6. Caracterización del levitador
6.3. Limitaciones del levitador
As to the first dimension, i.e., potential criteria to set the boundaries to define relevant network actors, there are several possibilities such as:595
• Boundaries of organizations or groups • Geographic boundaries
• Boundaries based on participation in certain events • Boundaries based on characteristics of actors
• Boundaries based on the relationships of actors among each other
In most cases, it is reasonable not to define network boundaries based on one criterion but on the basis of multiple criteria, since incorporating only one criterion might lead to a network, in which the enclosed actor set is defined insufficiently. For example, in an analysis of the relationships between start-up companies and banks the existence and also
594 See Jansen (2003), p. 71. 595 See Jansen (2003), pp. 71-72.
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the absence of relations are of importance. However, if the network boundaries have only been set based on existing relationships among actors, the absent relations cannot be identified.596 Therefore, it is often advisable to use multiple criteria to specify the network boundaries. Laumann, Marsden and Prensky (1989) present two different approaches to define network boundaries. One approach, called the realist approach, identifies network boundaries and membership as perceived by the actors themselves.597 A second way of defining network boundaries is called the nominalist approach. Here, not the actors, but the researcher determines the criteria, who belongs to the network and who does not. In this case, the actors themselves do not necessarily have to share the feeling that they belong the same network. The approach followed in this study is the nominalist approach.
To define the boundaries of the syndication network of VCs, definitions or limitations regarding several dimensions had to be made. These dimensions included:
• Geographic focus (nation) of the portfolio companies and of the VCs
• Type of VCs to be included, i.e., type of venture capital providers to be included • Time period to be considered
• Investment stages to be considered
The decision regarding the geographic focus of this study needed to be made based on what kind of data was available from VentureXpert. The decision referred to two dimensions, i.e., the nation of the VCs and of the portfolio companies. Criteria to decide upon these questions were feasibility and practicability with respect to the goal of this study, i.e., to perform a thorough and detailed network analysis while still being able to manage the amount of computation implied by extensively large network.598
596 See Jansen (2003), p. 72.
597 See Laumann/Marsden/Prensky (1989), pp. 61 ff. For example, a street corner gang consists of its members, however, who is member and who is not a member of the gang, is determined by whom the persons in the gang perceive as being members. See Wasserman/Faust (1994), pp. 31-32.
598 Standard network analysis software packages available on the market, often show limitations when it comes to analyzing large networks. Also, more powerful computers would have to be used to perform these analyses. By 'large', networks including several thousand actors including their relationships are meant.
The questions mentioned lead to a 2x2-matrix presented below: •Investments in German portfolio companies •German VCs •Investments in German portfolio companies
•German VCs and non- German VCs with office in Germany during 1998-2005 •No allocation of investments to VC possible •No allocation of investments to VC possible 11 22 33 44 VCs German International G erm an In ternational Po rt fo lio co m p an ies
Figure 5.1: Theoretical options for geographic focus of this study599
There are four theoretical options that could have been chosen, two of which are, however, not feasible. The horizontal axis shows that either only German VCs or German and foreign VCs can be taken into account. The vertical axis refers to the investments, or portfolio companies, that are taken into account, which can also be either German or German and foreign ones. In order to decide, which of the four theoretical options to follow, it is important to compare what data exactly is needed for the analyses, and what data the database is able to provide. What is needed for the analyses is data on investments by VCs, subject to the conditions that it is discernible which individual VCs have invested jointly. Based on this and based on what VentureXpert is able to deliver, two options had to be eliminated, which is due to a reason inherent in the database: Although VentureXpert shows the name and nation of both, VCs and portfolio companies, it does only indicate, where the headquarter of the specific firm is located. For example, investments actually done by the Spanish office of 3i Group is, in VentureXpert, recorded as an investment of 3i Group Plc. That is, it is not possible to allocate the investments to the regional offices of VCs. Therefore, options three and four had to be eliminated. Option one is certainly possible, however it does only take into account VCs, the headquarters of which are located in Germany. What would then be
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excluded from the analyses were non-German VCs that still are active in the German venture capital market. Since there are several key players, i.e., non-German VCs, that are still very active in the German market, missing them would not reflect the actual status of syndication relationships in the German venture capital arena. However, in order to best reflect the German market, it has been decided to only include those non-German VCs that had an office in Germany.600 Therefore, what is included in the analyses then, are investments in German portfolio companies, done by German VCs and those non- German VCs that had an office in Germany during 1998-2005.601
In addition to selecting the geographic focus, decisions had to be made regarding the type of the firm, the time period, and the investment stages.
As to the type of the firm, it has been decided not to exclude any type of equity provider, since, if they fulfill the other criteria mentioned above and the further criteria that will be discussed below,602 and if they have invested in a German portfolio company, they are obviously active in the German venture capital market and should therefore not be excluded from the analysis.
Regarding the time period, for which the network data should be generated, the development of the German venture capital market has been taken into account.603 Based on this development, a decision had to be made as to when to set the starting point for the measurement of the network data. This starting point has been set to the beginning of 1998, since several indicators such as the funds invested, the number of inquiries of firms seeking equity capital, or the exits through IPOs increased significantly during that time. Especially the latter, i.e., the number of exits through IPOs might be a reasonable indicator for the market mood in the German venture capital market, since it indicates the general upswing and boom during that time very clearly. Since the development and
600 It has been assumed for this analysis that, if non-German VCs (with an office in Germany) invested in German portfolio companies, these investments have been generated by the German office of that VC. 601 The selection of the time period will be referred to further below.
602 Also bear in mind that further limiting criteria will be explained below, such as the time period considered or the investment stages. For example, only investments will be looked at, which are investments in the stages seed/start-up, early stage, expansion, or later stage. Any buyouts or acquisitions will be excluded. Thereby it can be ensured that only VCs are taken into account that are active in the relevant market segments. See below.
maintenance of relationships take time, and since relationships in this study are based on joint investments, it is advisable to take a time period into account, which is as long as possible. Therefore, the ending point for the measurement of the network data has been set to the end of 2005.
With respect to the investment stages, VentureXpert covers a large number of transactions historically around the globe, so that the search criteria include a large number of stages, which have been and still are used in different markets at different times.604 These investment stages, which partially also overlap, have been grouped to six categories, namely seed/start-up (including seed and start-up), early stage (including early stage and first stage), expansion (including expansion and second stage), later stage (including third stage, other later stage, and bridge), buyout/acquisition (including acquisition, acquisition for expansion, LBO, and recapitalization/turnaround), and other (including secondary purchase, open market purchase, private investment in public company, and VC partnership).605 In detail, the investment stages are defined as follows:606
Seed/Start-up:
Seed: An investment strategy involving portfolio companies, which have not yet fully established commercial operations, and may also involve continued research and product development.
Start-up: Financing provided to companies for product development and initial marketing. Companies may be in the process of being organized or have been in business a short time but have not sold their product commercially.
Early stage:
Early stage: An investment strategy involving investments in companies for product development and initial marketing, manufacturing, and sales activities. The companies will not yet be generating a profit.
604 See Thomson-Financial (2006): Thomson ONE Banker, http://banker.thomsonib.com/, date of access: January 2006.
605 Although partially deviating from categorizations explained before, here, the expressions and denotation as used by VentureXpert has been adopted in order to accurately present the categorization in that database.
606 Source: Thomson-Financial (2006): Thomson ONE Banker, http://banker.thomsonib.com/, date of access: January 2006.
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First stage: The first round of financing following a company's start-up phase that involves an institutional venture capital fund. The round is usually a step-up in valuation, total size, and per share price for companies whose product(s) are either in development or commercially available.
Expansion:
Expansion: Financing provided for the growth and expansion of an operating company, which may or may not be breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development and/or to provide additional working capital.
Second stage: Working capital for the initial expansion of a company, which is producing and shipping and has growing accounts receivable and inventories. Although the company has clearly made progress, it may not yet be showing a profit.
Later stage:
Third stage: Funds provided for the major growth expansion of a company whose sales volume is increasing and which is breaking even or profitable. These funds are utilized for further expansion, marketing, and working capital or development of an improved product.
Other later stage: A fund investment strategy involving financing for the expansion of a company, which is producing, shipping, and increasing its sales volume.
Bridge: Equity financing for a company expecting to go public within six months to a year. Buyout/acquisition:
Acquisition: The obtainment of control, possession, or ownership of a private portfolio company by an operating company or conglomerate.
Acquisition for expansion: Funds provided to a firm to finance the acquisition of companies.
LBO: A fund investment strategy involving the acquisition of a product or business, from either a public or private company, utilizing a significant amount of debt and little or no equity.
Recapitalization/turnaround: Strategy involving the debt restructuring of a company in order to reduce its level of gearing. Turnaround more specifically refers to financing
provided to a company at a time of operational or financial difficulty with the intention of improving the company's performance.
Other:
Secondary purchase: The purchase of stocks or holding from a private investor.
Open market purchase: This stage involves acquiring securities of companies whose common shares trade publicly.
Private investment in public company: Private venture investment into a publicly traded company.
VC partnership: Fund of fund investment.
Based on expert interviews and based on the findings of Vater (2002) it became obvious that the superordinate stage 'buyout/acquisition' implies a deal flow mechanism, which is not the same as the one for earlier financing stages. For buyout transactions or acquisitions, often investment banks are the ones that generate deal flow and that locate investment opportunities.607 However, this is different from the aspect considered in this study, i.e., how the network contacts between VCs influence the deal flow for these firms. Therefore, only investments have been selected that are either seed/start-up, early stage, expansion, or later stage investments, thereby referring to what previously has been defined as venture capital investments.608 Also excluded from this study are investments falling into the category 'other'. Including this category would dilute the clear focus of this study on venture capital providers.
Summarizing, the actors that are being incorporated in the network are defined based on the following criteria:
• German VC or PE or non-German VC or PE that had an office in Germany during the time period 1998-2005
607 See Vater (2002), p. 144. He found that, for buyout fonds, a major part of the deals stem from investment banks or M&A consultants. However, this is not the network that is intended to be studied within this work.
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• Investments in German portfolio companies
• Time period from January 1, 1998 until December 31, 2005
• All investment stages, excluding what is denoted in VentureXpert as 'buyout/ acquisition' and as 'other'
• All types of venture capital providers are included, as long as they fulfill the criteria above.