Survey of the Economic and Social Impact of Venture Capital in Europe

Research Paper
Research Paper

The European Private Equity and Venture Capital Association (EVCA) exists to represent the European private equity sector. With over 950 members throughout Europe, EVCAs many roles include providing information services for members, creating networking opportunities, acting as a lobbying and campaigning organisation and working to promote the asset class both within Europe and throughout the world. EVCAs activities cover the whole range of private equity, from seed and start-up to development capital, buyouts and buyins, and the flotation of private equity-backed companies.

Survey of the Economic and Social Impact of Venture Capital in Europe

This paper considers the role played by venture capitalists in the seed, start-up and expansion stages of an enterprise. It is based on a pan-European survey conducted on behalf of EVCA by Nottingham University Business School (NUBS), Nottingham, United Kingdom (in conjunction with CMBOR ) and with the support of Europe Unlimited, Brussels, Belgium.
1

June 2002

CMBOR was founded at Nottingham University Business School in March 1986 and carries out bespoke research in the field of venture capital and publishes regular reports on buy-out trends and other relevant issues in its Quarterly Review and annual European Buy-out Review.

Contents
Contents
Foreword Executive Summary Post-investment performance Employment Growth strategies Comparison with competitors Operation of the venture-backed company Destination of the investment funding Active involvement of the venture capitalist Background characteristics Size Sector distribution Survey Findings 1. Background characteristics 2. Operation of the venture-backed company 3. Post-investment performance Appendices Appendix 1: Survey methodology Response to the survey Appendix 2: Analysis of responses by country 3 5 6 6 7 7 7 7 8 9 9 9 10 10 11 16 21 21 21 22

Foreword
Foreword
The European Private Equity and Venture Capital Association (EVCA) first undertook investigations to improve general understanding of the economic impact of private equity with independent research back in 1996. The results of this survey are now well documented and prove that venture capitalists contribute positively to the rapid growth of companies to increase sales, employment, investment, R&D expenditure and exports. 5 years later, EVCA set about commissioning a similar investigation into buyouts, a subset of private equity. This found that without the buyout, 84% of companies would either have ceased to exist or would have grown less rapidly. It is hence, that this year, in spite of the current economic down cycle, the EVCA High-Tech Committee initiated the following independent study, to apply the same methodology to venture capital, the other subset of private equity. The findings of this research bring to light a greater understanding and awareness of the positive impact of venture investment on a growing company. It should not be forgotten that the involvement of Venture Capital is a long-term support, which goes to those companies, which have at all times, the potential of success and sustainability. There are in Europe, a high number of very promising European companies with great technology and enthusiastic and capable management. Venture capital is there for them, to help them build businesses and grow faster than they otherwise would. Venture-backed companies harness the entrepreneurial spirit, provide tomorrows technologies and create jobs. Regardless of economic cycles, the impact of venture capital investment on the overall economy, is clear. The latest statistics demonstrate sustained investment levels by European venture capitalists in all sectors, including the suffering high-tech sector. It is certainly the most encouraging response of a mature industry to the expectations, which have been placed upon them. EVCA encourages governments and policy makers to look at market facts and re-enforce the support given to venture capital, specifically by easing the regulatory environment both for establishing new companies and for their venture capital partners.

EVCA would like to acknowledge and give thanks to the members of the EVCA High-Tech Committee for leading this exercise, Europe Unlimited for contributing to the representation of the sample and Nottingham University Business School for their high quality research work.

Edoardo Bugnone EVCA Chairman

Jim Martin Chairman EVCA High-Tech Committee

Executive Summary
Executive Summary
Since 1995, Europe has seen a dramatic increase in venture capital2 investment in companies that are in their seed, start-up or expansion stages3. Not only has the total invested in these young companies grown from 2.6 billion per annum in 1995 to 12.2 billion per annum in 2001, but venture capitals share of total private equity investment has, over the same period, also risen from 47.2% to 50%. In January 2001, the EVCA report Survey of the Economic and Social Impact of Management Buyouts and Buyins in Europe (based on research carried out by CMBOR4) was widely welcomed, both as an insight into the nature and operation of buyouts and as an investigation of why this type of investment is important and valuable for the economy and society as a whole. This current report on the impact of venture capital investment mirrors the buyout survey. It aims to provide a similar analysis of the function and value of venture capital investments in early stage5 and expansion stage companies. The study was designed to investigate some of the reasons for the success of these types of investments. Its purpose was to find out more about three aspects of venture-backed companies:
Background characteristics the nature, size and business

Questionnaires were sent out between January and March 2002 to a sample of companies across Europe that had, between 1995 and 2001, received venture capital funding during their seed, start-up or expansion stages. This report analyses the 364 replies that were received, representing a good correlation with the relative size of each countrys venturebacked markets (see Appendix 2). The most significant findings of the study are that:
Some 95% of the companies replying to the survey stated

that, without venture capital investment, they could not have existed or would have developed more slowly
Almost 60% said that the company would not exist today

without the contribution of venture capital

An average of 46 additional jobs were created by each

responding company following the venture capital investment.

sector of investee companies

Operation of the venture-backed company the internal

organisation and strategies adopted

Post-investment performance indicators showing post-

investment achievement in a number of areas.

Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the seed, start-up or expansion of a business. Private equity therefore consists of venture capital and buyout investments. Seed involves funding to research and assess an initial concept; Start-up involves funding to develop and initially market the concept; Expansion involves funding to grow and expand an operating company The Centre for Management Buy-out Research, Nottingham, UK The term early stage encompasses the seed and start-up stages of a business.

4 5

POST-INVESTMENT PERFORMANCE
Without venture capital, my company could not have existed or would have developed more slowly (94.5%)

The responses of the venture-backed companies prove that venture capital investment is crucial to the existence, feasibility and success of businesses in the seed/start-up and expansion stages.
Overall, 94.5% of companies responding to the survey

said that the venture capital investment had been an essential ingredient in their creation, survival or growth.
Of companies receiving investment in the expansion

stage, 90% said that, without venture capital, they could either not have existed or would have developed more slowly.
72% of seed/start-up companies stated that they would

would have developed faster (0.8%)

would have developed in the same way (4.7%)

have never come into existence without the contribution of venture capital.

Impact of the investment on the creation, survival and growth of the company all responding companies (source: NUBS/EVCA)

Employment
The creation and growth of these young companies has also had a significant impact in terms of new employment opportunities.
Around 90% of responding investee companies declared

Increase (89.7%)

an increase in the total number of employees following the venture capital investment.
A total of 16,143 additional new jobs were created after

the investment by the 351 companies who responded to this part of the survey.
On average, 46 new jobs were created per company.

Same (3.1%)

Decrease (7.1%)

This represents a large percentage increase for both seed/ start up companies (two-thirds of whom had fewer than 6 employees at the time of the investment) and expansion stage companies (70% of whom had fewer than 50 employees at the time the investment was made)6.

Change in the total number of employees post venture capital investment all responding companies (source: NUBS/EVCA)

See Section 1.1 of the Survey Findings.

Growth strategies
Investee companies use venture capital investment funding to implement a range of growth strategies. The survey shows that increased expenditure on research & development, marketing and training has resulted in significant improvements in turnover and profitability.
Much more

Turnover

EBIT

Slightly more

About the same

Slightly less

Comparison with competitors

Over half the respondents considered that their performance in the post-investment period had been significantly better than that achieved by their competitors. The perception of nearly 80% of companies was that the growth in their EBIT (Earnings before Interest and Tax) had been either the same as or greater than that of their competitors.

Much less 0% 10% 20% 30% 40% 50%

Respondents perceptions of post-investment increases in turnover and EBIT in comparison to competitors all responding companies (source: NUBS/EVCA)

OPERATION OF THE VENTURE-BACKED COMPANY

Destination of the investment funding

The companies surveyed used venture capital investment to fund long term, value-adding developments such as research & development, marketing, and training. Investee companies reported significantly greater expenditure in all these areas.
Seed and start-up companies identified research & develop Mean Median

Training

Capital Expenditure Marketing Expenditure Research and Development 0% 200% 400% 600% 800% 1000% 1200% 1400% 1600%

ment as the area in which the largest post-investment increases in expenditure were made (multiplying factor of more than four for half of the surveyed companies).
Companies using venture capital investment to fund expan-

sion stated that the largest increases were in marketing, where expenditure almost tripled for half of the surveyed companies.

Percentage increases in expenditure between the time of the initial investment and the time of the survey seed/start-up stage companies (source: NUBS/EVCA)

 All companies invested heavily in training their employees.

Mean

Median

Half of the seed/start-up companies increased spending in this area by a factor of more than four, while half the expansion stage companies more than doubled their expenditure7.

Training

Capital Expenditure Marketing Expenditure Research and Development 0% 100% 200% 300% 400% 500% 600% 700%

Percentage increases in expenditure between the time of the initial investment and the time of the survey expansion stage companies (source: NUBS/EVCA)

Active involvement of the venture capitalist

The sampled companies reported that the involvement of the venture capitalist is not restricted to financial contributions, and often includes a variety of non-financial inputs.
It appears that seed/start-up companies value venture
Strategic advice Networking opportunities/ connections Focus and support Providing credibility/status for venture Sounding board for management ideas Financial advice and financial contacts Monitoring performance

Expansion

Seed/Start-up

capitalists most for their strategic advice.

Companies receiving investment to fund expansion on the

Attracting new investors Providing management expertise Help with appointing/ restructuring directors Challenging status quo Help with exit Encouragement to think bigger Knowledge of company law/tax Focus on shareholder value 0 5 10 15 20 25 30 35 40 45

other hand, consider the venture capitalists most important contribution to be the provision of credibility.

Single most important contribution by the venture capitalist (funding excluded) (source: NUBS/EVCA)

The definition of median (used in the following graphs and elsewhere in the reports) is the value achieved or exceeded by the upper 50% of the sample.

BACKGROUND CHARACTERISTICS
Expansion
70%

Size
At the time the venture capital investment was made, the majority of investee companies had fewer than 50 employees.
Two-thirds of companies in the seed or start-up stages
60% 50% 40% 30% 20% 10% 0%

Seed/Start-up

employed fewer than 6 employees in the year of the investment.

70% of companies in the expansion stage had fewer than

0 to 5

6 to 20

21 to 50

51 to 100

> 100

50 employees in the year of the investment.

Analysis by size of the companies surveyed number of employees in the year of initial investment (source: NUBS/EVCA)

Sector distribution
Although venture capital investment takes place in all sectors, a substantial majority of reporting investee companies are active in high-tech industries.
Communications Computer related Other Electronics related Biotechnology Medical/Health related Energy Consumer related Industrial Products/Services Chemicals and Materials Industrial Automation Other Manufacturing Transportation Financial Services Other Services Agriculture Construction Other

Expansion

Seed/Start-up

0%

5%

10% 15% 20% 25% 30% 35% 40%

Analysis of companies surveyed by investment stage and by industry sector (source: NUBS/EVCA)

Survey Findings
Survey Findings

1. BACKGROUND CHARACTERISTICS
70% 60% 50% 40%

Expansion

Seed/Start-up

1.1. The recipients of venture capital investment are typically companies with fewer than 50 employees.
For all responding investee companies, the number of

30% 20% 10% 0%

employees in the year of the initial investment ranged from 0 to 800, with a median value8 of 6.
For companies receiving venture funding in their seed or

0 to 5

6 to 20

21 to 50

51 to 100

> 100

start-up stages, around two-thirds (64.4%) had fewer than 6 employees.

70% of companies in the expansion stage had fewer than

Fig. 1.1.: Analysis by size of the companies surveyed number of employees in the year of initial investment (source: NUBS/EVCA)

50 employees.

1.2. Although venture capital investment takes place in all sectors, almost three-quarters of the companies financed in their seed and start-up stages are active in high-tech industries.
74% of companies financed in their seed and start-up stages

Expansion

Seed/Start-up

Communications Computer related Other Electronics related Biotechnology Medical/Health related Energy Consumer related Industrial Products/Services Chemicals and Materials Industrial Automation

are in high-tech industry sectors for example, internet technology, telecommunications, computer hardware, software, IT services and semiconductor, electronics, biotechnology, medical instruments and pharmaceutical activities.
Slightly fewer companies (62%) receiving investment in their

Other Manufacturing Transportation Financial Services Other Services Agriculture Construction Other 0% 5% 10% 15% 20% 25% 30% 35% 40%

expansion stage are high-tech, with the two main sectors being computer related and communications.

Fig. 1.2.: Analysis of companies surveyed by investment stage and by industry sector (source: NUBS/EVCA)

The median value is the value achieved or exceeded by the upper 50% of the sample.

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1.3. The most common stage of development for surveyed companies receiving venture backing is the start-up stage.
Just over a fifth were seed companies (22.5%). Over four out of ten (44.8%) of the responding companies

Start-up (44.8%)

were start-ups at the time of the investment financing.

Just over a third (32.7%) used venture capital to fund

expansion.

Seed (22.5%)

Expansion (32.7%)

Fig. 1.3.: Analysis of companies surveyed by stage of development (source: NUBS/EVCA)

2. OPERATION OF THE VENTURE-BACKED COMPANY

Expansion Seed/Start-up

2.1. Venture capital investment provides medium to longterm support to investee companies.
None envisaged

Around 90% of respondents declared that the planned

duration of the venture capital investment was between 2 and 7 years (86% for expansion stage companies, 91% for seed/start-ups).
Approximately 70% reported that the planned duration of

More than 7 years

5-7 years

2-5 years

the venture capital investment was 2 to 5 years.

Less than 7% said that no specific time-scale to exit of

Less than 2 years 0% 10% 20% 30% 40% 50% 60% 70% 80%

venture capital investment was planned.

Fig. 2.1.: Duration of investment envisaged by venture capitalist (source: NUBS/EVCA)

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2.2. The survey confirms that venture-backed companies view a healthy cash flow, new product development, market acceptance and highly trained employees as the most important value creation factors. Respondents were asked to consider how they planned to add value by ranking a number of factors on a scale between 1 (very low importance) to 5 (very high importance). The seed/ start-up group and the expansion stage group both identified the same four factors as being of prime importance:
Ensuring healthy cash flow (liquidity) (score of 4.05-3.96) New product development (score of 3.75-3.90) Gaining market acceptance (score of 3.65-3.78) Employing highly trained personnel (score of 3.5-3.76).

Ensuring healthy cash flow (liquidity) New product development Gaining market acceptance Employing highly trained personnel Developing business model Refining original business model Cost control Optimising capital expenditure Building brand identity Improving product quality 1 1.5 2 2.5 3 3.5 4 4.5 5

Fig. 2.2.a: The ten most important value creation factors (rated on a scale of 1-5) seed/start-up stage companies (source: NUBS/EVCA)

Ensuring healthy cash flow (liquidity)

Building brand identity, optimising capital expenditure and cost control were also given high priority by both groups. However, the other three value-adding strategies identified in the top ten were different for each group. While broadening the product range and improving business efficiency/reputation were ranked highly by expansion stage companies, seed/start-up firms focused on developing/refining the business model and improving product quality.

New product development Gaining market acceptance Employing highly trained personnel Broadening product range Building brand identity Cost control Improving business efficiency Improving reputation Optimising capital expenditure 1 1.5 2 2.5 3 3.5 4 4.5 5

Fig. 2.2.b: The ten most important value creation factors (rated on a scale of 1-5) expansion stage companies (source: NUBS/EVCA)

12

2.3. The companies surveyed used venture capital funding to achieve significant increases in their budgets for research & development, marketing and training.
For all companies, the initial venture capital investment

Mean

Median

Training

Capital Expenditure

has been followed by a sharp increase in spending on research & development. Half the seed/start-up companies multiplied their efforts in this area by more than four times (median increase 370%)9, while half the expansion stage companies almost doubled the amount invested (median increase 95%).
The median value of marketing expenditure for the seed/

Marketing Expenditure

Research and Development 0% 500% 1000% 1500%

Fig. 2.3.a: Percentage increases in expenditure between the time of the initial investment and the time of the survey seed/start-up stage companies (source: NUBS/EVCA)

start-up companies more than tripled after the investment. For the expansion stage companies, the median value of spending in this strategic area grew by almost the same amount which makes marketing the type of expenditure with the largest post-investment growth for companies at this stage of development.
Median training expenditure after the venture capital

Mean

Median

Training

Capital Expenditure Marketing Expenditure Research and Development 0% 100% 200% 300% 400% 500% 600% 700%

funding multiplied by a factor of more than four for the seed/ start-up companies and more than two for the expansion stage companies.

Fig. 2.3.b: Percentage increases in expenditure between the time of the initial investment and the time of the survey expansion stage companies (source: NUBS/EVCA)

The largest percentage increases in these areas of strategic expenditure occur amongst the seed/start-up phase companies mainly because businesses at this stage of development typically start from a very low base figure.

13

2.4. Most venture capitalists adopt a hands-on strategy in their working relationships with their investee companies.
More than 90% of all responding companies reported that

Monthly (57.2%)

they have contact with their venture capital backer on a weekly or monthly basis.
The percentage of companies having contact with their

venture capital backer at least once a week is 36.6% for seed/start-up companies and 28.6% for expansion stage companies.

Weekly (36.6%)

Less than monthly (6.2%)

Fig. 2.4.a: Frequency of contact between venture capitalist and seed/start-up stage company (source: NUBS/EVCA)

2.5. Investee companies value the venture capitalists strategic input in non-financial, as well as financial, areas. It is clear that venture capitalists focus on monitoring financial performance and giving financial advice. However their input often extends beyond these areas. Two questions focused on this aspect of the investor/company relationship.
The first question asked the companies to identify the ven-

Monthly (63.0%)

ture capitalists level of input in a number of company activities. For each activity, they were asked to estimate the percentage of venture capitalist involvement, ranging from 0% (no involvement by venture capitalist) to 100% (venture capitalist has sole responsibility).

Weekly (28.6%)

Less than monthly (8.4%)

Fig. 2.4b: Frequency of contact between venture capitalist and expansion stage company (source: NUBS/EVCA)

14

The opinions of seed/start-up and expansion stage companies were very similar on this point. In most companies the involvement of the venture capitalist covers a wide range of non-financial areas. These include monitoring operating performance, formulating strategy, acting as a sounding board for management ideas and helping management to maintain focus. The venture capitalists contribution in financiallyoriented areas (monitoring financial performance, regular budget reporting, financial advice) is, as would expected, also relatively high.
The second question asked companies to identify what they

Expansion

Seed/Start-up

Monitoring financial performance Regular budget reporting Financial advice Monitoring operating performance Formulating corporate strategy/direction Sounding board for management ideas Maintaining focus 0% 10% 20% 30% 40% 50% 60% 70%

valued (apart from the provision of investment funding) as the venture capitalists single most important contribution. In this question there was a wider divergence between the opinions of the two groups (seed/start-up and expansion stage companies). - For seed/start-up companies, strategic advice, networking opportunities and focus and support were the most important contributions. - For expansion stage companies, providing credibility/ status, focus and support, strategic and financial advice were the most important contributions.

Fig. 2.5.a: Contribution made by venture capitalist in various aspects of company operation (source: NUBS/EVCA)

Expansion

Seed/Start-up

Strategic advice Networking opportunities/ connections Focus and support Providing credibility/status for the venture Sounding board for management ideas Financial advice and financial contacts Monitoring performance Attracting new investors Providing management expertise Help with appointing/ restructuring directors Challenging status quo Help with exit Encouragement to think bigger Knowledge of company law/tax Focus on shareholder value 0 5 10 15 20 25 30 35 40 45

Fig. 2.5.b: Single most important contribution (funding excluded) by the venture capitalist (source: NUBS/EVCA)

15

3. POST-INVESTMENT PERFORMANCE
Expansion Seed/Start-up

3.1. The post-investment period is characterised by large percentage increases in turnover.

Year 3 to 4

The annual percentage increase in turnover for companies

in their seed or start-up stage is very large for the first year following the investment around 200%. The average annual growth rate over the first four years is 120%.
Growth rates of expansion stage companies after the initial

Year 2 to 3

Year 1 to 2

Year 0 to 1 0% 50% 100% 150% 200% 250%

input of venture capital are, as expected, lower than those for seed/start-up companies but are nevertheless substantial. The average annual growth rate for the first four years is 33%.

Fig. 3.1.: Median percentage change in turnover (source: NUBS/EVCA) 10

3.2. While venture capitalists may expect expansion stage companies to achieve a growth in profits over the period of the investment, they recognise that it may be some years before a typical seed/start-up company becomes profitable.
For seed/start-up companies EBIT is initially highly negative,

Year 3

Year 2

Year 1

Year 0 -250% -200% -150% -100% -50% 0%

as the business generates more costs than revenues. Three years after the initial investment, a majority of companies have still a negative EBIT.
The results for expansion stage companies are quite differ-

Fig. 3.2.a: EBIT as a percentage of turnover for seed/start-up companies median (source: NUBS/EVCA)

ent, with EBIT increasing steadily from 1.2% of turnover in the year of the investment to 4.4% after three years.

Year 3

Year 2

Year 1

Year 0 0% 1% 2% 3% 4% 5%

Fig. 3.2.b: EBIT as a percentage of turnover for expansion stage companies median (source: NUBS/EVCA)

10 Year

0 is the year in which the venture capital investment was made.

16

3.3. Most responding companies reported an improved competitive position in terms of both market share and profits. Changes in turnover and profits are, of course, affected by general market conditions as well as by the individual companys performance. To understand whether or not venture capital is really improving investee companies position, we therefore need to analyse their financial performance relative to their competitors.
Almost 90% of the respondents considered that, since the

Turnover

EBIT

Much more

Slightly more

About the same

Slightly less

Much less 0% 10% 20% 30% 40% 50%

investment, the growth in their turnover had either been the same as or greater than that of their competitors. 57% of respondents reported that their turnover had grown more than that of their competitors.
More than three-quarters (77%) considered that, since the

Fig. 3.3.a: Respondents perceptions of post-investment increases in turnover and EBIT in comparison to competitors (source: NUBS/EVCA)
Expansion Seed/Start-up

investment, growth in EBIT had either been the same as or greater than the growth in their competitors profits.

Much more

Slightly more

About the same

Slightly less

Much less 0% 5% 10% 15% 20% 25% 30% 35% 40%

Fig. 3.3.b: Respondents perceptions of post-investment increases in turnover in comparison to competitors (source: NUBS/EVCA)
Expansion Seed/Start-up

Much more

Slightly more

About the same

Slightly less

Much less 0% 10% 20% 30% 40% 50% 60%

Fig. 3.3.c: Respondents perceptions of post-investment increases in EBIT in comparison to competitors (source: NUBS/EVCA)

17

3.4. Venture-backed companies deploy growth strategies to increase their sales in export markets. Companies at all stages of development reported an increase in exporting activities following the venture capital investment.
The number of seed/start-up companies engaged in exporting Exports to: Inside Europe Outside Europe Year of investment 12.6% 4.6% Last year 20.0% 10.6%

rose from one-third (37.2%) of companies in the year of the investment to nearly six-tenths (59.7%) in the last year11.
For seed/start-up companies already exporting at the time

Table 3.4.b: Comparison of exports before and after the venture capital investment as a percentage of sales for seed/start-up companies (source: NUBS/EVCA)

of the investment, the share of output exported rose from 17.2% in the year of the investment to 30.6% in the last year an increase of 78%.
The number of expansion stage companies engaged in

Exports to: Inside Europe Outside Europe

Year of investment 19.3% 7.1%

Last year 23.4% 13.0%

exporting rose from just over a half (55%) in the year of the investment to almost three-quarters (72%) in the last year.
For expansion stage companies already exporting at the

Table 3.4.a: Comparison of exports before and after the venture capital investment as a percentage of sales for expansion stage companies (source: NUBS/EVCA)

time of the investment, the share of output exported rose from 26.4% in the year of the investment to 36.4% in the last year an increase of 38%.

3.5. The venture capital investment enabled investee companies to create an average of 46 jobs per company. Almost all the surveyed companies reported that, as a result of the investment, they had been able to create substantial numbers of new jobs.
Around 90% of all respondents declared an increase in

Increase (89.7%)

the total number of employees (92% for seed/start-ups and 84% for expansion stage companies).
In all, 16,143 jobs were created by the 351 companies

Same (3.1%)

Decrease (7.1%)

who responded to this question (11,633 by seed/start-up companies, 4,510 by expansion stage companies).
This average of 46 jobs created per company is particu-

Fig. 3.5.: Change in the total number of employees after the investment all responding companies (source: NUBS/EVCA)

larly impressive in the light of the fact that, before the investment, two-thirds of the seed/start-up companies (ie the businesses that created 72% of the new jobs) had fewer than 6 employees.
11 Last

year means 2001 (or 2000 if more recent financial data not available).

18

3.6. Employees at all levels achieved higher levels of earnings and other forms of remuneration following the investment, with many companies using incentivisation tools such as stock options and performance-related pay.
For the surveyed group as a whole, around half (49%)

Increased

About the same

Decreased

Top management

Middle management

reported that total earnings (including fixed, variable earnings and equity packages) rose for top management since the investment.
For middle management, remuneration rose in 54% of

Other employees

0%

10%

20%

30%

40%

50%

60%

70%

cases, and for other employees in 50% of cases.

The largest increases in overall remuneration were achieved

Fig. 3.6.a: Post-investment changes in management and other employee remuneration expansion stage companies (source: NUBS/EVCA)

by the expansion stage companies, where between 52% and 63% of companies reported increases in remuneration across all three employee categories. Forms of remuneration such as equity participation and variable (performance-related) pay are becoming increasingly popular as motivation tools for both management and other employees.
Overall, the number of employees who participated in
Top management

Increased

About the same

Decreased

Middle management

share option schemes rose from 38% in the year of the investment to 53% in the last year (from 22% to 38% for expansion stage companies and from 46% to 60% for seed/start-up companies).
For all companies, the number of employees receiving

Other employees

0%

10%

20%

30%

40%

50%

60%

70%

Fig. 3.6.b: Post-investment changes in management and other employee remuneration seed/start-up companies (source: NUBS/EVCA)

performance-related pay increased from 28% in the year of the investment to 36% last year (from 26% to 37% for expansion stage companies and from 30% to 36% for seed/start-ups). Many companies also use share options as a recruitment tool.
Stock options were used to attract new management in

65% of cases (70% seed/start-up, 54% expansion stage).

In these companies, the percentage of management

receiving stock options increased from 52% (58% seed/ start-up, 36% expansion stage) at the time of the investment to 79% (82% seed/start-up, 72% expansion stage) at the time of the survey.

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3.7. The perception of the responding companies is that the contribution of the venture capitalist has been crucial to the feasibility and success of the company.
Employment

Increased

About the same

Decreased

A vast majority of all respondents considered that employment (74%), research & development (69%) and investment (72%) were higher than they would have been without venture capital investment in the company. In half the cases, exports were perceived to be higher.
The views of companies in their seed/start-up stages were

Research & development

Exports

that employment (76%), research & development (73%) and investment (72%) were all higher.
The figures for companies who used venture capital to

Investment

0%

10%

20%

30%

40%

50%

60%

70%

80%

Fig. 3.7.: The perceived impact of the venture capitalist all responding companies (source: NUBS/EVCA)

fund expansion were only slightly lower (employment 69%, research & development 62% and investment 70%).

3.8. Almost three-quarters of seed/start-up companies could not have existed without venture capital.
Overall, 95% of companies stated that, without the venture

Without venture capital, my company could not have existed (56.9%) would have developed more slowly (37.6%)

capital investment, they could not have existed or would have developed more slowly (90% of expansion stage companies, 97% of seed/start-up companies).
The majority (almost 60% of all respondents) said that they

could not have existed without venture capital (72% of seed/ start-up companies, 25% of expansion stage companies).
would have developed faster (0.8%) would have developed in the same way (4.7%)

Fig. 3.8.: The overall impact of the investment on the foundation, survival and growth of the company all responding companies (source: NUBS/EVCA)

20

Appendices
Appendices

Appendix 1: Survey methodology

Number of responses Year 1995 1996 1997 1998 1999 2000 2001 Total Expansion 2 5 7 19 25 43 18 119 Seed/start-up 3 14 14 30 36 114 34 245 Total 5 19 21 49 61 157 52 364

The survey was carried out between January and March 2002. The sample was derived from both the EVCA database and the Europe Unlimited database. Our sample included all companies who had had venture capital backing (for seed, start-up or expansion) across Europe between 1995 and 2001. The structure of the questionnaire was based on the framework used for the Survey of the Economic and Social Impact of Management Buyouts and Buyins in Europe (published by EVCA, January 2001). However, the survey questions were adapted to take into account the particular characteristics of venture capital investment. After first making any modifications required to comply with variations in venture capital legislation or practice in each target country, the questionnaire was translated into French, German, Italian and Spanish.

Table A.1: Responses by year of investment and investment stage (source: NUBS/EVCA)

Response to the survey A total of 364 responses were received from the 2,908 questionnaires sent out, representing a return rate of 12.5%.

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Appendix 2: Analysis of responses by country

VC backed deals % by country % of total responses

Figure A.2 shows, for each surveyed country, its share of the total number of questionnaires returned, compared to its share of the total number of European venture capital deals. With the exception of Spain, the Netherlands and Norway (where the response rate was rather low), the proportion of questionnaires returned from each country was much in line with the relative size of that countrys venture-backed markets.

Austria Belgium Denmark Eire Finland France Germany Greece Iceland Italy The Netherlands Norway Poland Portugal Spain Sweden Switzerland UK Other 0%

1.2% 1.9% 4.1% 3.9% 1.9% 2.5% 1.7% 2.2% 3.6% 3.3% 18.7% 16.5% 19.4% 19.0% 0.9% 0.8% 1.1% 6.4% 6.9% 4.6% 2.8% 3.2% 1.9% 1.6% 2.8% 1.2% 0.6% 4.2% 1.1% 5.3% 6.0% 2.3% 2.2% 17.4% 24.2% 1.2% 1.4%

5%

10%

15%

20%

25%

30%

Fig. A.2: Response rate by country compared to total number of venture capital deals (source: NUBS/EVCA)

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Contributors
Contributors

Contributors from EVCA:

Mr. Jim Martin, Add Partners Mr. Edoardo Bugone, Argos Soditic Mr. Denis Champenois, Innovacom Mr. Alan Duncan, Prelude Technology Investments Dr. Kent Hansen, IMH Management Holding Mr. Lennart Jacobsson, Swedestart Management Mr. Waldemar Janz, Target Partners Mr. Ere Kariola, 3i Finland Mr. Edoardo Lecaldano, Alice Ventures Mr. Serge Raicher, Pantheon Ventures Mr. Jean-Bernard Schmidt, Sofinnova Mr. Karl Schtte, Trinity Venture Capital Mr. Falk F. Strascheg, Extorel Private Equity Advisors Mr. Charly Zwemstra, NIB Capital Private Equity

Contributors from Nottingham University Business School (NuBS) and CMBOR:

Prof. Mike Wright Mr. Andrew Burrows Dr. Louise Scholes

Contributor from Europe Unlimited:

Mr. William Stevens

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This EVCA Research Paper is published by the European Private Equity & Venture Capital Association (EVCA). Non-EVCA members can obtain copies of this paper at 100 per copy. Copyright EVCA June 2002