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VALUE-ADDED ACTIVITIES IN VENTURE CAPITAL AND THE EFFECTS OF STAGE: AN EMPIRICAL STUDY

SUMMARY OF FINDINGS This thesis explores how Venture Capital funds value-added activities differ between stage and if the Venture Capital funds specialize accordingly. We used a survey targeting 275 venture capital deals from Danish-based Venture Capital funds operating within ICT or Life Science. The survey consisted of 28 questions on the perceived contribution of the VC funds in various value-added activities, as well as a maximum of 37 questions on the characteristics of the firm, the founders, the deal, and the level of interaction with the fund. We obtained 69 usable responses, and through that the effect of the stage on the portfolio companies perceptions was analysed. These are our main findings: Funds differ: We find significant differences between portfolio companies perceptions of their funds contribution. This implies that a portfolio company should, to the extent it is possible, choose a fund based not just of money, but on the specific needs of the firm 8 distinct areas of value-add: We confirmed that Venture Capital funds add value within at least 8 overarching areas: Strategy, Technological position, Market position, Professionalization, Financing, Credibility, Internationalization, and Exit orientation. Value-added activities differ: We find significant differences between the importance of these 8 areas of value-added. Portfolio companies in our sample, on average, ranked the funds contributions within Credibility, Professionalization, Finance, and Strategy to considerably more important than the rest. 3/8 value-added activities depend on stage: We find that the perceived importance of Venture Capital funds activities differs across portfolio company stages for Strategy, Market position, and Credibility. We find no difference across stages, however, for the remaining 5 areas of Technology position, Professionalization, Finance, Internationalization, and Exit orientation. Funds specialize in stages: We find that some Venture Capital funds specialize in stage, in order to deliver focused value-added activities within Strategy, Market position, and Credibility.

Interaction matters: We find that the degree of interaction between the Venture Capital fund and their portfolio companies has a positive effect on the perceived importance of the funds value-adding contributions.

Stamps of approval are important: We find that the funds function as certification of portfolio companies is highly important and depends positively on stage. Thus, credibility is more important in later stages, which implies that paying for affiliation to a reputable fund might be worthwhile.

OTHER FINDINGS We found that Market position depends on stage. This is an interesting finding, which we interpret not as less of a need for Market position value-add in the earlier stages, but rather a need for an operational focus on Market position in early-stage ventures that the funds simply cannot provide. With respect to financing, no funds were significantly better perceived than others, which indicates that funds are either a) not measurably different in this regard or b) the efforts in helping the venture get financing are not adequately perceived by the portfolio companies. We also find that Credibility is more than simply the funds ability to provide Financing. We cannot fully explain why portfolio companies in later stages perceive funds value-add to Credibility significantly higher, while there is no difference in Financing. Our opinion is that while financing is necessary throughout the life of the venture, the importance of credibility becomes increasingly greater, as the firms mature and the investment sizes grow and amount of stakeholders which the company is exposed to grow. We therefore encourage entrepreneurs to look at the track record of funds and their ability to pass on the firm to later-stage investors. Internationalization had no difference between stages, and our findings suggest that the international focus of a company is conducted on a case-by-case basis. Furthermore, no funds displayed any specialization in international value-add, and portfolio companies ranked internationalization as the area which Venture Capital funds contribute the least. We find this to be a supporting argument of the extremely national focus of Danish Venture Capital. Of course not all firms are meant to be international, but we encourage the trend of Venture Capital funds broadening their network and focus. Finally, these findings are based on a sample of ICT and Life Science funds in Denmark. We can therefore say nothing of the trends in other industries, countries, and for later growth

stages of Venture Capital / Private Equity. Furthermore, we emphasize that we have no information on the performance of the portfolio companies, and we have no knowledge of whether a greater perceived contribution of a fund will result in a better performing company. However, we do believe these findings to be relevant for both Danish-based Venture Capital funds and their portfolio companies, in the sense that funds differ not only on their investments, but their ability to transfer knowledge to their investments. We therefore hope entrepreneurs will start to look at venture capital as more than simply money.

Notes about the project: These findings are the result of the authors 6 month Bachelors thesis for their B.Sc. International Business degree at Copenhagen Business School. The authors all received a 12 for the assignment. If you have any comments or questions, please do not hesitate to contact either one of us. Contact information can be found below: Martin Collignon Industry Analyst (Google) Cell: +45 2648 1569 Email: martin@mcollignon.com LinkedIn: dk.linkedin.com/in/martincollignon Joachim Satchwell Analyst (Polaris Private Equity) Cell: +45 2890 1381 Email: js@polarisequity.dk LinkedIn: dk.linkedin.com/in/joachimsatchwell Anders Valentin Junior Consultant (Quartz+Co) Cell: +45 2968 6936 Email: Anders.valentin@quartzco.com LinkedIn: dk.linkedin.com/in/andersvalentin

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