Introduction

This chapter probes in detail the final phase in the venture capital (VC) firms’ lifecycle, namely exit from the funded investee companies. The term exit refers to the divestment of the company from the VC firms’ portfolio (Schwienbacher 2009). As there are no other avenues for disposing of the VC firms’ stake in the investee ventures and since the VC-backed companies do not pay out any dividends, exit is the only way for a VC firm to redeem its return on investment (Schwienbacher 2009). Therefore, the exits are as important as the entry decisions themselves. Moreover, exit is also a signal of the quality of the concerned VC firm, which is crucial for follow-up fund-raising. Thus, any study pertaining to VC investments cannot be deemed to be complete unless we have analysed the last crucial stage in the lifecycle, that is, exit from funded ventures.

Although, there are several interesting issues that can be analysed in the context of VC exits, our focus is on understanding the determinants of successful exits in the face of huge agency risks encountered by the investing VC firms. In this study on VC exits, the primary unit of analysis is the individual VC firm. Thus, the incidence of successful exits has also been analysed at the VC firm level.

It is a well-documented fact that VC firms exit the investee companies using one of the following five exit routes: initial public offering, or IPO (stock market listing of the funded company), strategic sale (merger and acquisition [M&A] of the funded company with a strategic partner based on mutual synergies of the participating businesses), re-financing (selling off its own stake to another upstream VC firm), re-purchase (purchase of the VC firms’ stake by the firm founders), and write-offs (company files for bankruptcy). IPO is regarded as the most profitable exit route, with an internal rate of return (IRR) of 80 per cent, followed by M&A (Cochrane 2005). The rates of return are comparatively much lower for two other exit types, namely re-finance and re-purchase. Write-offs yield negative returns. In our analysis, we do not intend to look into the individual rates of return from these different exit routes.

Introduction

The aim of this chapter is to investigate portfolio involvement strategies of the VC firms. In this context, portfolio involvement refers to the active participation by venture capital (VC) firms in various aspects of the investee venture. Specifically, we assess their involvement levels in six major areas – human resources (HR), business operations, marketing and business development, financial activities, business strategy, and crisis management. Further, we compute the aggregate VC involvement index and then cluster (and profile) the VC firms based on the same into three distinct categories: most intensely involved VC firms, moderately involved VC firms, and least involved VC firms.

To start with, it is important to reiterate that VC firms significantly differ from the other conventional financial intermediaries (namely banks and equity markets) in one principal aspect. Compared to the other financial mediators, VC firms are regarded as active and personalized sources of funding. Thus, the VC firms not only provide finance but are also known to actively intervene in other operational and strategic aspects of the investee ventures (such as administration, marketing and sales, recruitment, product development, and so on). This activism is necessitated by the need to tackle the risks emanating from agency problems associated with funding ventures in nascent and emerging domains (Elango et al. 1995; Sapienza, Manigart, and Vermeir 1996). While such agency risks exist in the developed VC markets as well, they pose difficulties in emerging markets with a weak institutional support (Wright, Lockett, and Pruthi 2002).

Accordingly, the objective of this chapter is manifold. First, to identify, categorize, and quantify the level of involvement of the VC firms in various aspects of the investee companies. Second, to divide the VC firms into distinct segments based on their aggregate intensity of involvement. Third, to identify the underlying attributes that drive this variation in involvement levels.

The rest of this chapter is organized as follows: To start with, we propose a conceptual framework based on literature and arrive at testable hypotheses based on the same. We then move on to the description of the research design for this study. This is then followed by the discussion of results. Finally, we summarize our findings and derive managerial implications.

The aim of this chapter is to present a comprehensive survey of the most significant studies in the domain of venture capital (VC). The latter may be classified into two broad streams – first, those that delve into the ecosystem related aspects of the VC industry and, second, those that probe the micro-level decision-making processes of the individual VC firms per se. While the former visualizes the VC ecosystem as a macro entity, the latter discuss the underlying risks and other challenges encountered by the individual VC firms in their micro-level decisionmaking processes.

Since the motivation of this study is gaining an insight into both these aspects, our review of the literature encompasses both these dimensions. To start with, we begin with an overview of the VC ecosystem as an integrated whole. We then move on to review literature that focuses on the individual VC firm as a micro-entity.

The VC Ecosystem

The VC ecosystem may be viewed as a conventional supply–demand framework (Poterba 1989). The limited partners (LPs), namely fund providers, and general partners (GPs), namely fund managers, constitute the supply side of this ecosystem, whereas the investee firms comprise the demand side. The supply (Ss) and the demand (Dd) sides of the VC ecosystem are each, in turn, affected by a set of systematic and non-systematic influences. Systematic influences refer to the overall macro environment and policy level factors that affect all the concerned economic agents in the system in a more or less uniform manner. The nonsystematic influences are the micro aspects of these economic entities that, in turn, influence their performance. Each of these has been discussed in detail in the following sections. Supply Side of the VC Ecosystem

As noted, the supply side of the VC ecosystem is affected by both systematic and non-systematic factors. At a global level, the systematic influences govern the overall quantum of VC funds allocated to any economy. In general, the LPs are inclined to allocate more VC to better-performing economies. The non-systematic influences refer to the attributes that affect the fund-raising potential of the individual GPs. These in particular depend on the success rates of their historical investments and the relative expertise of the individual VC fund managers.

In a course I teach on the dynamics of global capitalism, I begin with two sets of photos: garment and auto factories at the turn of the twentieth century and at the turn of the twenty-first. Students can see that the auto factory has undergone radical change, transforming the shop floor from a labour-intensive environment to one that is capital-intensive and reliant on advanced machinery. Robots now piece and fuse parts in an automated rhythm where previously workers had toiled by hand. The garment factory, however, looks much the same, with its rows of women hunched over sewing machines. While the demographics and pace may have changed, the factories, machinery, and value chain structure seem to exist outside of time, isolated from the developments that have transformed the rest of the global economy.

There's much that is striking about this pairing. First, autoworkers generally have higher union density now than garment workers and earn significantly higher wages because of it – despite all the assembly being done by robots. Second, it captures the sheer durability of the sweatshop within the garment sector. As I demonstrate in this book, the regulatory regime that had once enforced a degree of spatial inflexibility finally dwindled to nothing with the 2005 MFA phase-out. And the emergence of market spatial inflexibility, which gives labour new openings, can only occur if the flows between supplier and buyer are unrestricted. With this change, and a capable labour movement, there is hope yet that garment factory workers may close the gap.

A radical restructure of production

On 30 November 2018, the High Court of Bangladesh implemented a restraining order – passed days earlier – mandating the closure of the Dhaka office of the Accord for Fire and Building Safety (‘Accord’) and forcing its staff to leave the country. Introduced following the tragedy at Rana, the Accord had been heralded as an auditing regime finally capable of remedying the inhumane and often downright dangerous conditions that were endemic to Bangladesh's garment industry. However, the High Court's November restraining order, which pre-empted a negotiated 2021 Accord extension, was the result of concerns over inadequate government scrutiny.

To contribute to our knowledge of the capabilities that are perceived as strategic by emerging market firms, this chapter presents a study of eight Chinese companies with different internationalization levels. They includes two exporters, the high-tech bus manufacturer Higer and the low-tech manufacturer of car seats Baby First. We also examine high-tech multinationals AVIC (aviation), Advantech (computer systems), and ShangGong Group (industrial sewing machines), in addition to low-tech Chervon (hand-held outdoor tools) and Siwei-Johnson (specialized vehicles). Finally, we examine retail service firm Sanpower. By examining and comparing/contrasting the capabilities identified as strategic by these companies, we aim to gain insights into strategic capability development based on the experience of the world’s largest emerging economy. For example, more than one company mentioned their reflection capabilities, a cognitive process where people attempt to increase their awareness and learn from past business experiences, and explained how they apply this mechanism to corporate governance.

This chapter might be euphemistically called a summary of the book “in pictures,” as it includes all of the key graphics used throughout the book to represent the core ideas of MST (including summaries of goal content themes, different kinds of emotion patterns, and personal agency belief patterns), TSP (including representations of the TSP Theory of Motivation and Optimal Functioning and the TSP Theory of Life Meaning), and principles for motivating self and others. This chapter was designed to provide readers with a quick summary of the book’s contents and an easy way to recall key ideas related to the challenge of motivating self and others.