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Smart money: The role of venture capitalists' knowledge in the financing of new biotechnology-based ventures

Remer, S-A. (2003). Smart money: The role of venture capitalists' knowledge in the financing of new biotechnology-based ventures. (Unpublished Doctoral thesis, City, University of London)


Entrepreneurial ventures, particularly in high-tech sectors, face a number of challenges to realize their potential and to develop into sustainable companies. Chief amongst those challenges is the lack of vital monetary and non-monetary resources. However, high levels of project risk and a liability of 'newness and/or smallness' make it difficult for these ventures to obtain missing resources externally.

In this situation, venture capitalists (VCs) are often assumed to play a key role for the ventures' successful development, by providing not only cash but also 'smart' money. VCs are said to be experts in identifying the most promising investment opportunities prior to the investment and in providing value-added oversight and support to them in the post-investment phase. This assertion seems plausible looking at many of today's well-known high-tech organizations that had received venture capital during their early days.
However, the recent high-tech Bubble at the stock markets casts some doubt about the actual 'smartness' of VCs. In the aftermath of this Bubble, also thousands of VC-backed ventures went bankrupt, incurring substantial losses for all stakeholders. This intensified resource constraints on existing ventures and threatens the development of promising new sectors.

It is therefore pertinent to ask how 'smart' venture capital really is and to investigate how VCs' knowledge is related both to their investment approach and the performance of their investments.

The academic literature on venture capital offers several theories of venture capital investment - the financial intermediation or financial signalling theory, the principal-agent theory, and the resource-based or resource-dependence theory - each of which (implicitly or explicitly) suggests a positive role for VCs' knowledge.

The empirical literature in this context, however, produces ambiguous findings. VCs' investment activities apparently differ widely, as does the outcome of these activities: VC-backing has been found in turn to enhance, to have no effect on or even to detract from the performance of entrepreneurial ventures.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Doctoral Theses
[thumbnail of Remer thesis 2005 PDF-A.pdf]
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