The Marketing Strategies Of Venture Capitalists

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Venture capital has become an increasingly important source of financing for new companies, particularly when such companies are operating on the frontier of emerging technologies and markets. VC plays a prominent role in the entrepreneurial process, financing the growth of knowledge based industries worldwide and has become instrumental for industrial development by exploiting vast and untapped potentialities. In recent years, industrial corporations are dependent upon an unprecedented high share of all venture capital investments (Christopher 2000, Gompers & Lerner 1998, Maula & Murray 2000a). The venture capital industry as an institution is a good example that prides itself on 'nursing' companies, rather than just financing them, as money is only part of the contribution venture capitalists make to growing businesses, the roles played by venture capitalists are many, they offer knowledge and contribute to the growth of companies , help the firm obtain alternative sources of equity finance, interface with the investor group, monitor the financial performance, help their portfolio firms attract alternative sources of financing, help to build a distribution network, and also help to attract top-flight management.

Historically venture capital evolved as a method of early stage financing, but the notion of venture capital recognizes different stages of financing in diversified sectors (See Chart 1). VCs can provide a wealth of information to a beginning entrepreneur and may make the difference between a good idea and a flourishing business. Venture capital companies screen the business prospects and technical merits of the proposed company before investing in venture capital funding. They only invest in a small percentage of the businesses they review with a long-term perspective. They prefer to actively participate in the company's management by contributing their expertise, technical skills, and business experience which they have gained from helping other companies with similar growth challenges. These venture capital firms help to nurture the growth of technology and entrepreneurs resulting in job creation, economic growth and international competitiveness.

Chart 1

(Source IVCA June 2008)

Review of Literature

By grave and Hunt et al. (2005) summarized that VC's typically invest in industries such as high technology and biotechnology, which tend to have a high level of ambiguity, necessitating ongoing adjustments to investment strategy. Sjo gren and Zackrisson, (2005) summarized that VC's can help identify and develop appropriate business models, identify relevant markets and marketing activities - as well as providing access to networks locally and across distances, thereby contributing valuable new contacts. Repullo and Suarez et al. (2004) analyzed that the early-stage companies that attract Venture Capital investment can take advantage of the VC's experience, knowledge, understanding of the entrepreneurial process, and network of relationships. Busenitz et al. (2004) have taken an inter-organization learning perspective in their reconsideration of the venture capitalists 'vale adding proposition'. Brau et al. (2004) documented that venture capitalists in general add value and also the authors concluded that finding venture capital from the right backer is probably better then receiving venture capital per se. Pruthi et al; Carpenter et al. (2003) documented that Venture capital (VC) firms perform an important governance function for their investee companies by providing monitoring and value-added activities. VC firms are risk seeking, active participants in the development of their portfolio companies and are an important source of external governance resources for their investee companies. Hsu et al. (2002) summarized in their recent research that the networks of venture capitalists influence their value adding capability. Brander, Amit and Antweiler et al. (2002) summarized that venture capital has received considerable academic attention and documented how Venture Capitalists syndicate their investments. Gompers and Lerner (2001) summarized that venture capitalists typically finance high risk and potentially high reward investment projects, purchasing equity or equity-linked stakes while the firm is privately held. Mason and Harrison (2000) documented that after the boom and bust of the Internet hype, since 2000, the interest of venture capital firms has shifted from seed and start-up situations to more mature investment stages, because such investments are considered safer, easier to manage, and markedly more capital than knowledge (hands-on) intensive. At the same time, new ventures have become more knowledge than capital intensive-requiring even more hands-on involvement. Banatao and Fong (2000) explained that venture capital helped fund every wave of innovation in Silicon Valley: the establishment of the semiconductor industry in the 1960s, the inception of the personal computer industry and the biotech industry in the 1970s, the boom of the workstation and networking industries in the 1980s, and the commercialization of the Internet in the 1990s. Hellmann and Puri et al. (2000) documented that time-based competition and especially the reduction of "time to market" is an objective for many technology driven firms that aim to gain a competitive edge. And venture capital plays a significant role in helping innovative start-ups reduce the time to bring a product to market. Sweeting (1991) documented that there are basically two different approaches followed by VC firms to discover new venture opportunities, a proactive and a reactive approach. In the proactive approach venture capitalists are actively seeking up potential entrepreneurial firms to invest in, for instance by attending industry fairs or by direct involvement in influential innovative environments. The reactive approach implies that venture capitalists wait for the business plan proposals to arrive. Gorman and Sahlman (1989) documented that the venture capitalist proves to be, much more than the most immediate vision of simple supplier of risk capital, a financial intermediary capable of supporting and strengthen the growth of a company and assisting it with strategic planning, management recruiting, operations planning or introductions to potential customers and suppliers. MacMillan et al. (1988) documented that because of their experience with numerous ventures and their extensive exposure to financial, labor and other resource markets, venture capitalists are uniquely positioned to provide valuable assistance to their portfolio companies in key aspects. Black and Gilson et al. (1998) documented that Venture capital is often referred to as the money of invention and venture capital fund managers as those who provide value-added resources to entrepreneurial firms. Sapienza et al. (1996) summarized that venture capitalists provide value-creating services to their portfolio companies such as networks, moral support, general business knowledge and discipline. Bhide (1994) summarized that one of the objectives of the venture capital firm, through involvement with the portfolio company, is to add value. Ehrlich et al. analyzed that (1994) from the entrepreneur's perspective, a VC company may provide a wide range of benefits to a venture in addition to capital through its roles of pre-investment screening, post-investment monitoring and value-adding. Finally, the provision of venture capital is an institution which does more than the financing of the start-ups; it helps a new and risky enterprise to get established in the marketplace by providing entrepreneurs with industry contacts such as accountants, patent lawyers, marketing consultants and suppliers, that aid in the growth of the firm. It is widely believed to be influential for new innovative companies venture capitalists are said to be benefiting their companies through a variety of activities and help to accelerate growth. Hence, the provision of venture capital is an institution which does more than the financing of the start-ups; it helps a new and risky enterprise to get established in the marketplace. However the phenomenal growth of venture capital market in India not only creating great opportunities but also increasing competition among venture capitalists and today in order to compete and become successful, Venture capitalists are trying to differentiate and adopting various strategies to establish their positions in the competitive market place. They are,

Competitive Analysis

Usually, new technology driven markets emerge as the choice for the VC firm and they make it possible through hiring experienced principals and devote significant resources to understand new technologies and markets which would also help to seek promising innovative firms and to create competitive advantage. VC firms competitive analysis strategy would include initiating technology assessment that is, VC firms evaluate each technology against robust criteria to make sure that it is truly innovative and can be adequately protected through patenting and has sufficient market potential to justify the investment of time and resources, and has a clear path to commercialization.VC firms try to distinguish from other VC firms through continuous competitive analysis and create an edge for their portfolio firms through patent protection and enrichment.

Direct marketing

The other important marketing strategy of venture capitalists is direct marketing where VC firms target directly the individual managers as prospective clients and this was particularly proved important given the finding that a significant proportion of investee companies did not use an intermediary to identify or select the venture capitalist. However at an initial stage a more generic campaign may be required to raise awareness among managers for a VC firm about the positive attributes of venture capital and the ensuring benefits of a relationship with a venture capitalist but given the large and dispersed population of potential entrepreneurs in an economy, only a very small number of the largest venture capital firms could consider the expense of generic advertising. So the smaller VC firms should promote their services through specialist scientific journals, trade press, promoting events and initiating an association with university departments and corporate research laboratories for defined and accessible population. However in both the cases smaller and larger VC firms promoting their services through the production of articles and advertisements in the plethora of business media supplements should be careful because this route may suffer from well-known "me too-ism" problems as many established venture capitalists produce articles with virtually identical messages and articles or promotion material which are written do not fully convey how individual venture capitalists are differentiated from one another.

Focusing on the intermediary

Smaller venture capitalist firms often believe that it may not be feasible to establish a network of regional offices, and they employ a less costly alternative or strategy by designating an individual of the VC firm or head office partners as being responsible for marketing in a particular geographical area with a clear focus to develop networks with influential and local intermediaries, few other smaller independent VC firms who are geographically defined look forward for some form of association with another venture capitalist for a good link and network and seek such alliances with similar organizations in other regions to gain both scale and scope of economies. The association generally could involve a merger or a cross-referral arrangement between venture capitalists targeting differing market segments.

Venture Capital Campaign

Choosing the right entrepreneur is an important element considered by venture capitalists and in order to attract potential entrepreneurs VC firms believe a good campaign strategy would result in large amount of reach. Venture capital firms promote their profiles innovatively through web marketing, blogs, press releases and publishing company articles or information about the VC Company to create confidence and awareness in the minds of the entrepreneurs. Today web marketing has become a very useful technique not only to promote the strengths and success stories of a VC firm but also present clear distinctions for their services. Most of the VC firms follow several techniques of web marketing such as joining different groups of private equity and venture capital institutions or promote their services through face book and LinkedIn networks or create a group of own industry, corporate blogs, business networks and connections promoting various profiles and features of the VC firm which include track record, fund size, investments, operational experience, portfolio investments, market growth, team members and successful exits.

Proximity to business headquarters

Venture capital firms generally dislike investing in companies in remote locations because of the difficulty of finding and vetting deals in these locations, moreover VC firms consider that it is highly difficult and costly to attract and retain management talent or experts who serve as company board members and mentors, this is particularly true for early stage investments, which typically require more intensive hands-on involvement from venture capital firms. Most venture capital firms only work with businesses whose headquarters are located within 200 miles which allows for more frequent and easily scheduled meetings, which in turn facilitates a closer partnership with the undertaking to pursue steady growth and a tidy exit. Great distance to be traveled between the venture capitalists and the entrepreneur's enterprise might increase the likelihood of less frequent monitoring resulting in failure or loss of the deal.

Typical Characteristics of Venture Capitalist

Venture capitalist can be characterized as one who wields the ultimate power of existence over hopeful entrepreneurs and their start-up ventures, the most important characteristics of the successful venture capitalists are,

Domain Expertise and Education

Many VC's are highly qualified and have a combination of degrees such as arts and law, engineering and business management, charted accountancy with marketing etc. Venture capitalists invest in more than just companies, that is they invest in the future of a particular technology or a particular market thus they develop expertise in a particular industry or management function or area to take well-informed investment decisions which is supported by basic educational knowledge and technical and managerial expertise.

Management Experience

Generally VC's are individuals who have either been entrepreneurs themselves or worked with start-ups for much of their careers. The VC's executive management experience in the fields of manufacturing, marketing, strategic alliances etc or an experience as a business consultant do help them to understand to a good extent, the challenges and opportunities that arise in nurturing a company from a start-up idea to a scalable, profitable competitive business.

Personality

VC's are extraordinary individuals possessing exceptional intelligence, energy, vision and drive, they are unique and believe in building synergistic partnerships. VC's have a strong determination and willingness to work for long hours, their geographical reach and research interest enables them to identify and assess innovation as it develops around the globe, and their self confidence and leadership helps them to collaboratively compare each potential investment's utility, investment merits, addressable markets and likely growth rates.

Professional Network

The most important tool of venture capitalist in addition to keen business insight and highly skilled capabilities is a wide network of industry connections. As they actively involve with their portfolio companies they believe that their contacts help taking companies to the next stage and beyond, so they continuously attend industry events and networking meetings to develop contacts and learn more about new and emerging business opportunities. VC's believe that the proprietary network of corporates, business leaders and capital market participants provides access to quality deals and enables them to conclude investments in a highly competitive environment.

Thought Leadership

VCs are required to anticipate future trends, and as a result they are highly connected, obtain information from a variety of sources, and have to quickly synthesize what's next. Some of the VCs are more active in public, and are on the speaking circuit, and are sharing their ideas. Trade associations are a key intermediary in many sectors undertaking conventions, providing members with resources and organizing meetings.

Objectives of the study

The objectives of the study are to appraise the marketing strategies of Venture capitalists, their preferred stage of investment, and the pages they examine in a proposed business plan before taking investment decision and strategies they adopt to promote their venture fund service.

Methodology

The study is based on both the secondary and primary sources of information. The sample companies were identified from the data published by (IVCA) Indian Venture Capital Association (2008). We learned that all together 100 venture capital companies are actively involved in venture capital funding in India. A questionnaire was sent to all these venture capital firms eliciting details on their marketing strategies, in the IVCA (2008), the data base contains current information on all the one hundred venture capital firms active in India and various service providers (affiliate members) are available.

Statistical Tools

Data thus collected was processed, analyzed and interpretated to draw the valid inferences. For analyzing the data and providing the realities of the research outcomes suitable statistical techniques were employed, Viz., Chi-square and Mean.

Results and Discussion

How big are the VC firms? Are they all small firms, are they all big or are they diverge vastly in size? In Table 1 we classified the venture capital companies by their fund size. It shows that, the firms are distributed more or less evenly across the size classes. Thus, there are 21.05% of firms with a fund size of less than US$ 25 million; there are another 26.32% of firms in the size class of US$ 25-50 million. There are 21.05% of firms in the size class of US$ 51-100 million and there are 15.79% of firms each in 101-350 US$ million class size and 350 US$ million and above size class. The mean fund size of the firms is US$ 221.89 million. It appears that venture capital firms of small size are also successful in their ventures.

Table 1 Venture Capital Companies classified by the size of fund

Size of the fund

in US$ Million

No. of Venture Capital Companies

%

Less than 25

4

21.05

25-50

5

36.32

51-100

4

21.05

101-350

3

15.79

350 and above

3

15.79

Total

19

100.00

Note: Mean size of the fund = 221.89 US$ Million

Table 2 Classification of Venture Capital Companies in the stage in which it invested and by fund size

Class Interval of fund size

$ US Million

Classification of VC firm by Stage of funding

Seed

Start-up

First

Second

Expansion

Mature

Turnaround

Total

Less than 25

3

3

2

1

3

2

1

15

25-50

2

3

2

2

4

1

0

12

51-100

2

4

1

0

1

0

0

8

101-350

1

2

1

2

2

1

1

10

350 &above

0

1

2

3

3

1

1

11

Total

8

13

8

8

13

5

3

58

*Some of the Venture Capital companies funded in more than one stage.

Table 2 gives the classification of Venture Capital firms by stage of funding and by fund size. It should be noted that some of the VC firms are investing in more than one stage that is why we find 58 observations in total while the sample VC firms are only 19. To provide a statistical dimension to the study we arrived at chi-square to find the relationship between the two variables employed in the above table. Null hypothesis is that there is no relationship between the fund size and the stage in which the venture capital firm is investing. The value of chi-square is estimated at 21.589 this is less than the table value of 36.415, given the DF of 24 at 5% level of significance. Therefore the null hypothesis is accepted and there is no relationship between fund size and the stage in which the venture capital firm invests.

Table 3 Classification of Venture Capital Company by the pages they examine in a proposed business plan before taking investment decision

Minimum pages in Business plan

Under 20

20-35

36-50

Over 50

No restriction

Total

No of VC firms

6

2

1

1

9

19

(%)

31.58

10.54

5.26

5.26

47.36

100.00

Table 3 refers to the classification of Venture Capital Company by the pages they examine in a proposed business plan before taking investment decision. We tried to understand the minimum pages the VC firms ask for in a proposed business plan, we obtained data from VC firms that 47.36% of VC firms opine that there is as such no restriction for minimum pages in a business plan.

Table 4 Classification of Venture Capital Companies by the strategies they adopt to promote their venture fund

Promotion strategies of Venture Capitalists

Entering attractive new sectors

Innovative Product

Differentiate through quality

Others

Total

No of VC firms

9

7

11

3

(%)

30.00

23.33

36.67

10.00

100.00

*Some VC firms reported more than one strategy they adopt to promote their venture fund.

Table 4 refers to the classification of Venture Capital Companies by the strategies they adopt to promote their venture fund. To survive in the business Venture Capital companies adopt various strategies, the three most important strategies in terms of their importance in promoting their venture finance services are differentiate through quality of services in terms of rendering to their entrepreneurs (36.67%), enter new attractive business sectors to dominate in the field (30.00%) and support the entrepreneurs continuously in developing innovative product.

Table 5 Classification of Venture Capital Companies by the way they identify their target Customers

Size of Fund in

US $ Million

Target customers are found through

Professional reference

Reference of own investments

Deal flow facilitators

Internet matching sites

Direct contact by entrepreneurs

News papers

Others

Total

Total

14

11

10

2

18

1

3

59

(%)

24.00

18.65

16.94

3.38

30.50

1.69

5.08

100.00

*Some VC firms reported more than one way they adopt in identifying their target customers

In the proactive approach venture capitalists are actively seeking up potential entrepreneurial firms to invest in, for instance by attending industry fairs or by direct involvement in influential innovative environments. The reactive approach implies that venture capitalists wait for the business plan proposals to arrive. Table 5 refers to the classification of Venture Capital Companies by the way they identify their target Customers that is, Entrepreneurs. Of the many ways of identification Venture Capital Companies preferred direct contact with entrepreneurs. 30.50 % of VC firms reported that they identify their customers by direct contact. Professional reference is another way in which VC firms identify the entrepreneurs. Media particularly News papers do not seem to be important in identifying the target customers, even though this is an important cannel to spread information about VC funding.

Table 6 Classification of Venture Capital Companies by their Marketing Strategy

Size of Fund in US $ Million

Aggressive growth

Numerous markets with small venture promotion

Innovative differentiation

Market differentiation

Others

Total

Total

3

2

9

6

4

24

(%)

12.5

8.33

37.5

20.00

16.67

100.00

*Some VC firms reported more than one marketing strategy

Table 6 refers to the classification of Venture Capital Companies by their marketing strategy. The important marketing strategies adopted by Venture Capital firms to remain successful in the market place are innovative differentiation, as may be seen from the table (5.22) that 37.5% of VC firms marketing strategy is innovative differentiation. Other important marketing strategies adopted include market differentiation, aggressive growth and enter numerous markets with small venture promotions.

Conclusion

Venture capitalists provide a wide range of services to the entrepreneurs besides providing the all needed finance but in order to remain competitive and successful, venture capitalists should not limit their focus on only attracting potential entrepreneurs, they also should focus on creating positive experience through their services to entrepreneurs. Today only those Venture capitalists are successful who devote significant resources to their portfolio firms and deliver deep expertise in the sector and understand new technologies, markets locally and globally to support the entrepreneurs continuously in the development of product or service and help in creating global markets for their products.

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