Value-adding activities of venture capital companies: a content analysis of investor’s original documents in Germany

Abstract

As many studies have shown, venture capital companies pursue value-adding activities for their portfolio firms to achieve abnormal returns compared to the market. Value-adding activities are complex and highly diverse, but also are very relevant to practice. Hence, the topic has been considerably analyzed in academic literature. However, there continues to be a lack of in-depth knowledge because of the sensitivity and scarcity of publicly available data from venture capital companies. We provide in-depth insights into the practices of venture capital companies. Using a longitudinal data-set obtained from nine venture capital companies in Germany, we qualitatively analyzed their value-adding activities. Drawing on investors’ original documents, including business plans, investment committee papers, reports and annual statements of the investments, we created a typology of which value-adding services were performed. Results suggest that, consistent with prior studies, venture capital companies are highly engaged in supporting ventures with respect to financial and human capital issues as well as in establishing strong governance mechanisms to reduce information asymmetries between founders and investors. Venture capital companies also make moderate use of their network of relevant contacts. Support for operational issues is low.

Keywords:

• Venture capital
• non-financial value added
• non-financial contributions
• value creation
• new venture

Acknowledgments

We thank the nine venture capital funds from Germany which supported our research by allowing us to analyze their documents and interview the investment managers. We are grateful for their trust and support. Further, we thank the ‘Wissenschaftsförderung der Sparkassen-Finanzgruppe e.V.’ as well as the ‘NRW.Bank’ for their continuous support of our project. In addition, we would like to thank the two anonymous reviewers. Their suggestions and their encouraging feedback greatly helped us to improve the quality of this article. We also wish to thank Elizabeth Scott Anderson, PhD for her great proofreading service.