away from the investment.

Barry et al. (1990), Megginson and Weiss (1991), Ljungqvist (1999), Gompers and Lerner (1999a), Franzke (2001), Lee and Wahal (2002) and others have considered the role of venture capitalists in the going public process. MacIntosh (1997) analyzed factors that affect the choice of the complete class of venture capital exits (IPOs, acquisitions, secondary sales, buybacks, and write-offs); this work has been extended and the factors that affect the selection of different exits have been empirically tested by Cumming and MacIntosh (2000) using a hand-collected data set from venture capital exits in Canada and the United States. Recent papers by and ­Schweinbacher (2002) and Cumming (2002) analyze exits in Europe; Fleming (2002) considers Australian data. Petty et al. (1999) provide U.S. case studies on harvesting venture capital investments for different types of exits. Smith and Smith (2000) discuss aspects of IPOs, acquisitions and buy-

14 • A Cross-Country Comparison of Full and Partial Venture Capital Exit

backs. Black and Gilson (1998) introduced the notion of implicit contracting over exit. Hellmann (2000) and Smith (2000) analyze control over exit. Cochrane (2001) significantly adds to this research by considering a large sample of U.S. industry data.

This paper extends previous research on the complete class of venture capital exit vehicles and the associated selection effects for measuring the risk and return to venture capital investing. We distinguish between full and partial exits for the complete class of venture capital exits. We provide empirical tests of the factors that the choice of a full or partial venture capital exits over the complete class of exits, and provide ­evidence that the risk and return to venture investing differs by the extent of exit for each exit vehicle. Partial exits are ­typically associated with a higher risk and return, which is consistent with the proposition that partial dispositions are more common among exits whereby informational asymmetries are more pronounced.

We use hand-collected data on 248 VC exits from Canada and the United States. This data was collected using our own ­surveys and distributed with the assistance of the Canadian Venture Capital Association, and Venture Economics in the U.S. The trade-off in collection more detailed private VC exits information is in the comparatively smaller data set; nevertheless, our descriptive statistics are comparable to the available U.S. industry data described by Cochrane (2001) and the Venture Economics Annual Reports, and the available Canadian industry data from the Canadian Venture Capital Association Annual Reports (see section 6). Our hand-collected data involves a number of distinguishing features from available U.S. industry data employed by Cochrane (2001). For example, the U.S. industry data does not distinguish between selection among the full class of private exits (acquisitions, secondary sales, and buybacks), and it does not distinguish between selection of full and partial exits over the five distinct different types of exits, among other things (see section 6 below).

In the spirit of Black and Gilson (1998), Jeng and Wells (2000), and Mayer et al. (2002), we also provide an analysis of international differences in venture capital. We find significant differences in exit behaviour and the risk and return to venture capital as between Canada and the United States. We find a lower risk and return to venture capital investing in Canada.

These differences are likely attributable to a combination of market and regulatory factors that differ between the two countries.

2. Types of Exit Vehicles Employed by Venture Capitalists In general, VCs will exit their investments by one of the ­following five methods. In an initial public offering (IPO) the firm sells shares to members of the public for the first time.

The VC will typically retain its shares at the date of the public offering, selling shares into the market in the months or years following the IPO. Alternatively, following the IPO the VC may dispose of its investment by making a dividend of investee firm shares to the fund's owners. Despite the fact that the VC will not usually sell more than a small fraction of its shares at the time of the IPO (if any at all), exits effected by sales subsequent to the IPO are (following common usage) classified as IPO exits.

The VC may also sell the entire firm to a third party, which we refer to below as an acquisition exit. Typically, the buyer is a strategic acquiror – a larger entity in the same or similar business to the acquired firm that wishes to meld the firm’s product or technology with its own (either vertically or horizontally). Strategic acquisitions often involve the merger of two corporations with some prior contractual relationship, such as in the supply of inputs or the licensing of a particular technology (MacIntosh, 1994).

This form of exit may be affected in a number of different ways. For example, the transaction may be structured as a sale of all the shares in return for cash, shares of the acquiror, or other assets. Alternatively, the transaction may be structured as a sale of the firm's assets or as a merger between the investee firm and purchasing firm (or a subsidiary thereof).

In an exit effected by way of secondary sale, the VC will sell its shares to a third party – typically a strategic acquiror, and in some cases another VC. A secondary sale differs from an acquisition exit in that only the shares of the VC are sold to the third party; the entrepreneur and other investors will retain their investments. Where the purchaser is a strategic acquiror, it will usually be seeking a window on the firm’s technology, with a view to possibly effecting out a complete acquisition of the firm sometime in the future.

In a buyback exit, the VC will sell its shares to the entrepreneur and/or the company.

A write-off typically involves the failure of the entrepreneurial firm. The VC may continue to hold shares in a non-viable or barely profitable enterprise in the case of a write-down, as discussed below.

3. Full and Partial Venture Capital Exits An exit may be full or partial. A full exit for an IPO involves a sale of all of the venture capitalist's holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist's holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a secondary sale or a buyback exit (in which the entrepreneur buys out the venture capitalist), a partial exit entails a sale of only part of the venture capitalist's holdings. A partial writeoff involves a write down of the investment.

Because partial exits for each type of exit are somewhat unique, we have empirically tested the data both for all exits together, and for each exit vehicle separately. The next section develops a theory of full versus partial venture capital exits for each type of exit vehicle.

4. A Theory of Partial Exits In previous work (MacIntosh, 1997; Cumming and MacIntosh, 2000, 2001), we provide a general theory of venture capital exits. This work, primarily based on Black and Gilson (1998) and Gompers and Lerner (1999), is briefly summarized as follows. VC investors are active, value-added investors. They bring not merely capital to the table, but knowledge, skill, and a network of legal, accounting, investment banking, marketing, and other contacts that are useful to a fledgling enterprise. We hypothesize that a VC will exit from an investment when the projected marginal value added as a result of the VC's efforts, at any given measurement interval, is less than the projected cost of these efforts. By "effort" we mean all of those things that VCs can do to add value to an enterprise. By "cost" we mean all the direct and overhead costs associated with creating value, the costs of monitoring and periodically re-evaluating the investment, as well as the opportunity cost associated with alternative deployments of

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A Cross-Country Comparison of Full and Partial Venture Capital Exit • 15

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capital. By "projected" we mean to suggest that the VC will take into account not merely present cost and effort, but a summation of all future costs and efforts. By "measurement interval", we mean those points in time (whether quarterly, yearly, or otherwise) at which the VC formally or informally reassesses its continued commitment to an investment.

Below, we refer to the projected costs of maintaining the investment as the “maintenance costs”.

We predict that the exit condition will tend to be satisfied, and the VC will effect an exit, when its skill set is exhausted, when the maintenance costs of the investment increase unexpectedly, or when the VC’s potential value added diminishes sharply (owing, e.g., to an internal event such as a failure of the firm’s technology, or an external event like a competitor’s invention of a superior product. This will be subject to considerations relating to the VC’s opportunity cost of investment, however. We hypothesize that the VC will exit its investment even when the potential value added exceeds the investment’s maintenance cost, if the VC can sell the investment to a party with a greater ability to add value (such as a strategic acquiror).

Regardless of ability to add value, there may also be windows of opportunity for the VC to sell into the public market when valuations for technology firms are particularly high.

There may be one other category of exit motives. The VC and the buyers may share enough information so that the price paid is the proper one, and the VCs are merely looking for liquidity; investors may be getting anxious for cash. A second information story may be that the market has enough information that would lead it to over-value the company. In this second case, VCs may decide to ‘take the money and run’.

Similarly, it may also be that the new investors have excess cash in search of investments; for similar evidence on the price paid by VCs and their IPO exits, see Gompers and Lerner (1999a, 2000).

When would we expect to observe partial exits? Initially, a partial exit appears to be an odd phenomenon. A partial exit, involving the disposition of some, but not all of the VC's investment, will lower the VC's potential upside profit commensurately with the lessening of the VC’s equity stake. It will also dilute the VC’s ability to exercise powers of control over the enterprise – powers that can be useful in bringing discipline to management and to maximizing the value of the

16 • A Cross-Country Comparison of Full and Partial Venture Capital Exit

investment. It will not, however, substantially decrease the VC’s maintenance costs. Such costs are relatively fixed; i.e., the cost of maintaining an investment, per dollar of investment, will increase less than proportionately with the size of the investment. Turning this on its head, as the size of the VC’s investment decreases, it sacrifices economies of scale in investing. We thus expect that partial exits will be made only in a small number of special situations, which we summarize here and elaborate below. As will be seen, in most of these situations, the purpose of the partial exit is to mitigate information asymmetries arising as between the VC as seller, and the outside buyer(s).

5. Conclusion The comparative evidence in the Canadian and U.S. survey data indicates the importance of selection effects across the full class of exits (IPOs, acquisitions, secondary sales, buybacks, and write-offs) for both full and partial exits. Significant differences exist in the proportions of full and partial exits across different exit vehicles, and across the two countries.

The significant differences we observe in the risk and return to venture capital within each country are in part attributable to selection effects in the choice of exit vehicle and in the extent of exit. The significant differences we observe in the returns to venture capital across the countries are consistent with the legal and institutional differences in the U.S. and Canadian venture capital industries. Both the extent of exit for different exit vehicles and legal and institutional factors appear relevant in assessing the risk and return to venture capital across countries.

International differences between Canada and the United States provide some insight into the factors that affect the selection of full versus partial exits. The extent of exit may be predicted by the degree of information asymmetry between firm insiders and outsiders. Overall, we find evidence in support of some, but not all of the expected relationships. Curiously, however, in no case do we find support for our hypothesized relationships in both the United States and Canada. We believe that some of these differences are explicable. For example, that a buyback is more likely to result in a partial exit in the U.S. and not in Canada can be explained by the higher average investment made by U.S. venture capitalists in their invested firms, which diminishes the entrepreneur’s ability to use her own resources to buy out the VC. Similarly,

Significant differences exist in the proportions of full and partial exits across different exit vehicles, and across the two countries

that IPOs tend to be associated with partial exits in Canada can be explained as a product of Canada’s regulatory environment, with longer escrow and hold period requirements. The statistical insignificance of IPO exits as a predictor of a partial exit in the U.S. is probably due to the six-month escrow period that binds VCs after the IPO. If many VCs sell immediately following the elapse of the escrow period, these exits will show up as “full” exits on our data sample, even though anecdotal evidence provides strong support for the proposition that U.S. venture capitalists typically agree to an escrow so as to signal the investment quality to outside investors.

Other differences in our empirical results between the two countries are less easily explained. We posited a number of factors (such as a less efficient capital market, lower average VC skill, and a variety of intuitional factors) that would lead us to believe that a partial exit would have more value in Canada than in the United States. Our result in relation to the significance of the market/book ratio is in keeping with this hypothesis, as is the result pertaining to secondary sales.

However, the hypothesis also suggests that the technology investment variable should be more significant in Canada than in the U.S. In fact, it is significant in the U.S. but not in Canada, as is the capital for investment variable. Thus, our theoretical predictions about differences between the two countries are not supported by the data. It may be that our Canadian results are contaminated by noise resulting from the lower average skill level of Canadian VCs, given that this will tend to introduce some randomness into exit decisions.

That there are demonstrable differences in the results between Canada and the United States is in itself significant, as it suggests that even if our theory is incomplete, the selection of full versus partial exits and the risk and return to venture investing in the two countries does indeed differ in light of different institutional, regulatory, and market contexts. ­Further research across other countries is warranted.

A Cross-Country Comparison of Full and Partial Venture Capital Exit • 17

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Does Venture Capital Require an Active Stock Market?

Bernard S. Black & Ronald J. Gilson

18 • Does Venture Capital Require an Active Stock Market?

1. Introduction The United States has comparatively small banks that play a limited role in the governance of large corporations, and a well developed stock market with frequent initial public offerings (IPOs). In contrast, Japanese main banks and German universal banks are larger in size relative to Japanese and German firms, and play a larger role in monitoring large firms. Neither country has an active IPO market. Advocates of bank-centered capital markets, such as these in Japan and Germany, claim that this structure fosters patient capital markets and long-term planning, while a stock market centered capital market is said to encourage shortterm expectations by investors and responsive short-term strategies by managers. Advocates of stock market-centered systems stress the adaptive features of a market for corporate control, which are lacking in bank-centered systems, and the lack of empirical evidence of short-termism.

theory that a strong stock market is a precondition to a substantial venture capital industry. The United States has a much more fully developed venture capital market than ­Germany. The differences are of both size and substance. The United States has a larger number of venture capital funds and the funds themselves are larger relative to each country's economy. United States funds invest heavily in early-stage ventures and high-technology industries, while German ­venture capital provides primarily later-stage financing in lower-technology industries.

In sum, the United States and Germany illustrate the pattern we seek to explain: the United States possesses a dynamic venture capital industry, centered on early stage investments in high-technology companies; Germany lacks a comparable industry.

3. The importance of exit by the venture capital fund In this article, we extend the debate about the relative ­efficiency of bank- and stock market centered capital markets by explaining a second systematic difference between the two systems: the existence of a much stronger venture capital industry in stock market-centered systems. We define "venture capital," consistent with American understanding, as investment by specialized organizations ("venture capital funds") in high-growth, high-risk, often high technology firms that need equity capital to finance product development or growth. We exclude "buyout" financing that enables a mature firm's managers to acquire the firm from its current owners, even though in Europe, so-called "venture capital" firms often provide such financing.

Other countries have openly envied the U.S. venture capital market and have unsuccessfully sought to replicate it. We offer an explanation for this failure: We argue that a well developed stock market that permits venture capitalists to exit through an initial public offering (IPO) is critical to the existence of a vibrant venture capital market.

Understanding the link between the stock market and the venture capital market requires that we understand the implicit and explicit contractual arrangements both between venture capital funds and their investors, and between venture capital funds and entrepreneurs. We offer an explanation for two characteristics of the United States venture capital market. First, we explain the importance of exit -- why venture capitalists seek to liquidate their portfolio company investments in the near to moderate term, rather than becoming long-term investors in portfolio companies.

Second, we explain the importance of the form of exit: why the potential for exit from a successful start-up through an IPO allows venture capitalists to enter into implicit contracts with entrepreneurs concerning future control of startup firms, in a way not available in a bank-centered capital market. The implicit contract over future control that is permitted by the availability of exit through an IPO helps to explain the greater success of venture capital in countries with stock market-centered capital markets.

The first step in understanding the link between the stock market and the venture capital market involves the importance of exit by the venture capital fund from its investments. We develop below an informal theory for why exit from successful investments is critical both for the relationship between a venture capital fund and its portfolio companies, and for the relationship between the fund and its capital providers.

3.1. Exit from the venture capital fund - portfolio company relationship Venture capitalists provide more than just money to their portfolio companies. They also provide management assistance, intensive monitoring of performance, and reputational capital -the venture capitalist's ability to give the portfolio company credibility with third parties.

A well developed stock market that permits venture capitalists to exit through an initial public offering (IPO) is critical to the existence of a vibrant venture capital market Management assistance: Venture capital fund partners are experienced at developing startup companies and possess market knowledge based on other portfolio investments in the same and related industries. They can assist a managementthin early-stage company in locating and recruiting the management and technical personnel it needs as its business grows, and can help the company through the predictable problems that high-technology firms face in moving from prototype development to production, marketing, and distribution. Venture capitalists’ industry knowledge and experience with prior startup firms helps them locate managers for new startups.

2. Venture capital in the United States and Germany In this section, we compare the venture capital industries in the United States and Germany in order to motivate our

Intensive monitoring and control: Venture capital funds have both strong incentives to monitor entrepreneurs' performance,

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Does Venture Capital Require an Active Stock Market? • 19

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deriving from equity ownership and strong control levers, disproportionate to the size of their equity investment. One control lever results from the staged timing of venture capital investment. The initial investment is typically too small to allow the portfolio company to carry out its business plan.

The venture capitalist will decide later whether to provide the additional funding that the portfolio company needs. The contract between a venture capital fund and a portfolio company provides other control levers. The venture capitalist typically receives convertible debt or convertible preferred stock that carries the same voting rights as if it had already been converted into common stock, plus greater board representation -- often an absolute majority of the board -- than if board representation were proportional to voting power.

Board control lets the venture capitalist replace the entrepreneur as chief executive officer if necessary. Even where the venture capitalist lacks board control, the investor rights agreement gives the venture capital ­provider veto power over

the reputation market necessary to prevent the venture capitalist from misusing this power. significant operating decisions by the portfolio company. We discuss below the reputation market necessary to prevent the venture capitalist from ­misusing this power.

Reputational capital: Much like an investment bank underwriting an initial public offering, the venture capital fund acts as a reputational intermediary. Venture capital financing enhances the portfolio company's credibility with third parties.

Talented managers are more likely to work for a venture ­capital-backed company, because the venture capitalist's participation provides a credible signal about the company's likelihood of success. Suppliers will be more willing to risk committing capacity and extending trade credit to a company if a venture capitalist both vouches for and monitors its management and technical progress. Customers will likewise take more seriously the company's promise of future product delivery. Later on, the venture capitalist's reputation helps to attract a high quality underwriter for an IPO of the portfolio company's stock. The venture capital fund's proffer of its reputation to third parties who have dealings with a portfolio company is credible because the fund is a repeat player, and has put its money where its mouth is by investing in the portfolio company.

Economies of scope in venture financing: The management assistance, monitoring, and service as a reputational intermediary that a venture capitalist provides share a significant economy of scope with its provision of capital. This scope economy arises from a number of sources. The portfolio company must evaluate the quality of the venture capital fund's proffered management assistance and monitoring.

Similarly, potential employees, suppliers, and customers must

20 • Does Venture Capital Require an Active Stock Market?

evaluate the fund's explicit and implicit representations concerning the portfolio company's future. Combining financial and nonfinancial contributions enhances the credibility of the information that the venture capitalist provides to third parties and bonds the venture capitalist's promise to provide nonfinancial assistance to the portfolio company. Combining financial and nonfinancial contributions also lets investors in a venture capital fund evaluate the fund's nonfinancial contributions by measuring its return on investment.

The venture capitalist’s non-capital inputs have special value to early-stage companies. As the portfolio company's management gains experience, proves its skill, and establishes its own reputation, its need for the venture capital provider's management experience, monitoring, and service as a reputational intermediary declines. Thus, at some point, the ­venture capital provider's nonfinancial contributions can be more profitably devoted to a new round of early-stage companies.

But because the economies of scope discussed above link financial and nonfinancial contributions, recycling these capitalist's nonfinancial contributions also requires the venture capitalist to exit and recycle its financial contribution from successful companies to early-stage companies.

3.2. The exit and reinvestment cycle for venture capital funds and capital providers Exit is also efficient for the relationship between a venture capital fund and the investors in the fund. Exit responds to three contracting problems in the venture capitalist - capital provider relationship. First, capital providers need a way to evaluate venture capitalists' skill, in order to decide to which managers to commit new funds. Second, capital providers need to evaluate the risks and returns on venture capital investments relative to other investments, in order to decide whether and how much to invest in venture capital. Third, capital providers need to be able to withdraw funds from less successful managers. Exit by venture capital funds from specific portfolio investments provides a benchmark that lets capital providers evaluate both the skill of different venture capitalists and the profitability of venture capital relative to other investments. At the same time, payment of the exit proceeds to capital providers lets the capital providers recycle funds from less successful to more successful venture capital managers.

Conventional limited partnership agreements between venture capital funds and capital providers reflect the efficiency of exit for this relationship. The limited partnership agreement typically sets a maximum 7-10 year term for the partnership, after which the partnership must be liquidated and the ­proceeds distributed to the limited partners. During this term, the proceeds from investments in particular firms are distributed to limited partners as realized. Moreover, venture capital funds have strong incentives to exit from their investments well before the partnership period ends. A fund's ­performance record, based on completed investments, is the fund's principal tool for persuading capital providers to invest in new limited partnerships.

The explicit contract between capital providers and the venture capitalist, requiring liquidation of each limited partnership, is complemented by an implicit contract in which capital

providers reinvest in future limited partnerships sponsored by successful venture capital funds. The expectation of reinvestment makes it feasible for venture capital funds to invest in infrastructure and expertise that will outlive any one ­limited partnership. The efficiency of exit for the venture capital fund - capital provider relationship complements its efficiency properties for the portfolio firm - venture capital fund relationship. Taken together, they provide a strong rationale for exit from individual portfolio investments as a central component of a viable venture capital industry.

preneur’s preference that the venture capital fund exit through an IPO if feasible; (2) how this preference for exit via IPO is expressed in a self-enforcing implicit contract over future control; and (3) how this implicit contract provides the entrepreneur with incentives that are not easily duplicated if sale of the portfolio company is the only exit option.

Because the incentive properties of this contract go to the heart of the entrepreneurial process, its availability in a stock-market-centered capital market links the venture capital market and the stock market.

4. The availability of exit by IPO: Implicit contracting over future control

Our model requires three noncontroversial assumptions: (i) the entrepreneur places substantial private value on control over the company she starts; (ii) it is not feasible for an untested entrepreneur to retain control at the time of the initial venture capital financing; and (iii) it is feasible for a successful entrepreneur to reacquire control from the venture capitalist when the venture capitalist exits. We discuss each assumption below.

The analysis above establishes the importance of exit to the venture capital market. But it does not yet differentiate between stock market-centered and bank-centered capital markets. A stock market makes available one special type of exit -- an initial public offering. But another exit strategy is available to venture capital funds in both bank-centered and stock market centered capital markets: the portfolio company can be sold to a larger company. Indeed, even in the United States, venture capitalists often exit through sale of the portfolio company rather than through an IPO. Exit through sale of the portfolio company is likely to be the most efficient form of exit in some cases. For example, innovation may be better accomplished in small firms while ­production and marketing may be better accomplished in large firms. In this circumstance, selling a startup company to another firm with manufacturing or marketing expertise can produce synergy gains, which can be partly captured by the startup firm through a higher exit price.

In other cases, an IPO may be the most efficient form of exit.

The potential for an IPO to provide a higher-valued exit than sale of the company must be considered plausible, given the frequency with which this exit option is used in the United States. Viewed ex ante, venture capital financing of firms for which exit through IPO will (or might turn out to) maximize exit price could promise a higher expected return in a stockmarket-centered capital market; where an IPO exit is feasible, than in a bank-centered capital market. But this extra exit option should affect investment decisions only at the margin.

It cannot explain the dramatic differences between the ­venture capital industries in the United States and Germany.

Thus, we are only part of the way towards a theory that explains the observed link between venture capital markets and stock markets. What remains to be shown is that the potential for exit through IPO, even if exit often occurs through the portfolio company's sale, is critical to an active venture capital market. This part shows that the potential for exit through IPO allows the venture capital provider and the entrepreneur to enter into an implicit contract over future control of the portfolio company in a manner that is not readily duplicable in a bank-centered system.

4.1. The contracting framework The relevant time to assess the influence of an IPO's availability on venture capital contracting is when the entrepreneur and venture capital provider contract over the initial investment, not when exit occurs. We seek here to explain three elements of venture capital contracting: (1) the entre-

A private value for control is a standard feature in venture capital contracting models. Moreover, for entrepreneurs, the assumption appears to be descriptively accurate. The failure rate for startup companies is high. Without a large private value for control, many potential entrepreneurs won’t leave a secure job to start a new company. Yet entrepreneurs cannot demand control when they seek venture financing. The typical entrepreneur has not previously run a startup company.

Venture capitalists insist on retaining control to protect themselves against the risk that the entrepreneur won't run the firm successfully or will extract private benefits from the firm instead of maximizing its value to investors.

The situation changes once a startup firm has succeeded. The entrepreneur has proved her management skill and provided some evidence that she can be trusted with other peoples' money. Returning control to the entrepreneur could now maximize firm value. Even if not, the value lost may be less than the entrepreneur's private value of control. The opportunity to regain control also provides an incentive, beyond mere wealth, for the entrepreneur to devote the effort needed for success. But how can the venture capitalist commit, ex ante, to transfer control back to the entrepreneur, contingent on a concept as nebulous as "success"?

4.2. The entrepreneur's incentive contract When the entrepreneur sells an interest in her company to a venture capital fund, the venture capitalist receives both an equity interest in the firm's value and significant control rights, both explicit (for example, the right to remove the chief executive officer) and implicit (for example, the right to decide whether the firm can continue in business through staged funding). In return, the company and the entrepreneur get three things. The portfolio company receives capital plus nonfinancial contributions including information, monitoring, and enhanced credibility with third parties. In addition, the entrepreneur receives an implicit incentive contract denominated in control. This incentive contract depends on the availability of an IPO exit strategy.

An IPO exit is available only if the portfolio company is successful. When an IPO occurs, the entrepreneur receives cash

»

Does Venture Capital Require an Active Stock Market? • 21

fsrforum • volume 15 • issue #5

to the extent that she sells shares in the offering, plus increased liquidity for unsold shares. In addition, the entrepreneur reassumes much of the control originally ­ ceded to the venture capitalist. The venture capitalist's percentage stake is reduced by its sale of shares, in the IPO or thereafter, by the venture capitalist's in-kind distribution of shares to its investors, and by the company's sale of new shares in the IPO. The now-public firm also no longer depends on the ­venture capitalist for future funding. Three years after the IPO, only 12% of lead venture capitalists retain 5% or more of the portfolio company's shares. The venture capitalist has both less incentive to monitor and less need, because some monitoring will now be undertaken by stock market analysts.

In addition, the fund loses its special control rights, including board membership and veto power over business decisions.

Typically, the convertible securities held by the venture capital fund are converted into common stock at the time of the IPO; the negative covenants contained in the investor rights agreement also terminate on an IPO. Control becomes vested in the entrepreneur, who may hold a controlling stock interest and, even if not, retains the broad discretion enjoyed by chief executives of companies without a controlling shareholder.

The opportunity to acquire control through an IPO exit gives the entrepreneur a powerful incentive beyond purely financial gains from the value of her shares in the firm. In effect, the prospect of an IPO exit gives the entrepreneur something of a call option on control, contingent on the firm's success.

In contrast, if the venture capital provider exits through sale of the portfolio company to another company, control passes to the acquirer, even if the entrepreneur remains in charge of day-to-day management. Thus, if an IPO exit is not available, the entrepreneur cannot be given the incentive of a call option on control exercisable in the event of success.

4.3. Feasibility of the implicit contract over control; superiority to an explicit contract It remains to demonstrate the feasibility of the implicit incentive contract over control and its superiority to an explicit contract. The feasibility problem is to specify a selfenforcing implicit contract whose terms are clear and whose breach by the venture capital provider would be observable and punished by the market. Consider the following stylized implicit contract: The entrepreneur will be deemed sufficiently successful to exercise her call option on control, and the venture capital provider will exit through an IPO, if a reputable investment banker will underwrite a firm-commitment IPO. The need to specify the conditions under which the entrepreneur can exercise the call option on control is met by delegating the performance assessment to a third party. The investment banker's internal standards for companies it is willing to take public, made credible by its willingness to commit its own capital and reputation to the offering, establish the conditions for exercise of the entrepreneur's call option.

The requirement that the venture capitalist's breach of the implicit contract be observable and punishable by the market. The universe of portfolio companies that merit a public offering is limited, as is the number of venture capital

22 • Does Venture Capital Require an Active Stock Market?

providers. Both sides of the market are relatively concentrated, both numerically and geographically. Moreover, venture capital funds typically specialize in portfolio companies geographically proximate to the fund's office. Proximity facilitates the emergence and maintenance of a reputation market. A claim by an entrepreneur that a venture capital provider declined to allow a portfolio company to go public when a reputable investment banker was available would quickly circulate through the community and hurt the ven-

The universe of

portfolio companies that merit a public offering is limited, as is the number of venture capital providers. ture capitalist in the competition to be lead venture investor in other companies in the future.

The viability of reputation market constraints on venture capitalist behavior is confirmed by another aspect of the venture capitalist-entrepreneur relationship. The venture capitalist's staged capital commitment, coupled with the right of first refusal with respect to future financing typically given to the venture capitalist, permits the venture capitalist to act opportunistically. What can the entrepreneur do if the venture capitalist offers to provide the second-stage financing that the entrepreneur needs to continue at an unfair price?

The original venture capitalist's right of first refusal presents a serious barrier to obtaining financing elsewhere: who would offer financing when the offer will succeed only when a better informed party -- the original investor -- believes the offer is too generously priced? A reputation market can police this risk of opportunism.

An implicit contract over control is likely to be preferable to an explicit contract. Creating an explicit state-contingent contract that specifies the control consequences of the full range of possible states of the world over the four- to ten-year average term of a venture investment, without creating perverse incentives, would be a severe challenge to the parties' predictive powers and drafting capabilities. Moreover, the venture capitalist will be willing to cede control only at the time of exit, not before. A mechanical formula cannot ensure that a reputable underwriter will be willing to take the portfolio company public. Thus, a supposedly explicit contract, defining when the entrepreneur has the right to reacquire control through an IPO, cannot easily be enforced. Such a contract would be substantially implicit in fact, even if explicit in form.

Finally, an implicit/explicit dichotomy oversimplifies the real world. Some elements of the contract over control are explicit, while others are left implicit. For example, cessation

of the venture capital fund's special control rights at the time of an IPO is explicit, while the triggering event -- the IPO -- is left implicit. And conversion of the venture capitalist's convertible securities into common stock is sometimes explicitly required if the portfolio company achieves defined financial milestones, even without an IPO.

4.4. Consistency with empirical evidence In our model, successful entrepreneurs often prefer exit by IPO, and have the implicit right to demand this form of exit not only when it maximizes firm value compared to a sale of the firm, but also when the entrepreneur's private value of control outweighs the entrepreneur's loss in share value. Thus, our model predicts that the venture capitalist's successful exits will take place disproportionately through IPO. If so, IPO exits will be more profitable than exits through sale of the portfolio company, by more than can plausibly be explained by the ­different values available through these different forms of exit.

This prediction is confirmed. U.S. venture capital funds earn an average 60% annual return on investment in IPO exits, compared to 15% in acquisition exits; IPO exits are much more profitable in Canada as well. It is not plausible that these large differences could arise if the venture capitalist chose in each case the exit that maximized share price. Our theory is also consistent with the evidence discussed above of a correlation in the United States between frequency of IPO exit and new capital contributions to venture capital funds.

5. Implications for venture capital in bank-centered capital markets Exploring the implications of the link between venture capital markets and stock markets is more complicated than the simple admonition that bank-centered capital markets should create a stock market. That straightforward approach has been tried before and failed. For example, France and Germany created special stock exchange segments for newer, smaller companies during the 1980s that, by the mid-1990s, had been closed or marginalized. Nonetheless, efforts are underway to try again to create stock markets that cater to small hightechnology companies including the Alternative Investment Market of the London Stock Exchange; Euro NM, a consortium of the French Le Nouveau Marche', the German Neur Market, and the Belgian New Market; and EASDAQ, an exchange explicitly patterned after the U.S. NASDAQ and of which the NASD is a part owner. This flurry of stock market creation, with the explicit goal of enhancing European venture capital, suggests that there may be value in exploring the normative implications of the stock market-venture capital market link.

In our view, it is not merely a stock market that is missing in bank-centered systems. The secondary institutions that have developed in bank-centered systems, including the banks' conservative approach to lending and investing, are less conducive to entrepreneurial activity than the secondary ­ institutions of stock market-centered capital markets. ­Experienced venture capitalists who can assess the prospects of new ventures and provide the nonfinancial contributions that venture capitalists supply in the United States are absent, as are investment bankers experienced in taking early-stage companies public. Neither institution will develop quickly. A strong venture capital market thus reflects

a path-dependent equilibrium among of a number of ­interdependent institutions.

For example, Germany today faces a chicken and egg ­problem: a venture capital market requires a stock market, but a stock market requires a supply of entrepreneurs and deals which, in turn, require a venture capital market. In addition, German entrepreneurs who care about future control of their company must trust venture capitalists to return control to them some years hence and must further trust that the stock market window will be open when they are ready to go public. The institutional design issue is how to simultaneously create both a set of mutually dependent institutions and the trust that these institutions will work as expected when called upon.

Our analysis suggests an approach to creating a vigorous venture capital market: avoid the need to create multiple new institutions by piggybacking on another country's institutions. Most obviously, in the increasingly global capital market, other countries could follow Israel's lead in relying on the United States stock market and its supporting infrastructure. For example, a German company that maintains accounting records in a fashion consistent with U.S. standardsless of a burden when done from the beginning than if implemented by a conversion, as when Daimler-Benz listed its shares on the New York Stock Exchange -- confronts no regulatory barrier to listing on NASDAQ, the exchange most suitable to venture-capital-backed IPOs. With NASDAQ comes its institutional infrastructure. For example, both Hambrecht & Quist and Robertson, Stephens & Co., leading investment bankers for venture-capital-backed IPOs in the United States, are opening European offices and holding conferences to introduce American venture capital funds to European entrepreneurs. Silicon Valley law firms are also actively recruiting European IPO candidates.

This institutional infrastructure, can shorten the shadow of the past and, over time, induce the development of local institutions. For example, in the near term, foreign venture capitalists will likely find it profitable to hire and train locals to help them find investment opportunities. In the medium term, some of these people, once trained, can form their own firms and compete with their former employers.

6. Conclusion In this paper we have examined one path-dependent consequence of the difference between stock market-centered and bank-centered capital markets: the link between an active stock market and a strong venture capital market. We have shown that economies of scope among financial and nonfinancial contributions by venture capital providers, plus venture capital investors' need for a quantitative measure of venture capital funds' skill, can explain the importance of an exit strategy. Moreover, the potential for exit through an IPO allows the venture capitalist and the entrepreneur to ­contract implicitly over control, in a manner that is not easily duplicable in a bank centered capital market. Finally, we have suggested that the best strategy for overcoming path dependent barriers to a venture capital market in bank-centered ­systems is to piggyback on the institutional infrastructure of stockmarket-centered systems.

Does Venture Capital Require an Active Stock Market? • 23

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fsrforum • volume 15 • issue #5

Interview with drs. Bernd W. Mintjes Founder of Maxwell Group

Roija Rasuli

How did you start your firm?

As a professor, of Innovation and Entrepreneurship in Groningen, I got lots of feedback from my students that I should start something that would aid new and innovative firms.

What better than to invest in the projects of my students so that was the first step. As part of the curriculum they handed in business plans and I approached the students with the most appealing ideas. A year later I started to invest in other new firms as well and that’s how I set up InvestorMatch. Out of the three projects that I invested in one turned out be very successful.

Why is investing important?

Drs. Bernd W. Mintjes (51) is the founder of Maxwell Group in Amsterdam. Maxwell Group is a leading consultancy in the field of innovation and entrepreneurship in the Netherlands. After studying psychology and economics, initiated his current career as an investor, advisor and manager with that he was ­involved in the launch and growth of more than 200 successful companies.

Since 2003, he invests in companies as a Business Angel. In recent years he had some very successful exits and in 2008 he was a founding member of the ­umbrella organization of Business Angels in the Netherlands, the BAN. In 2008 he started Investormatch, the biggest platform for investors in the Netherlands, where more than 500 Angels and 300 Funds are affiliated.

Mr. Mintjes is associated with the University of ­Groningen, where he teaches strategy, entrepreneurship and innovation and the Entrepreneurship minor program was set by him. He advises universities in the field of valorisation, innovation and ­entrepreneurship. He gained further fame through his participation in the TV series "Een groeiend bedrijf" and "Dragons Den" and the radio program De Pitch. He regularly gives lectures about the secrets of a successful business.

26 • Interview

Innovative ideas need financing and especially new starting firms need the financial support so there is a lack of solutions for such firms. Their contribution to the economy is vital as they bring new ideas to life with a continuous forward-looking approach. Therefore, better solutions have to be developed in order to create the requisite platform for such firms to prosper in their early years. Currently, we see lots of business angels investing in new firms but it would be a great solution if large pension funds would start investing as well. This would introduce a larger capital platform for new firms and of course for the pension funds high returns. I believe that this would be very good for the economy and at the some time benefiting both parties.

Is having a larger network important to attain financing?

An entrepreneur should be completely focused on his/her core business and that is by itself more than a fulltime job. It is better for a firm to involve professionals that arrange all the side details of their firm because after all financing is important but can be complicated if you have to arrange all the details on your own. Therefore, our focus within investor match is to focus on customers needs and provide the optimal solution so that our ‘new’ firms can focus on their business and investors on getting their returns.

How does the future look like for new firms?

Currently, it is extremely difficult for new firms to obtain financing but there is hope for them. We observe two kinds of trends. The first one is business angels, which are the majority of the investor portfolio and second, crowd funding which will increase more in the coming 5 years. However, we have noticed that the banks are not that keen to invest in young

Currently, we see lots of business angels investing in new firms but it would be a great solution if large pension funds would start investing as well.

innovative firms due to the crisis obviously. So we need more alternative funding of young firms in the coming years.

Has your firm taken any measures to support new/potential firms during these difficult times?

At InvestorMatch we focus on how to serve the needs of both parties. We have two parties: entrepreneurs and investors where both try to find their optimal solution and returns. So our focus is very much on having interactive platform where both can “meet”. Besides we can also be seen as the trend watcher of venture capital so that we can evaluate at each step what will work best for our clients.

When you see a project; are you always certain that it is going to be a success?

As an investor you always take a risk because success cannot be taken for granted. But even if banks are not providing funding for new firms we see a growing demand for more investors but at the same an increasing rise in investors. This implies that there is a market, even if it is not risk-free, supply and demand are increasing

If a project turns out to be success: does that mean an exit?

Out of my experience, I can know that a project proves to be a success within 2 years. If it takes longer than that then it should be stopped straight away. But when it turns out to be a success it will be sold within 5 years.

Do you cooperate with other organisations (e.g. government support) to fund a very good and promising project?

Government support such as subsidies etc. is something that never happens. But indeed, getting investors together is a collaborative effort so in order to have business angels who are willing to invest in new businesses needs some corporation.

How do you the see future of new firms?

Good. I believe these firms can expect more financing so more investors from which they can choose.

What has been your most successful exit?

We sold Stericycle to a US firm, which was an idea of young entrepreneur. The firm specializes in waste management of hospitals.

What is important for a good elevator pitch?

It would be very good if you can show during your pitch your product which will make it feel real at the same time the investor realizes that it has a certain potential. I personally believe that a pitch consists of three parts: 1) the energy and motivation that you communicate; 2) the content, and 3) what is it that you want from that investor. Many people many times forget the last part whereas it is the most essential part because an investor needs to know what it is you are looking for.

» Interview • 27

fsrforum • volume 15 • issue #5

It is better to have small stakes in a few firms in order to have diversification in your investment.

How does investormatch work?

You could see us as a dating site. The entrepreneur signs up and the investor is always anonymous so that he/she can select the projects that are appealing.

As a student, can I also invest in young firms and what would be the best way to start?

That is possible but since students do not own large sums of money it would be therefore wise to invest in smaller projects with little investment. A good way would be to start with crowd funding this will allow getting experienced with small sums of money and later on you can increase your stakes.

What do you prefer most: investing in new firms or setting your own business?

Investing in new firms brings lots of variations in my work.

It is better to have small stakes in a few firms in order to have diversification in your investment. In the past years, I have invested in 200 firms, which have made my work extremely interesting.

What is the average return that an investor can expect?

This is 17% on an annual basis; looking at the past five years.

This is the return that the business angels can expect to receive.

What trend do you see?

After decades of expansion, mass consumption and globalization I see a new trend. The last year I see more and more consumers and businesses opt for the very small scale. Micro consumption.

Three trends that support this: 1. The great rise of crowdfunding. People choose where they want to invest in instead of leaving it to banks, pension funds and large investors. Overal, I foresee a huge growth in the number of platforms and especially the number of investors since they will increase the number of investments through the upcoming platforms.

2. Micro consumption. The transparency of the Internet has enabled consumers to choose from many more products.

For instance, you can create the exact product wit hall the specifications accroding to your needs as you want and it is a day later on your doormat. I foresee an even larger online selection of unique small producers who are able to provide customized products.

28 • Interview

3. Micro production. The emergence of especially the 3D printer will provide small production companies that can produce on request. Individual production on demand of individual consumers. Production will take place again in the Netherlands.

What does this mean for investors?

My advice: invest now in high-quality small production companies with sufficient expertise to set up in the Netherlands these small-scale production. You can combine old fashioned craftsmanship with new technology. Specialize yourself by choosing a unique raw material(s) for your production.

The future belongs to the high-quality manufacturing firms that are capable to fulfill individual needs of their customers quickly into unique products.

What would you advise students?

Encourage your professors to invest in your ideas. If they practice the talk it would be very encouraging for students to take initiatives. This would be a good opportunity to combine practice and theory. I also advocate a greater contribution from entrepreneurs to tell their stories to students forming a bridging between practice and theory. Guest lectures could be an option but I mean attracting successful entrepreneurs to be more involved during the courses than a one-time gathering.

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Startende financials voor de Rijksoverheid Het gaat om veel geld. En het gaat om belangrijk geld. Geld dat van ons allemaal is. En dat besteed wordt aan zaken met een grote maatschappelijke impact. Zaken als milieu, veiligheid, onderwijs, gezondheidszorg en infrastructuur.

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fsrforum • volume 15 • issue #5

Venture capital firms as smart investors

Joern Block

Venture capital investment plays an essential role in the evolution and eventual success of new ventures. Besides the capabilities and resources of the start-up and the characteristics of its founders venture capital firms (VCs) arguably have the highest level of influence in shaping and developing start-up firms. By investing in new ventures, often as a syndicate of several VCs rather than alone, VCs impact new ventures in several ways. Primarily and most obviously, VCs, expecting a high rate of return at high risk, lend financial capital to new firms so that these can compensate their often negative cash flows and fund their growth ambitions. Moreover, VCs are referred to as smart investors. They can assist start-ups by providing human capital in the form of management skills, experience, and expertise. VCs can do so in several ways, for example by providing strategic advice and planning support, by taking a governance role on a board of directors, or – though somewhat less likely – by actively engaging in day-to-day operations.

Empirical research shows that the involvement of a VC investor shortens a start-up’s time-tomarket and speeds up the professionalization of marketing activities as compared to non-VC funded start-ups (Hellman and Puri, 2002).

Empirical research shows that the involvement of a VC investor shortens a start-up’s time-tomarket and speeds up the professionalization of marketing activities as compared to non-VC funded start-ups Next to financial and human capital, VCs have social capital that the start-ups will seek to access. This social capital is derived from the (social) network of professionals, experts (e.g. for industry, market, technology, and law issues), and other VCs in which the VCs are embedded.

In particular, VCs are strongly linked with each other, through the joint syndicated investments they have made in the past. A strong social network of its VCs thus provides the start-up with access to unique and valuable resources and future opportunities. Our own empirical research shows that highly-networked VCs provide more funds to start-ups that other VCs (Alexy, Block, Sandner, and Ter Wal, 2012) and that start-ups funded by highly-networked VCs have better chances than other start-ups to get another funding round in the future.

30 • Venture capital firms as smart investors

So, what can start-ups seeking VC learn from this line of research?

• First, choose your VC carefully. If you have several VCs interested in your start-up (which would clearly be a luxurious situation) choose the one that can help you best growing the firm. It is not only the funds provided and the financial valuation obtained that matters. ­Ideally, VCs are smart investors that help growing the firm through their human and social capital. The likelihood of getting another funding round and thus the start-ups survival chances increase with highly-networked and experienced VCs. Corporate VCs (CVC), i.e., VCs that are linked to industrial firms such as GE, Philips, and Siemens, can constitute attractive partners for start-ups. CVCs may have the technological resources, capabilities, and distribution networks that the start-ups lack. Moreover, when the start-up is successful, selling the start-up to the corporation behind the CVC via a trade sale opens up an interesting exit possibility.

• Second, be aware that the smart capital provided by experienced and highly-networked VCs does not come for free. Empirical research by Hsu (2004) shows that VCs with a high reputation acquire start-up equity at a 10-14% discount. Thus, from a start-up perspective, smart and financial capital seem to be substitutes to some degree that need to be traded-off against each other.

References Alexy, O., Block, J, Sandner, P., Ter Wal, A. (2012). Social capital of venture capitalists and start-up funding. Small Business Economics, 39(4): 835-851.

Hellman T, Puri M. (2002). Venture capital and the professionalization of start-up firms: empirical evidence. The Journal of Finance, 57(1): 169-197.

Hsu, D. H. (2004). What Do Entrepreneurs Pay for Venture Capital Affiliation? Journal of Finance, 59(4): 1805-1844.

Venture capital firms as smart investors • 31

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fsrforum • volume 15 • issue #5

Geweldig dat door mijn initiatief het beleggingsbeleid is veranderd Remco van Amelsfoort - Kwantitatief Financieel Trainee SNS REAAL

“Juist nu er een storm door de financiële wereld raast, is het werken bij een bank-verzekeraar interessanter dan ooit! Ik heb gekozen voor een traineeship bij SNS REAAL. Als relatief kleine speler, krijg je hier echt de kans om mee te doen en impact te hebben.”

Aldus Remco van Amelsfoort, Kwantitatief Financieel Trainee bij SNS REAAL. Hij is 2 jaar geleden na het afronden van zijn Master Econometrie met het traineeship gestart. Zijn eerste opdracht heeft hij gedaan bij SNS Asset Management op het gebied van beleggen. Onlangs heeft Remco zijn traineeship afgerond en is hij gestart in de functie van PortfolioManager bij Asset Management.

Wat heb je gedaan in je eerste opdracht?

In mijn opdracht heb ik gekeken naar een kwantitatieve beleggingsstrategie in Europese aandelen. Ik heb hier onderzoek naar gedaan en op basis van de verzamelde data een model gemaakt dat de rendementen per verschillende factor uitrekent. Door de wegingen van de aandelen te bepalen aan de hand van de fundamentele factoren, zoals cash flow of dividend, kan er een hoger rendement worden gerealiseerd.

De eerste stap was het enthousiast maken van mijn eigen team. Daarna heb ik een voorstel gemaakt om een fonds op te zetten voor onze interne klanten (SNS Bank en REAAL ­Verzekeringen). Op dit moment wordt het fonds geïmplementeerd. Het geeft wel een goed gevoel dat naar aanleiding van mijn voorstel het beleggingsbeleid van SNS Asset Management wordt aangepast.

‘Je krijgt de vrijheid om zelf te bepalen welke opdrachten je doet, op welke afdeling en bij welk merk. SNS REAAL bestaat uit verschillende consumenten merken, zoals SNS Bank, REAAL, Zwitserleven, ASN Bank en RegioBank. Zo kan ik mijn eigen ontwikkelingspad kiezen, vervolgt Remco’. Je krijgt bovendien 4 uur per week de tijd om vrij te besteden aan je ontwikkeling. Je volgt diverse inhoudelijke opleidingen. Ik ben nu bijvoorbeeld bezig met mijn CFA. Daarnaast volg je een gezamenlijk traject met de andere trainees voor je persoonlijke ontwikkeling. En je hebt ook een mentor uit de top 100 van SNS REAAL die je het hele traineeship begeleidt. Daarnaast doe je ook veel naast je werk. Ik geef bijvoorbeeld gastcolleges op universiteiten.

Over SNS REAAL SNS REAAL is een Nederlandse bankverzekeraar met negen consumentenmerken waaronder SNS Bank, RegioBank, ASN Bank, REAAL en Zwitserleven. We richten ons vooral op de Nederlandse retailmarkt, inclusief het midden- en kleinbedrijf. Onze ambitie is samengevat in onze missie: eenvoud in geldzaken. Onze kernwaarde GEEF! laat zien dat wij ons verantwoordelijk voelen voor onze klanten, voor de maatschappij en voor het resultaat dat daaruit voortvloeit.

Dat lukt alleen met betrokken medewerkers die geloven in elkaar en in ons bedrijf.

In de afgelopen jaren is de financiële sector in een ander daglicht komen te staan. De financiële wereld is in beweging en onze markt blijft veranderen. Sinds 1 februari 2013 is de Nederlandse Staat enig aandeelhouder van SNS REAAL geworden. We zijn het vertrouwen van klanten en de samenleving deels kwijtgeraakt. We staan voor uitdaging om dat vertrouwen weer terug te winnen. Wij willen geldzaken echt eenvoudig en begrijpelijk maken. Het klantbelang staat hierbij altijd centraal. Dit bereiken we met betrokken, gemotiveerde collega’s. Jij kunt hier ook een bijdrage aan leveren.

Wie zoeken we SNS REAAL is op zoek naar ambitieuze en talentvolle starters die snel willen én kunnen doorgroeien. Maar die ook de drive hebben om meteen een flinke bijdrage te leveren aan onze organisatie. Binnen SNS REAAL leer je vooral je eigen verantwoordelijkheid en vrijheid in te zetten.

Je bent de regisseur van je eigen loopbaan. En wij? Wij doen er alles aan om je daarbij te helpen.

We willen graag met je kennismaken. We organiseren diverse activiteiten, zoals lunches en inhousedagen. Hierbij leer je onze huidige trainees kennen en vertellen we je meer over het traineeship. Geef je op door te mailen naar campus.recruitment@snsreaal.nl.

Wat houdt het traineeship in?

Het (kwantitatief) Financieel Traineeship duurt 2 jaar. Tijdens het traineeship werk je zelfstandig aan diverse opdrachten van 6 maanden. Het leuke is dat je werkt aan actuele vraagstukken die er echt toe doen. Je onderzoek belandt dus niet in een la. Integendeel, je levert echt een bijdrage aan het resultaat. Afdelingen waar je je opdrachten kan doen zijn ­bijvoorbeeld Group Risk Management, Financial Markets, het Actuariaat en SNS Asset Management.

Company presentation • 33

fsrforum • volume 15 • issue #5

Tafelzilver; ABN AMRO

K(r)anttekening | Drs. Joost Groeneveld RA RV1

Tafelzilver duidt op een zekere luxe. Je kunt met bestek van mindere kwaliteit eten, zoals roestvrij staal; plastic. Je kunt zelfs met een houten prikkertje voedsel naar de mond brengen.

Dus zilver is overbodig. Als de financiële nood hoog is, kun je het verkopen. Jammer genoeg is het vaak zo dat de nood dan ook bij anderen is toegeslagen en dat zulk zilver niet zoveel meer opbrengt als voorheen. Wie wat te lang bewaart, heeft niet zoveel meer.

Het tafelzilver van Wientjes is natuurlijk helemaal geen tafelzilver. Zo’n bank ligt niet te niksen in een buffetlade. En het bezit ervan is geen teken van luxe maar een gevolg van crisis.

De aanschaf ervan was niet om er zelf beter van te worden, of om met rijkdom te koop te lopen, maar om anderen uit de problemen te helpen. Er is dan ook ruimhartig voor betaald.

Als ik het goed lees, heeft de overheid sinds 2008 in ABN Amro zo’n E32 mrd geïnvesteerd (NRC Handelsblad, 29 juni 2013). De term investeren zou ik zelf niet gebruiken. Die duidt op een te behalen rendement. Dat laatste stond hier meen ik niet voorop. Er is geld in gepompt. Dat wel.

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators).

Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

De aandelen van de bank zijn nu eigendom van de Nederlandse Staat. Ze zijn van ons allemaal. En als we die aandelen nu allemaal tegelijk zouden verkopen, zou dat misschien wel E13 mrd opleveren (“berekeningen van financieel analisten”): nog geen E1.000 per inwoner. Als je nu verkoopt en die E13 mrd incasseert, komt dat ten goede aan de staatsschuld. De Staat leent nu langjarig voor ongeveer 2%. Zo’n opbrengst

En als we die aandelen nu allemaal tegelijk zouden verkopen, zou dat misschien wel E13 mrd opleveren. levert dus een besparing op van E260 mln. Best leuk, namelijk elk jaar E20 per inwoner. Verlichting van onze staatsfinanciën lijkt me hiermee nauwelijks een argument te kunnen zijn.

34 • Tafelzilver; ABN AMRO

Nee, het moet om andere dingen gaan. Vanaf nu beschouwen we het als een belegging, gericht op een te behalen rendement.

En dan heb je 3 mogelijke adviezen: kopen – houden – verkopen.

Kopen is al gebeurd. Dus nu zijn er maar 2 mogelijkheden over. En daarover wordt nu gediscussieerd. Matthias de Wit (Petercam) rekent met een opbrengst van E11 mrd. Hoe hij daaraan komt? “Ongeveer 0,8 maal het eigen vermogen van E14 mrd. De factor 0,8 baseert hij op een combinatie van de marktwaarde van andere grote Europese banken, de winstgevendheid van ABN Amro en het risico op toekomstige afschrijvingen”. Ik vermoed dat hij in grote lijnen de koers/ winst-verhouding van beursgenoteerde banken volgt. Dan gaat het om prijsvorming en niet om waarde. Zo ook “een andere specialist die anoniem wil blijven” (waarvoor hij zijn redenen wel zal hebben). Die “schat de vermenigvuldigingsfactor zelfs nog lager in, op 0,5 keer het eigen vermogen”. Bij de beslissing om te kopen of te houden, gaat het natuurlijk om de spanning tussen waarde en verwachte prijs. De prijs wordt door de specialisten kennelijk afgeleid uit marketcomparables. In feite wordt daarmee marktefficiency verondersteld. Dat lijkt me nu voor banken welhaast een ­illusie.

Zoals business valuators weten, bestaat economische waarde uit verwachte geldstromen en risico. Prijzen voor geld en risico zijn bepaald door de verhoudingen op de vermogensmarkten. Daarnaast kan belastingheffing van invloed zijn.

Als we die laatste factor even vergeten (bij de overheid zou dat vestzak/broekzak kunnen zijn), blijven verwachting en risico over, die beide gewaardeerd moeten worden. Het is dan ook een beetje vreemd dat steeds maar weer wordt verwezen, ook door de hier geciteerde specialisten, naar de boekwaarde van het eigen vermogen en behaalde winst. Beide bedragen zijn een uitkomst van de edele kunst/kunde van het “dubbel boekhouden”. Sterker nog, afgezien van stortingen en onttrekkingen is de winst/verlies gelijk aan het verschil tussen de eigen vermogensbedragen op 2 momenten. Tenzij die winst niet “all inclusive” is. Dus het gaat om de balans: wat wordt geactiveerd, respectievelijk gepassiveerd en tegen welke bedragen. Daar is weinig objectiefs aan. Uiteenlopende ‘principes’ strijden om voorrang. Ik noem: activering; saldering; waardering; rubricering; afschrijving en amortisatie; voorzichtigheid; realisatie; gebeurtenissen voor/na balansdatum; going concern; stand alone. Het is een arsenaal aan mogelijk­ heden om de boekhoudkundige uitkomsten op verschillende

manieren te bepalen. En dan nog iets: door uit te gaan van het verleden wordt de toekomst daaraan gelijk gesteld. Dat is in de meeste gevallen onjuist.

Zodoende heeft winst als grondslag voor waarde grote beperkingen: winst is geen geld; de toekomst zal anders zijn dan een (gewogen gemiddeld) verleden; winst is ‘zeker’, want gerealiseerd. Eigenlijk zou winst daarom eerst moeten worden ontdaan van alle risico-correcties zoals voorzichtigheid en voorzieningen, voordat daar gewone risicoverhoudingen op los zouden kunnen worden gelaten. Anders krijg je een dubbeltelling. En dat is dan nog afgezien van ‘nor-

Prijzen voor geld en risico zijn bepaald door de verhoudingen op de vermogensmarkten malisaties’ voor incidentele en verouderde informatie. Toch zie ik bij de kerngegevens in NRC geen verwachte geldstromen. En dat is nu juist waar het om zou moeten gaan. Je hoeft eigenlijk geen grote specialist te zijn om binnen de range van E7 mrd - E13 mrd iets over een haalbaar te achten prijs te zeggen, als die niet al gauw zal worden gerealiseerd. Gelijk is zo aan ieders zijde.

“Door de aanhoudende crisis en de problemen binnen de bankensector zijn Europese banken op de beurs zwaar ondergewaardeerd”. Het zal betekenen dat de beurswaarde (noteringen van heden) veel lager is dan op dit moment de economische waarde van de aandelen. Als dat waar is, lijkt een advies om nu te verkopen niet economisch verantwoord. Waarom nog eens verlies nemen? Daar komt nog iets bij: een beursgang is iets anders dan af en toe een plukje aandelen dat dagelijks wordt verhandeld. De prijzen zijn niet zomaar vergelijkbaar.

Vanzelfsprekend zegt president-directeur Zalm dat de bank er klaar voor is. Een consultant: “Hij wil onder het juk van de overheid uit”. Maar zonder het baken van een behoorlijk berekende economische waarde van de aandelen blijft de discussie beperkt tot eigen belang en politiek.

Het zal ook wel een politieke vraag zijn of de Staat – in vergelijking met de input van E32 mrd - er zonder verlies vanaf komt. Alsof dat verlies nog niet zou zijn genomen. De aandelen staan nu bij de Staat voor E11,2 mrd in de balans. Dus met E13 mrd opbrengst zou al boekwinst worden gemaakt. Maar boekwinst is als boekenwijsheid: die is niet echt.

Notes 1 Directeur Wingman Business Valuators B.V., Breda

Tafelzilver; ABN AMRO • 35

fsrforum • volume 15 • issue #5

Word of the chairman

Sep Vermeulen

Dear members, In front of you lies the last edition of the FSR Forum of the academic year 2012-2013. Therefore, it will also be the last edition coming from the XVth FSR Board. At the moment some of you are still studying hard in the University’s Library, while others try hard to deliver a solid bacheloror master thesis and some lucky ones are already enjoying their vacation. At the FSR office it is a busy period with the new board making their first full time weeks to get to know the association.

After the last period we can look back at another three wonderful events. The Asset Management Tour took place for the first time in the history of the FSR. The tour consisted of five asset managers located in Rotterdam, Amsterdam and The Hague. This first edition was a great success and in the future we will definitely organize the tour again. Secondly, the European Finance Tour took place. This year’s destination was the financial capital of Switzerland: Zurich. Here, twenty participants were provided a sneak preview of how the financial world works in a country like Switzerland. Lastly, the International Research Project took place in Beijing for the charity of this year, Right to Play. After their good preparation in the Netherlands the research was done effectively and the results have already been presented to the charity.

After weeks of many interviews we presented proudly to you the new board on the 6th of June.

The new board members for the XVIth FSR board will be Gijs Romer, Karen Wiersma, Justin Toet, Floris Mathol, Martine Kruseman and Gert-Jan Breukink. On Thursday the 5th of September the XVIth board will officially be installed at the General Members Assembly. I would like to invite you all for this special moment and an official invitation will be sent to you soon.

Further on in this FSR Forum the new board members will introduce themselves to you.

FSR News

Column Björn Waltmans

Column Chris Wouterlood

38 39

The XVIth board is working hard to make the upcoming year even better than the previous. In September the Erasmus FSR Congress will take place for the second time. With ‘Secrets of Public Debt’ as the main subject this year it will be an eye-opening event for all students and other interested parties. It will take place on the 18th of September in the afternoon.

Three of the twelve FSR committees are already complete to start the preparations for the upcoming academic year. These are the International Banking Cycle, International Research Project and Accountancy committee. For the other nine committees the new board is still on the lookout for new members. A year as a committee member at the FSR includes a wide range of new experiences, from the first contact with the corporate world to improving your organizational skills. However there a many more benefits to enjoy like the active members day, active members weekend and numerous drinks and dinners. Make sure you are aware of the deadline on the 15th of September for applying for the remaining committees. It will prove to be a very strong asset to you, for experience in your field of interest, by building a strong network and by building a great C.V. As mentioned above our board year is coming to an end. On behalf of the XVth FSR Board I would like to thank all of our members, active members, partners and professors who have made this year into an unforgettable and successful one. A board year we consider being of distinctive value for the future. I hope to see you next year and wish the new board all the best.

36 • FSR news

International Research Project

European Finance Tour

40 42

fsrforum • volume 15 • issue #5

Not all bad news for European venture capital Most recent news update about the subject.

Despite gloomy conditions, the European venture capital market is reportedly doing better than many expected.

With European markets engulfed in a debt crisis that has seen many lenders reluctant to give money to risky businesses, many observers have assumed that one of the last places to get value is in the continent’s venture capital sector.

Not so, says the UK’s industry body the British Private Equity & Venture Capital Association (BVCA). The group says that the chances of European VC firms achieving an IPO exit is broadly the same as their US counterparts, and that many in the industry have been misled by policy makers and institutional investors.

The BVCA has been conducting a study into the market alongside Dow Jones, and has concluded that the industry is in “much ruder health” than expected. Richard Anton, the BVCA’s chairman, said: “Attitudes have unfairly hampered European high-growth companies which in turn poses a serious threat to the future of both entrepreneurship and the economy across the continent.

“This report explodes some of these myths and is an extremely welcome and robust contribution to the debate over the financing of European start-ups. The sooner we can dispel the myths that unnecessarily hinder venture capital; the sooner venture capital can help power the next ­generation of world-beating companies.”

Bron: http://www.theneweconomy.com/business/not-all-bad-news-for-european-venture-capital (www.theneweconomy.com)

FSR news • 37

fsrforum • volume 15 • issue #5

FSR Former board member

Björn Waltmans

The first time I got acquainted with the FSR as an association was during the 1st lustrum back in 2002-2003. Two very enthusiastic people were promoting a conference in the C-hall of the faculty of economics and after several convincing champagne drinks later on (note: this was pre-Lehman), I was welcomed to join their lustrum committee. From the very first moment, the FSR struck me as an open and welcoming association eager to organize activities contributing to the students’ knowledge of economics in general as well as to social & organizational skills. Therefore, after a successful lustrum celebration, I decided to interview for the function of chairman of the FSR board for the academic year 2003-2004.

I got selected and had the privilege to work along a very enthusiastic and hard working group of 6 other people that shared the same ambition to further professionalize the FSR and extend / improve the range of student activities.

After being formally appointed as the VIth Board of the FSR in the first week of September 2003, we immediately started off with organizing several activities, amongst which the International Banking Cycle ("IBC") and the Big 4 Cycle, two major and important FSR events. Many students will find internships and eventually jobs through these events at investment banks as well as the Big 4 accountancy firms. The following academic year I interviewed at several investment banks myself as a result of my participation of the IBC 2004-2005 and started my career in investment banking in London later on.

After having lost the 'Erasmus Bedrijvendagen' in the prior year the challenge was to (again) show that the FSR was no longer only an affiliation of the faculty association but had the right to exist as an independent study association. This was typically done through the monthly meeting of all study associations, but also through lobbying at the faculty itself.

In addition, advice from the FSR Advisory Board, consisting of former Board Members, has also been very much appreciated.

During the course of the year we therefore focused on FSR core activities and made sure these were well organized e.g. the International Research Project. Also, we have established the FSR Alumni Association to remain connected with active FSR members and expand the FSR network. If you have been or are part of an FSR committee, I can surely recommend membership.

Besides all the activities, we have had a lot of fun during the many FSR drinks and dinners (of course complemented with

38 • FSR news

Cuban cigars) and got to know a whole lot of people from other societies as well as FSR committee members. However, the greatest and also most emotional moment during my Board year has been my discharge and the appointment of my successor because at that very moment it hits you; suddenly you realize that a fantastic year has come to an end, that you have made many friends (especially my fellow board members of whom I am still very proud) and that it has changed you as a person.

The skills I have learned from my Board year vary from how to work intensively with other people to how to structure and prepare for meetings (although our Board meetings still took 2 hours+ at the end!) to how to present myself. During the IBC for example it was my task to welcome and introduce the investment banks in front of a classroom with hundreds of students. Also, the chairman is ultimately responsible for everything that happens; at least that is how I have experienced it. All this (and more) added significantly to my profile and helped me securing a job as a London investment banker.

In 2007, I started my career at Sequoia, an independent corporate finance advisory, investment management and private equity investment firm. During my time at Sequoia (2007-2010), I have advised a diverse range of clients from hedge funds to public sector clients mainly focused on the utility sector. In 2011, I started working for Wilshire Associates in the private markets division. Wilshire Private Markets ("WPM") is a private equity fund-of-funds with USD 5 billion of assets under management. WPM is an investor in primary partnerships, secondary partnership interests and co-investments. My daily tasks consist of a.o. analysing investment performances, assisting senior management with fund raising activities and sourcing deal flow. Also, I am involved in HR to that extent that I am responsible for our European intern program. Our current intern is even a former FSR Board member!

All in all the FSR has contributed extensively to my personal development, to my network of business contacts & friends (I still see most of my fellow board members frequently and we share a strong connection) and, most importantly, to my time as being a student. You're only a student once and when you get the opportunity to join the FSR Board or any other FSR committee, I can only say: Take It, You Won't Regret It!

Passport Name Björn Waltmans Age 32 years Residence Amsterdam, The Netherlands Employed at Wilshire Associates Current position

Which FSR Board VIth Board Board function Chairman Study ir. Aerospace Engineering / BSc. Economics Year of graduation 2007 Which car do you drive Any car What do you drink on a Friday night Lager beer complemented by spirits and liquor Life motto You only live once, but if you work it right, once is enough

fsrforum • volume 15 • issue #5

FSR Member

Chris Wouterlood

Passport Name Chris Wouterlood Age 22 Residence Rotterdam Study Bachelor Economie & Bedrijfseconomie FSR event Inhouseday at Achmea and the Bachelor Accountancy Day Job at Currently intern at Nestlé and before that at Achmea Department of job Finance & Control (Nestlé) and Planning & Control (Achmea) Life motto I feel sorry for people who don’t drink. When they wake up in the morning, that’s as good as they’re going to feel all day.

I visited my first FSR event during the second year of my bachelors: the Bachelor Accountancy Day. Despite the fact that I wasn’t immediately hooked by accountancy, the connection to the corporate world which was facilitated by the FSR ensured that I would participate in other FSR events and started to keep track of the career site.

After my exchange to Sweden I’d decided that I wanted to take a gap year, gaining working experience and broadening my understanding of the corporate world. However, despite the fact that I had decided to do an internship, I hadn’t decided yet at which company I wanted to do it and at the FSR I got the opportunity to join one of the in-house days of the International Research Project at Achmea. Turned out that this was a good call, so at the end of the day I had made up my mind and started working on my application. The combination of a challenging business and its relevance for society triggered me.

Since there weren’t any vacancies available at the time I send in an open application. A little while later I was invited for several interviews and soon this resulted in an internship at the Planning & Control department. During six months I was assigned to a senior business controller and assisted in the business planning process, financial reporting and the target setting and target realization process concerning Stakeholder Value Management.

Looking back upon my time at Achmea, I can honestly say I had a great time. The assignments were very challenging due to the high level of ownership you are awarded concerning your projects. In addition to this, there is a large focus on your personal development. Furthermore, Achmea is very flexible concerning working hours and even allows you to work at home! In my opinion, these three factors are key in describing the corporate culture at Achmea and my affinity with the company.

makes my internship very diverse. The great thing about this, is that I can get to know the whole company and not just solely one division. My responsibilities at Nestlé focus on financial reporting and supporting the various divisions in their day to day tasks. Three days a week I work within the Finance & Control department and two days a week I work at the Confectionary department (chocolate!). Like I stated before, this is a great combination since you get to understand what drives your company’s business and that helps you to further customize your support of the business.

Looking back upon both my internships, I can ensure you that it’s a great experience. Not only because you get to expand your network and gain more working experience, but you also get to experience what sort of working environment suits you. For me, that is a flexible employer who focusses not solely on your output, but also on your personal growth (as a person and as a professional). Both Nestlé and Achmea share these values and provided me with feedback on regular basis. During the last year I’ve learned a lot about myself, both personally and professionally. On the other side, the differences between these two companies and internships have enabled me to develop both my technical skills as well as my know-how concerning a large organization, because you get to see an organization from so many different angles.

If I can leave you with one thing, it is this: whether you’re sure or not about your chosen field of work, do an internship in it to experience what you truly value in your job and future employer. If you have any questions or remark, please contact me on LinkedIn.

After my internship at Achmea, I wanted to do another internship in a whole different field. Through a friend I became aware of a vacancy at Nestlé at the Finance & Control department. Within a week after I send in my application letter, I went on an interview and became even more excited about working in FMCG. The diversity of this business is huge and thus you’re challenging yourself every day.

Since February I’ve been assigned to three different controllers who all work for a different division within Nestlé, which

FSR news • 39

fsrforum • volume 15 • issue #5

International Research Project

On the 12th of May it was time to say goodbye to the Netherlands and ‘’nihao’’ to Beijing. A group of 20 highly motivated students gathered at Schiphol to start two weeks of company visits and lots of other activities. After these two weeks of intense research for Right To Play, some stayed for two more weeks to discover the greater China.

The first week started with an informal visit (with a huge jetlag) at Tsignhua University. A Dutch exchange student showed us the campus and we learned more about the Chinese culture and this enormous metropolis. The next days we visited several companies like KLM, CBRE, KPMG and Goldwind. Often we received a presentation from one of the Dutch employees, which made it feel familliar and easier to ask all our questions on Chinese traditions. This week we also had some time to discover the delicious food and the hutongs (neighborhoods with very narrow streets). The bicycle ride through one of these districts was quite a challenge, but gave us a total different view of the city.

During the weekend there was some time to visit the highlights of Beijing, such as the Great Wall, the Forbidden City and the Summerpalace. On top of this, everyone had already bought a ticket at home for the ‘’Great Wall Music Festival’’ to see David Guetta. We had an amazing time on this fabulous location and a return to the city we will never forget.

After this weekend full of cultural visits, it was time to visit more companies and learn more about the Chinese culture. Visits at Scania, Hilton and the Bangkok Bank took place and gave us some new insights in the Chinese way of living. This week it was also time to visit the charity that is linked to this year’s research, Right To Play China, and ask all our questions for the research. Unfortunately, the professors had to leave on Tuesday, but the karaoke night gave them a great farewell. After their goodbye, the participants visited some more companies, such as the embassy, DSM and Ernst & Young.

After this intense period of company visits, the last Saturday in Beijing was used to spot some more temples, buy souvenirs and enjoy the sun. At the end of the day, we had a closing dinner with the whole group and enjoyed our last night together. The next morning, the first group had to leave Beijing and return home while the other group packed their bags for some travelling through the country.

In these two additional weeks, several parts of the country were visited. The pandas in Chengdu, the army in Xi’an, the skyline of Shanghai and the beach on Hainan were spotted. The last night everyone returned to Beijing to have a final dinner at our favorite restaurant, Mr. Shi. We can conclude that these were two (or four) great weeks in which we’ve learned as much as we’ve enjoyed and we would like to especially thank our partners, the Erasmus Trust Fund and Stichting Fonds voor Geld en Effectenhandel, and everyone else who has helped us with the realization of the International Research Project 2013!

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fsrforum • volume 15 • issue #5

Asset Management Tour

On the 15th of May the first edition of the Asset Management Tour took place. Together with the Financial Study association Amsterdam we noticed there was missing an event concerning asset management and the possibilities to bring our members in contact with our partners in the field of asset management. After we had discussed our plans with our partners, we started a national campaign for this event because it is an event not only for FSR or FSA members, but for students from all Dutch universities. During the weeks of promotions we had a lot of enthusiastic students for application, but only twenty students would be selected to participate during the Asset Management Tour.

We started the three days trip at the “Generale Thesaurie” at the Ministry of Finance in The Hague. After a short presentation about this department and the career possibilities, we had a tour and got a glimpse of the trading floor and afterwards we had a lunch together. During the lunch other employees joined us so we could ask them anything about working at the Ministry, their considerations and so on.

Then it was time to start heading to the next company ING Investment Management. At ING we were told about the department of investment management and the possibilities of working at ING, but particularly the case was intriguing and realistic. We were divided into teams and during every of the four rounds we received information about the markets and companies which we were able to invest in. Based on these investments decisions we had to compose our investment portfolio. Finally, the team that was able to beat the market was the winner of the case. After this case we went to a tapas restaurant together with the ING employees to get to know more about them and the company.

The next day it was time to visit CBRE in the morning. For the tour was about asset management, we visited the real estate department of CBRE at Schiphol. First there was a presentation to get a global view about the company and then we were divided into five teams. There were about 20 real estate options to invest in and each team could do a bid on one of them. All of the teams had a limited budget so everyone had to think critically about their investment decision. Afterwards every team had to give a presentation about their decisions and chosen strategy. During lunch with the employees the winners were announced and we were heading for Rotterdam to bring a visit to Robeco.

At Robeco we had a short introduction about the company and their history and the goal of the afternoon was making us known with their work and what it is like to do equity research at Robeco. The case was about the possibility of choosing three different stocks to invest in. First we had to read the market reports and the company profiles. After that we could choose our stock and we had the possibility to interview the management of the company we were willing

to invest in. The case gave an insight into the life of an equity researcher at an asset manager. It was a new and creative way to get to know the company and during the buffet we could get in touch with the employees of Robeco. Afterwards we went back to Amsterdam to have some drinks since we had been working very hard these first two days.

The next morning we headed to the Zuidas where we were going to visit APG. During the presentation and case there was a video team attending for some recordings for the new company video of APG. In the case we had to do a due diligence of a company and had to decide whether we would bring out a buy- or sell-advice on the stock of the company.

During the case we were able to get a short view on what it is to work within APG and the possibilities to join APG. During the lunch and breaks there were some employees available so we could get to know the people that work at APG and what the culture is about.

Last but not least, Friday afternoon we headed for BNP Paribas in Amsterdam. At BNP we were told about the company and its separated structure. The case was a simulation of a famous deal BNP had done in the past. We were asked to do some research whether we would buy shares of a casino in Greece.

We had a short talk with the owner and afterwards we had to give a presentation about our considerations and if we had chosen to buy or sell the shares of the company. We ended the day, and with this also the tour, with a delicious barbeque together with employees of BNP. At the barbeque we could ask our last questions before everyone went home.

On behalf of the FSR we would like to thank all our partners for giving us a lot of in-depth knowledge into the world of asset management and all the different aspects of it.

FSR news • 41

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European Finance Tour

After months of preparation, the day was there to leave for Zurich. On the 5th of May in the evening, we took the train from Utrecht Central Station to Zurich Hauptbahnhoff. The mood amongst the participants was good, everybody was excited to visit the city famous because of its ‘banking secret’. The journey took about 12 hours, so we were able to catch some sleep in our coupes. The next morning everyone seemed to feel quite fresh and our week full of company visits could start. First we dropped of our luggage at the hotel and had a quick moment to fresh up. Then we headed to Credit Suisse, our first company visit. We enjoyed an interesting ­presentation about the core activities of the company. The presenter told us about a typical working day for a relationship manager working in the wealth management department, which probably made some people quite enthusiastic. After this visit we had some time off, we had dinner at a nice Italian restaurant and closed the day by having a few drinks.

At seven o’clock we had to get up for an early company visit, since we were expected at 9.30 at UBP (Union Bancaire Privée). UBP is a big player in private wealth management, where we had a presentation about wealth management. We were told about the investment strategies of the bank and how customers play a role in the building of their personal investment portfolio. After this visit we went straight to UBS, which was close to UBP. While having some time for an informal chat with employees of UBS, we enjoyed a terrific lunch. After this lunch, there was a presentation about asset management, which was a preparation for the case we had to make that afternoon. We were taught about different aspects of asset management, such as the difference between bonds, stocks, cash, gold and the relationships between these assets and the economic market cycle. During the afternoon we had to build our own portfolio in teams of five. We were given market information and afterwards we had to discuss what impact this information could have on our current portfolio. Finally, UBS made a simulation to see who performed best. This competition element made the case even more fun! After the case we got a personal city tour from Jeroen van ‘t Hooft from UBS. He showed us all the highlights of Zurich, which we enjoyed fully. Then there was time for dinner, fortunately, because everybody was hungry after this long and intensive day. We had some drinks afterwards in a bar close to our hotel.

Wednesday started early as well, because we had to visit Leonardo & Co. in the morning. During the inhouseday in the Netherlands we got a case to make ourselves at home, which we had to present during this meeting in Zurich. Everybody was a bit nervous, because we had to work out different financial models to evaluate a company, for which we had to make our own assumptions. It was nice to listen to the input of other teams and the feedback given from the employees of Leonardo & Co. was very instructive. During the presentations we had a fantastic lunch, with different Swiss specialties. After the lunch we went to SwissRe, a large reinsurance company. The office was established outside the centre of Zurich, so we had to take the bus. The

42 • FSR news

tour gave us an amazing view off the Swiss landscape. At SwissRe we had to make a business case about insuring different buildings. We were given some information about how to do this and after choosing which building we wanted to insure and for which price, a simulation was done to see who made the most profit. Again, a competition element since we had to work in teams, which made the case exciting and competitive. After this interesting case we had a traditional Swiss dinner Raclette. For we had a day off the ­following day, we decided to discover the nightlife of Zurich and so we visited a club where we had a great time.

On Thursday we were free to have some site-seeing, since it was a national holiday and all the companies were closed. After a good night rest we decided to take a boat trip over the lake, to a nearby situated park. During the whole week the weather was amazing and this day was sunny as well. We enjoyed the sun while relaxing in the grass. Afterwards everybody had some time to fill in for themselves. In the evening we went to another club near our hotel where we had a great time.

That Friday we had to wake up quite early. However, everybody was excited to visit FIFA. The office was located a little uphill and it was amazing, very modern and high tech with a huge garden surrounding it. We got a presentation about all the charity work FIFA does and about the legal structures within the organization. Next we got a little tour throughout the building.

Last but not least, the university was our last visit. The campus was quite big and the buildings were beautiful with a lot of historical details. We got a tour around the campus and a presentation about the possibilities for studying in Zurich. At the end of the afternoon we had some time left before we had to get our luggage at the hotel. At 20:30 the train departed back to Utrecht. Tired but content we boarded the train and on our way home we talked about the tour.

Thanks to all participating companies, the funds and let’s not forget the participants. We had a great experience during our European Finance Tour in Zurich. Hopefully we will see you soon at a reunion!

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XVIth Board

Hi, my name is Gijs Romer and I will be the Chairman in the XVIth Board of the FSR. I grew up mostly in the vicinity of Arnhem, before I finished the last two years of high school in the area outside Zwolle. I decided to move to Rotterdam to study Business Administration and to join a fraternity, where I was part of several committees. Later on in my third year I got in touch with the FSR through the CleanTech Challenge. At the FSR I met a motivated and enthusiastic group that organizes great events for those affected with Finance & Accounting. At this phase of my study at the Erasmus it seemed clear to me that my time and energy is well spent at this study association. I foresee a great year for the FSR and our members, active and inactive, by guiding the FSR with this year again the Multinational Battle, the Corporate Finance Competition and two new events, not to mention the third lustrum celebration!

Hi, my name is Karen Wiersma. I am 20 years old and grew up in Utrecht. After the secondary school, I decided to study Economics and Business Economics in Rotterdam. I became a member at the fraternity R.V.S. Sanctus Laurentius, because I wanted to make new friends. At the fraternity I did several committees next to my study. In my second year I already decided I wanted to do a board year to develop myself. After hearing good stories about the FSR, I decided to apply. Next year I will be the Secretary of the XVIth Board of the FSR. Also I will organize The Audit, Bachelor Accountancy Day and the Female Business Tour. I am very excited for next year.

Together with my board members we are going to make it a year to remember! I hope to see you at one of our events.

My name is Justin Toet and in the upcoming year I will join the XVIth Board of the FSR as the Treasurer. I was born in The Hague and when I was six I moved to Middelburg where I spent most of my childhood. I decided to move to Rotterdam, where I started my study Business ­Economics. Last year I had the chance to experience joining the committee of the European Finance Tour, which was both a great learning experience and a good way to get acquainted with FSR. The upcoming year I will be responsible for organizing the Erasmus FSR Congress, the Dinners and The Valuation. The launch of The Valuation event was a great success last year.

I look forward to build upon this success and create a new and surprising second edition.

44 • FSR news

My name is Floris Mathol and I will take place in the XVIth Board of the FSR as the Commissioner of External Relations. I am 22 years old and I grew up in Wassenaar. After 18 years it was time for a new experience. I decided to start with Economics at the Erasmus University Rotterdam.

Last year I finished my Bachelors Economics & Business Economics and started an internship at the Royal Bank of Scotland in Amsterdam. Last year I participated in a committee with my student fraternity. The professionalism and the great variety of excellent events were the trigger to choose for a board position at the FSR. What attracts me most to my function is being in “charge” of the contacts between the FSR and its partners. I have the honor to see many different companies coming year. During this year I have the possibility to see different companies within the financial sector, this will hopefully give myself a clear view of where my strengths and interests lie. Next to being the link between the FSR and its partners I will be responsible for the Finance Day and the Asset Management Tour. I am looking forward to organize the events together with my fellow board members and committees.

Hi, my name is Martine Nieuwenhuijzen Kruseman and I will take place in the XVIth Board of the FSR as the Commissioner Activities. I was born in Blaricum, but moved to Haarlem, when I was four. After living in Haarlem for 15 years, I decided to study Economics and Business Economics in Rotterdam and I am planning to do my Master in Financial Economics. At the economic faculty association and my fraternity I participated in a number of committees. During the Finance Day I was impressed by the professionalism of the FSR and that made me decide to become a board member of the XVIth Board. I will be responsible for the International Research Project, Big 4 Cycle and the FSR Forum. I am really looking forward to this challenging year and will make it a great year with my board members!

Hi, my name is Gert-Jan Breukink and I will be the Commissioner Finance Activities of the XVIth Board of the FSR. I am 22 years old and I started my Bachelor Economics and Business Economics four years ago. In these four years I did several committees for my student fraternity ‘t Rotterdamsch Studenten Corps and other student organizations. Next to these good committees’ experiences, I had a really nice time in San Francisco in the autumn 2012 with a Business English Language training. Last year, I participated in different activities of the FSR. This was a good introduction to the FSR, after which I directly knew that I would like to apply for the XVIth Board of the FSR. During the coming year I will organize different financial activities.

I am really looking forward to organize these and I hope to see you all during these occasions.

FSR news • 45

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Bachelor Accountancy Day 2013

On Thursday 2nd May the Bachelor Accountancy Day took place in the World Trade Center.

Each year this event is cooperatively organized with EFR, STAR and STAR MScFM for bachelor students who have an interest in accountancy. The goal of this event is to introduce the ­students into the different aspects of the profession of an accountant and learn more about the trajectory towards becoming an accountant.

The day started with a presentation about the masters programme at the Erasmus School of Economics and the Rotterdam School of Management. After this presentation the students started to work on a case. Deloitte, Ernst & Young, KPMG and PwC prepared a case for the students through which they could get more familiar with the day to day work of an accountant. The case had to be solved in groups of students accompanied by accountants of the Big Four firms.

During the case the students were challenged to show their social, analytical and interview skills.

In the afternoon, after the students solved the case, the partners of each of Big Four firms arrived. During the day the students had the opportunity to prepare questions they wanted to ask the partners. The partner forum consisted of an interactive interview with the four partners, presided by Mr. Gortemaker. During one hour the partners were questioned about different topics, ranging from workload to moral responsibility and personal life. The concluding drinks gave the students the opportunity to get deeper into conversation with the accountants and the recruiters of the Big Four firms.

After all, it was an interesting and instructive day for the students. Besides the information about the profession of being an accountant they had the opportunity to experience the atmosphere during the informal lunch and drinks. We would like to thank Deloitte, Ernst & Young, KPMG, PwC, Mr. Van der Wal, Mr. van Rinsum and Mr. Gortemaker for their cooperation to make the Bachelor Accountancy Day this year again a successful event.

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fsrforum • volume 15 • issue #5

FSR Alumni Association The multiplier which leads you to synergy!

Dear FSR Alumnus or Future Alumnus, The academic year has almost come to an end. I guess you must be either preparing for exams or living the good life in Saint Tropez. At the office it is quiet, most people are on their annual leave. This gives me the opportunity to reflect on the past year for us, FSR alumni.

Together with my fellow board members: Anne, Maaike and Taco we organized, next to the traditional KETEL 1 drink, the first drink in Amsterdam. More FSR alumni seem to be moving to Amsterdam. Why is that happening I wonder. Isn’t Rotterdam the greatest city to live in? No tourists to guide to the Van Gogh museum, no drunks on the street, no ridiculous high parking tariffs; who wouldn’t love the business ambiance of Rotterdam?

As a (future) alumnus I encourage you therefore to keep living in Rotterdam. The city needs young people like you and besides that, it is easier to attend our drinks and activities if you live in Rotterdam. You could for instance have participated in our annual FSR Golf Tournament, a highlight for all our alumni members.

Connect with us. I encourage you to subscribe for the FSR Alumni Association. Next academic year the third lustrum of the FSR will be celebrated. I can already tell you now that it will be a legendary experience.

Alumni members, thank you for your support this year. Future alumni member, remember, it just takes one e-mail to alumni@fsr.nu to join a network for a life-time!

On behalf of the IXth FSR Alumni Board, Ashmita Krishna Chairman FSR Alumni Association Connect with us on LinkedIn on ‘Financial Study Association Rotterdam Alumni’

FSR news • 47

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Preliminary FSR Activity Agenda 2013-2014

September - October - November BIG 4 Cycle

March Finance Dinner

Get to know the 4 leading accounting firms

Get acquainted with the world of banking

Erasmus Banking Congress

Multinational Battle

The official kickoff of the academic year

Four multinationals, five battling cities, are you part of it?

International Banking Cycle

April The Valuation

The investment in your career

Traders Trophy Can you handle the pressure?

One day theory, one day practice

Multinational Dinner Get in touch with the multinationals

November The Audit Interested in Accountancy and do you want to meet four leading medium-sized firms?

Finance Day Want to know what finance is all about…

November - December Financial Business Cycle Explore the financial opportunities

January Traders Masterclass Beat the Bear, be the Bull

Female Business Tour It might be a men’s world but it would be nothing without women

Corporate Finance Competition Discover everything about Corporate Finance

January - April CleanTech Challenge Grow your green ideas!

48 • FSR news

April - May International Research Project Using your intellect for a charity!

May Bachelor Accountancy Day Will you choose for a career in accounting?

Asset Management Tour What’s your investment strategy?

European Finance Tour Exploring European financial world

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Ernst & Young will now be known as...

Ernst & Young wordt al in heel veel landen als EY uitgesproken. Maar een organisatie die, als enige ter wereld, mondiaal volledig is geintegreerd dient ook wereldwijd dezelfde naam en uitstraling te hebben.

Vanaf 1 juli is dat het geval. En heten we niet alleen EY, maar introduceren wij gelijktijdig onze nieuwe missie “Building a better working world�. Want in de snel veranderde wereld is het verkrijgen en behouden van vertrouwen

belangrijker dan ooit. Dat vertrouwen kan alleen worden waargemaakt door een constant streven naar het best mogelijke advies.

Door uitmuntende teams. Altijd en overal.

Die ambitie motiveert en inspireert ons.

Dat is weliswaar niet de eenvoudigste weg, maar wel de route die wij gekozen hebben.

Meer informatie over onze bijdrage aan een beter functionerende wereld kunt u vinden op www.ey.nl.