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Venture Capital

Fund Certification, Performance Prediction and Learnings from the Past

Series:

Armin Höll-Steiner

This book contains three studies. The first study investigates the relationship between private equity investors and fund managers and how intermediaries can mitigate their agency problems. The incentive structure of three intermediary types and their behavior in signaling fund qualities to investors are studied theoretically. A recommendation which intermediary to consult is given. The second study presents a new statistical method to predict the performance distribution of venture capital direct investments. The accuracy of this method is investigated and compared to existing approaches. The third study is about the European venture capital market’s historic development before and after the internet bubble and reasons for the bad development especially after the bubble.

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4 Study 3: European Venture Capital: What can we learnfrom the past? 153

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4 Study 3: European Venture Capital: What can we learn from the past? 4.1 Introduction VC is an important factor for economic growth as it targets the financing of innovative projects (Kortum and Lerner, 2000). A constant flow of new products, services and processes is necessary for any country that wants to keep up with international competition and increase the prosperity of its people. A good example are the USA who were able to convert innovative ideas into highly internationally competitive products and services through Venture Capital in the 1980’s and 1990’s. Good examples are companies like Microsoft, ebay or Google. Europe was trying to follow the North American example (Bottazzi and Da Rin, 2002; Aizenman and Kendall, 2008) and established a VC market as well as IPO markets in the European ecosystem over the last 20 years. In the 1990’s this concept seemed to work. Although the USA were the lead market in Internet start-ups and European start-ups mainly copied new business ideas from the US, investors earned attractive returns by financing European start-up companies. In consequence, more and more investors became interested in the asset class Venture Capital hoping to gain high returns. The strong development and growth rates in VC funding peaked in the Internet bubble in 1999/2000. 154 4 European Venture Capital: What can we learn from the past? An abrupt decline in the amount of capital raised by VC funds and in the capital invested into portfolio companies by fund managers followed. Investment levels of...

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