Richard T. Harrison

Is it worth it? The rates of return from informal venture capital investments

Despite growing interest in venture capital, there is a paucity of information on the rate of return to these investments and the limited research that is available refers almost entirely to portfolio returns for venture capital funds. The investment returns to business angels have been virtually ignored. This paper provides the first attempt to analyse the returns to informal venture capital investment using data on 128 exited investments from a survey of 127 business angel investors in the UK. The paper finds that the distribution of returns is highly skewed, with 34% of exits at a total loss, 13% at a partial loss or break-even, but with 23% showing an IRR of 50% or above. Trade sales are the main way in which business angels harvest their investments. The median time to exit for successful investments was 4 years. Large investments, large deal sizes involving multiple coinvestors, and management buyouts (MBOs) were most likely to be high-performing investments.

Barriers to investment in the informal venture capital sector

Much of the government intervention into the market ‘gap’ for start-up and early-stage equity finance in the UK is based on the belief that the problem is on the supply side. Based on an analysis of the informal venture capital market this paper argues that there is no shortage of finance available. A survey of business angels reveals that many are willing to allocate a higher proportion of their investment portfolio to investments in unquoted companies, with recent tax incentives having a positive effect on their willingness to invest. Over 90% are currently looking to make more investments. However, there are constraints on their ability to invest: they do not see enough deals that meet their investment criteria, the majority of the investment proposals that they receive are of poor quality, and they are often unable to negotiate acceptable investment terms and conditions with entrepreneurs. The implication is that there is a need for further interventions by policy-makers to remove these barriers so that more small firms can take advantage of the substantial pool of angel finance that is available.

A process model for entrepreneurship education and development

There has been a significant reawakening of interest in the applicability of action learning as a paradigm for management development, particularly as a pedagogical device in both classroom and executive development contexts. This development has occurred against a background of a wider re‐examination of the theory and practice of management education and development. Fundamentally, this re‐examination has been stimulated by criticism of the static, content‐oriented approach as inappropriate to the changing environment of the 1990s. In particular, there is a shift required for effective management: business schools will have to focus on the day‐to‐day realities of the business world, develop communication and leadership skills and emphasise continuous attention to the links between theory and practice. The implications are twofold: first, the range of teaching techniques must be extended to include process‐oriented approaches; second, and more fundamentally, there is a need for an expanded definition of the learning arena itself, and of the role of management schools within that. Renewed interest in and attention to the concept of the learning company, and to processes of both individual and organisational learning, redefines the context within which these changes are taking place. Reviews a number of key developments in this understanding of contemporary management education and development, and presents a summary of a new programme built as an action‐ and implementation‐oriented approach to entrepreneurial senior executive development. This programme aims to support the development of leadership in both large and smaller, growth‐oriented, companies, in a partnership which breaches the conventional separation both between the encapsulated learning arenas of the university and the organisation and between management and entrepreneurship education and development. This partnership emphasises the impact of intra‐group and interorganisational learning on both the participants and on the context of their organisations.

The Size of the Informal Venture Capital Market in the United Kingdom

Despite its undoubted importance to the financing of entrepreneurial ventures, there are few reliable measures of the size of the informal venture capital market. This paper reviews three methods used to generate such estimates – market-based approaches, firm-based approaches and the capture-recapture approach – and develops an alternative approach that is based on scaling up from the visible segment of this market represented by business angel networks. This methodology is applied to provide the first formal estimate of the size of the informal venture capital market in the United Kingdom. Informal venture capital investment is shown to broadly equate to the amount of institutional venture capital provided to start-up and early stage ventures. Reflecting the smaller average size of investments in the informal venture capital market, however, eight times as many businesses raise finance from business angels than from institutional venture capital funds.

Closing the Regional Equity Gap? A Critique of the Department of Trade and Industry's Regional Venture Capital Funds Initiative

MASON C. M. and HARRISON R. T. (2003) Closing the regional equity gap? A critique of the Department of Trade and Industrys regional venture capital funds initiative, Reg. Studies 37 , 855-868. The UK Labour Government has provided support for the establishment of regional venture capital funds in each of the English regions as part of its drive to create an entrepreneurially led knowledge- based economy. This initiative is a response to persistent gaps in the provision of start-up and early stage venture capital. In this paper we question the likely effectiveness of the initiative on four counts. First, there is a lack of early stage venture capital skills available to manage the funds. Second, the small size of the funds will make it difficult for them to achieve financial viability. Third, the funds are targeting the wrong problem. The maximum investment that they are allowed to make is £250,000; they may subsequently provide up to an additional £250,000 in follow-on financing. However, the main funding gap in the UK is in the £250,000 to £1 million range. Finally, the proposal ignores the role of demand-side constraints in contributing to the equity gap. The paper concludes that a more comprehensive approach is required to address equity capital gaps at the regional level. MASON C. M. et HARRISON R. T. (2003) Laccè s au capital, comment réduire lécart régional?: une critique de linitiative du ministère du Commerce et de lIndustrie quant au capital-risque regional, Reg. Studies 37 , 855-868. Au Royaume-Uni, la majorité travailliste a été favorable au lancement des fonds de capital-risque régionaux dans chacune des régions d Angleterre comme partie intégrante de sa campagne visant la cré ation dune économie dentreprise basée sur la connaissance. Cette intiative constitue une réponse à la présence persistante décarts dans laccès au capital risque de démarrage et de développement. Cet article cherche à remettre en question lefficacité éventuelle de linitiative de quatre points de vue. Primo, il savère un manque de compétences en capital risque dans la phase de développement pour assurer la bonne gestion des fonds. Secundo, limportance faible des fonds rendra difficile leur viabilité financière. Tertio, les fonds ciblent le mauvais problè me. Dans un premier temps, linvestissement maximal autorisé se chiffre à £250 000; dans un deuxième temps, des fonds supplé mentaires dun montant de £250 000 sont autorisés sous forme de financement additionnel. Toujours est-il que le principal écart de financement au Royaume-Uni se trouve dans une fourchette comprise entre £ 250 000 et £1m. Finalement, la proposition ne fait aucune attention au rôle des contraintes de la demande dans le creusement de cet écart de financement régional. En guise de conclusion, larticle affirme quil faut une façon plus détaillée afin daborder la question des écarts de financement sur le plan régional. MASON C. M. und HARRISON R. T. (2003) Schließung der regionalen Kapitallücke?, Reg. Studies 37 , 855-868. Eine Kritik an der regionalen Initiative des Ministeriums für Industrie und Handel zur Einrichtung von Beteiligungskapitalfonds Die Labour Regierung des Vereinigten Königreichs hat in allen englischen Regionen der Einrichtung von Beteiligungskapitalfonds als Teil ihrer Aktion unterstützt, eine unternehmerisch geführte, auf Kenntnissen beruhende Wirtschaft zu schaffen. Diese Initiative stellt eine Erwiderung auf anhaltende Lü cken in der Bereitstellung von Kapital für Anfänger und Jungunternehmer dar. In diesem Aufsatz wird die voraussichtliche Wirksamkeit der der Initiative in vierfacher Hinsicht in Frage gestellt. Erstens fehlt es an Fä higkeiten der Handhabung derartiger Fonds von Jungun- ternehmerkapital. Zweitens wird der geringe Umfang der Mittel es ihnen erschweren, finanzielle Rentabilität zu erreichen. Drittens gehen die Fonds das falsche Problem an. Es ist ihnen nur gestattet, Investierungen von maximal £250,000 vorzunehmen; danach dürfen sie zusätzlich höchstens weitere £250,000 gewähren. Die Mehrzahl der zu überbrückenden Finanzierungslücken im UK liegen jedoch in der Region £ 250,000-£1 mill. Letztlich aber gehen die Vorschläge an der Rolle der Beschränkungen seitens der Nachfrage vorbei, die zu der Kapitallücke beitragen. Der Aufsatz kommt zu dem Schluß, daß ein umfassenderer Ansatz vonnöten ist, wenn man die Probleme der Eigenkapitallü cken auf Regionalebene in den Griff bekommen will.

'Investment Readiness': A Critique of Government Proposals to Increase the Demand for Venture Capital

Intervention to address the equity gap has traditionally concentrated on supply-side initiatives. However, it is now recognized that demand side deficiencies are a significant reason why small and medium enterprises (SMEs) are unsuccessful in raising venture capital. This reinterpretation is reflected in recent documents from the UK government ‐ most recently a Consultative Paper from HM Treasury and the Small Business Service ‐ which have highlighted the need for SMEs to become investment ready in order to take advantage of the increased supply of venture capital that is now available. This article provides a critique of the Consultative Documents definition of investment readiness and outlines a programme to enhance investment readiness amongst SMEs.

Improving Access to Early Stage Venture Capital in Regional Economies: A New Approach to Investment Readiness

It is now recognised that many businesses are unsuccessful in raising equity finance because they are not investment ready. This has prompted enterprise support organisations in various countries to develop investment ready programmes. In the UK, the emphasis of these programmes is on providing information on sources of finance and how to access them, and on presentational skills. These are necessary but not sufficient conditions to get a business investment ready because they do not address business development issues which discourage potential investors. These issues are generally company specific and often require the input of significant expertise in order to make a company investable. This paper reviews LINC Scotlands approach, which is based on investment facilitation. It suggests that this approach does effectively address the business development support component of investment readiness at limited public cost and provides useful lessons for the design of investment ready programmes.

Learning and Organization in the Knowledge-Based Information Economy: Initial Findings from a Participatory Action Research Case Study

This paper reports on an ongoing, multiphase, project-based action learning and research project. In particular, it summarizes some aspects of the learning climate and outcomes for a case-study company in the software industry. Using a participatory action research approach, the learning company framework developed by Pedler et al. (1997) is used to initiate critical reflection in the company at three levels: managing director, senior management team and technical and professional staff. As such, this is one of the first systematic attempts to apply this framework to the entire organization and to a company in the knowledge-based learning economy. Two sets of issues are of general concern to the company: internal issues surrounding the companys reward and recognition policies and practices and the provision of accounting and control information in a business-relevant way to all levels of staff; and external issues concerning the extent to which the company and its members actively learn from other companies and effectively capture, disseminate and use information accessed by staff in boundary-spanning roles. The paper concludes with some illustrations of changes being introduced by the company as a result of the feedback on and discussion of these issues.