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O.E. KUZMIN, I.V. LYTVYN Yu.I. OSSIK
VENTURING
Teaching manual
Karaganda 2016
2 UDC 330.322.1
BBC 65.011я732 К89
Recommended to be published by the Ministry of Education and Science, Youth and Sports of Ukraine as the teaching manual for students of specialities
«Economics and entrepreneurship», «Specific categories» and «Management and administration»
of institutes of higher education (letter # 1/11-10589 from November 17, 2010)
Recommended to be published by the Academic Counsil of Karaganda Economic University Kazpotrebsoyuz as the teaching manual for students of economic specialities
(Protocol # 9 from May 26, 2015)
Revi ewers
V.P. Solovyov — Deputy Director of G.M. Dobrov Center for Science & Technology Potential and Science History Studies, the Doctor of Economics, professor;
S.A. Ishchuk — head of the department of regional development monitoring of Institute of Regional Research of NАS of Ukraine, Doctor of Economics, professor;
A.A. Taubaev — Vice-rector of Karaganda Economical University, Doctor of Economics, professor
K89 Kuzmin O.E., Lytvyn I.V., Ossik Yu.I.
Venturing: Teaching manual. — Karaganda: KarSU publ., 2016. — 311 p.
ISBN 978-9965-39-526-0
This book is the first teaching manual on “Venture business" in Kazakhstan. In an accessible form it deals with the history of emergence, main principles and mechanisms of functioning of venture business, basic kinds of venture entrepreneurship subjects (venture investors, venture enterprises, organizations of venture infrastructure etc.), the role and importance of public authorities in formation of systems of venture business support. The special attention is paid to consideration of venture management as one of the kinds thereof directed on development of young innovative firms by means of attracted venture capital and venture financing of projects.
For students of economic and technical specialities of higher education establishments, instructors, as well as for all those who are interested in issues of development and control of venture entrepreneurship.
UDC 330.322.1 BBC 65.011я732
ISBN 978-9965-39-526-0 © Kuzmin O.E.,
Lytvyn I.V., Ossik Yu.I., 2016
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CONTENTS
Preface ………...……..……...
Part 1. VENTURING BASICS …………..…..……...……….
1. Essence and importance of venture entrepreneurship...
1.1. Nature of venture business and its content...
1.2. Main categories of venture entrepreneurship...
1.3. History of venture entrepreneurship development...
Test questions and tasks……….………...
2. Venture investors as venture capital suppliers..…...…...
2.1. Essence and kinds of venture investors. Mechanisms of interaction of venture enterprises and venture investors ………...…...………….
2.2. Typology and educational and professional structure of venture capitalists 2.3. Basic forms of meeting with venture investors ………….……...…...
Test questions and tasks……….………...
3. Objects of venture innovation infrastructure …………...………..
3.1. Venture capital funds ………...
3.1.1. Traditional interpretation of venture capital funds ………..
3.1.2. Classification of venture capital funds ………....………….
3.2. Asset Management Companies ………...……
3.3. Objects of innovation infrastructure and their place in formation of scientific and technological clusters ………....….…..………
3.3.1. Incubators ………..………...………..
3.3.2. Technological claster formations ………..………...…………...
Test questions and tasks……….………...
4. Venture enterprises...
4.1. Сlassification of kinds of venture enterprises...
4.2. Kinds of ventures by way of creation and funding sources...
4.3. Forms and kinds of venture entrepreneurship...
Test questions and tasks……….………...
7 10 10 10 18 24 29 30 30 40 42 44 45 45 45 47 49 50 50 54 60 62 62 64 67 72
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5. Venture financing processes ………...………..
5.1. Kinds of venture financing ………...………...
5.2. Venture financing schemes ………...………...
Test questions and tasks……….………...
6. Stages of innovative enterprises development from the standpoint of their needs in venture capital ………...………...
6.1. Life-cycle stages of venture enterprise ………...……...………
6.2. Rounds of financing that are typical for professional venture capitalists...
Test questions and tasks……….………...
7. Systems of both state and private support and development of innovative venture activity of the world's leading countries...
7.1. Structure and types of innovation systems of the world's leading countries ...
7.2. Characteristic of policy and systems of support and development of innovative venture activity...
7.3. Activity of national venture capital associations ……...…...
7.3.1. National Venture Capital Association (NVCA) ……..…...
7.3.2. British Private Equity & Venture Capital Association (BVCA) ……...
7.3.3. European Private Equity & Venture Capital Association (EVCA) ……..
7.3.4. Russian Venture Capital Association (RVCA)...
7.3.5. Ukrainian Assotiation of Investment Business (UAIB) …..……...…...
Test questions and tasks……….………...
Part 2. VENTURING BASICS …………..…..……...………
8. Venture organization – open system and control object...
8.1. Main factors of influence on a venture organization as an open system…
8.2. Venture and corporate management ……….…..….……...
Test questions and tasks……….………...
9. Peculiarities of enterprise management systems creation at internal scheme of venture financing.………...………...………...
9.1. Venture financing schemes. Internal corporate venturing ………..
9.2. Internal ventures in the form of risk groups and departments of companies ...
9.3. Organizations like spin-out and spin-off – forms of internal venture 73 73 78 82
83 83 86 90
91 91 95 107 108 110 111 113 114 117 118 118 118 125 129
130 130 131
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entrepreneurship ……….……….…….
9.4. Creation of subsidiary venture capital funds (venture capital firms) …...
Test questions and tasks……….………...
10. Application of “independent" venture investing scheme ……….
10.1. Peculiarities of "independent" ventures creation ……….………..
10.2. Basic stages of "independent" ventures creation as well as financial provision of their investment projects realization ………..……...
Test questions and tasks……….………...
11. Search, selection and attraction of venture investors by managers of innovative enterprises ………..………...……….
11.1. Importance and topicality of a thorough search and selection of venture investors by managers of innovative enterprises...
11.2. Cooperation, financial support, search and choosing of "incubators" … 11.3. Attraction of individual investors – business angels...
11.4. Peculiarities of use of both venture capital funds and venture capital firms..
Test questions and tasks……….………...
12. Peculiarities of development of a presentation and business plan of a project for venture investors ………..………...……
12.1. Development of the presentation of a project for venture investors.……
12.2. Drawing up business proposal and business plan of a project for venture investors ………..………...………
Test questions and tasks……….………...
13. Formation of venture enterprise capital structure...
13.1. Approaches to formation of venture enterprise capital structure...
13.2. Advantages and disadvantages of venture financing approaches to venture entrepreneur and venture capitalists ………..………..
13.3. Alternative sources of venture enterprises financing... ………
Test questions and tasks……….………...
14. Planning and forecasing of future cost of an enterprise attracting venture capital ...……….…..…………...…………..
14.1. Planning of processes of production and sale of venture projects products...
137 138 145 146 146 147 150
151 151 152 154 157 163
164 164 166 175 176 176 179 181 184
186 186
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14.2. Forecasing future cost of an enterprise attracting venture capital...
Test questions and tasks……….………...
15. Investors’ exit strategies...
15.1. Kinds of strategies ………...
15.2. Advantages and disadvantages of investors’ exit strategies ………..………
15.3. Peculiarities of investors’ exit through the stock market...
Test questions and tasks……….………...
16. Use of external venture financing schemes of projects...
16.1. External ventures and forms of their organization ………….………
16.2. Control of venture strategic alliances ………...…...
Test questions and tasks……….………...
17. Evaluation of efficiency of venture financing of projects...
17.1. Classification of venture activity efficiency indicators...
17.2. Peculiarities of evaluation of venture financing cost-effectiveness...
Test questions and tasks……….………...
18. Main tendencies of venture business development in the world...
18.1. State of venture capital markets development under conditions of globalization ………...………
18.2. Importance of venture capital for university ventures development...
18.3. Prospects of venture business development...
Test questions and tasks……….………...
19. State and prospects of the venture business in Kazakhstan ……..…...
Test questions and tasks……….………...
References ……….….………...
Appendixes ………
188 202 203 203 212 214 219 221 221 221 230 232 232 241 251 253 253 271 279 284 285 288 289 301
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PREFACE
The present stage of global economy globalization demands to search for new methods and forms of innovation processes control. Control systems of innovative activity of Kazakhstan enterprises are insufficiently developed regarding requests of the present highly competitive environment. The global experience of solution of financial and organizational problems of innovation processes development has proved to be efficient in formation and development of venture entrepreneurship as a valid mechanism of stimulation of innovative growth of industrial enterprises. While having sufficient innovation potential, domestic branches of economy require significant financial investments for creation and production of science-intensive products.
Working out principles and formation of systems of venture entrepreneurship efficient control will allow an increasing inflow of investments to the real sector of economy, will favor essential acceleration of development of economy of Kazakhstan and its economy restructuring.
Attraction of the venture capital as a way of target investing of innovation developments should become the catalyst of introduction of innovative technologies at domestic enterprises. However the majority of aspects of ventures control remain insufficiently researched. There is no theoretical groundwork regarding the essence and special features of the venture entrepreneurship. One needs further researches on kinds and forms of the venture entrepreneurship, mechanisms of venture enterprises interaction with subjects of a venture innovation infrastructure as well as on questions of construction of venture management systems of enterprises. Considering that, it seems topical to publish a manual to help experts, innovation managers concerning a control system of innovative venture activity of innovations financing processes.
The aim of the manual – study of theoretical statements and applied recommendations directed on formation of venture organisations control system. It will enable students:
- to understand the essence of basic concepts of the venture entrepreneurship;
- to study classifications of kinds of venture enterprises and venture capital funds, to become familiar with organizational forms of venture entrepreneurship;
- to consider mechanisms of interaction of venture entrepreneurship subjects within the frameworks of the venture activity cycle;
- to analyze peculiarities of planning and organization of internal, external and
"independent" ventures at industrial enterprises;
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- to become familiar with prerequisites of venture business development in Kazakhstan as well as in the world;
- to develop skills of development of business presentations and writing of business plans for venture investors;
- to have formed the ability to search, evaluate and select potential individual and institutional investors by managers of innovative enterprises;
- to master skills in evaluation of cost-effectiveness of venture financing of projects and criteria of making decisions on expediency of projects implementation by venture investors.
The study of «Venture business" discipline assumes having methodical and deep knowledge on disciplines «Innovation management", "Innovation projects control" and so on; demands a purposeful work pertaining to study of special scientific as well as industrial literature, an active work at lectures and at practical classes, independent work and performance of individual tasks.
The purpose of lectures consists in showing to students the basic theoretical and historical aspects of venture business development worldwide, studying mechanisms of interaction of venture entrepreneurship subjects, in divulging the main schemes of venture financing and organizational forms of venture business construction, in researching prerequisites of venture entrepreneurship establishment in Kazakhstan.
The publication of the manual will promote:
- acquisition of basic categorial apparatus of venture entrepreneurship;
- consideration of historical stages of of venture business establishment worldwide and of mechanisms of state stimulation of its development;
- study of basic kinds of venture enterprises and venture capital funds and special features of their functioning;
- familiarization with mechanisms of interaction of venture investors, venture capitalists and innovators;
- generation of practical interest in construction of venture management systems at domestic enterprises and in attraction of the venture capital for innovation projects implementation.
During the study of the discipline students should:
1. Acquire skills at creating venture financing schemes of projects.
2. Develop abilities at drawing up of effective business proposals and a target writing of business plans for prospective venture investors.
3. Study sources of search of the venture capital; be able to choose potential venture investors, conclude agreements about venture capital attraction as well as to
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form optimum structure of the venture capital of enterprises according to existing approaches to venture investment in the world.
4. Form skills at evaluating venture financing cost-effectiveness of projects and at defining venture capital investment efficiency for all subjects of venture entrepreneurship.
5. Define the general information field regarding problems and prospects of venture business development, place and significance of individual branches of economy in global venture area.
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Part 1. VENTURING BASICS
1.ESSENCE AND IMPORTANCE OF VENTURE ENTREPRENEURSHIP
"Venture business is when one invests means in ten companies, half of them go bankrupt, in three cases the investments return, one company grows tenfold, and in one more company the profit exceeds investments hundredfold".
(Tim Draper, well-known venture entrepreneur) 1.1. Nature of venture business and its content
Venture business development as private property institution, is a consequence of pooling of an intelectual potential with a financial resource.
Natural necessity of evolutionary development of capitalization of a financial resource with the subsequent separation of venture business is caused by inability of a traditional financial system to offer a flexible and effective mechanism of financing of small innovative structures. The traditional financial system does not allow evaluating perspectivity of development and introduction of a breakthrough idea on the basis of the widely used financial examination of an investment project. Especially as traditional funding sources are not ready to sharing in so high investment and administrative risks.
In the venture business, as well as in other areas of economic relations the person predominates as to the place s/he occupies as one’s significance: s/he is considered not only as a source of human physical or intellectual work, but first of all as the bearer of highly skilled knowledge in the area of high technologies, of creative thinking skills, as the bearer and owner of a basic know-how of a venture project that has pragmatic and mercantile value.
Along with «intellectual potential» terms «intellectual capital» «human capital» are widely used as well and, due to it «venture capital» is suggested to be used that seems not quite correct.
Theodore Schultz was one of those who have made an attempt to make definition of the human capital. In the article «Capital Formation by Education» [177] T. Schultz presented manpower costs estimations, including expenses for education, and also the costs of job the person loses while studying.
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Let us notice that T.Schultz’s reasonings and conclusions can be true for the developed countries whose governments have created all necessary conditions for capitalization of the acquired educational potential. And under these conditions the required capitalization of educational potential of employees occurs automatically –
«Capital Formation», and that is why T. Schultz has the right to use the term «capital».
In this case the social and economic system as a whole is the traditional self-organizing system controled by means of introduction of investment flows (as well as investment flows arising within the system itself, in particular, in its economic subsystem) owing to existence of communication channels among subsystems [36].
Although T. Schultz's calculations were inaccurate, and he himself addressed to the students and colleagues asking them to specify, his concept was gradually recognized, untill it became clear, that the education capitalization is a decisive factor. As a matter of fact, T. Schultz became the father of the revolution of human potential investments.
More conservative (and, in our opinion, more accurate) terms are those used by international organizations in their analytical reports, as well as by individual scholars of the post-Soviet countries: «intellectual society resource», «intellectual society potential»
[36].
De Soto considers that the capital corresponds not to an accumulated reserve of assets, and to potential of development of new manufacturing [32, p. 49].
Let us try to approach to the capital, as to the potential in a critical way. For that we will consider the concept of the capital in the mentioned Peruvian scholar’s interpretation in more details. The potential, as is known, is connected with statics, and the capital as K. Marx asserts, arises in the process of labor, owner thereof sells it as a commodity, that is, it has a dynamic nature.
In the third chapter of the quoted above work De Soto formulates «mystery of capital» - latent effects of fully confirmed private property – confirmed not only and not so much for the protection of property rights to property, as for capital movement. In this case he sees six effects of the private property [32, pp. 56-69]:
a) fixation of economic potential of assets;
b) integration of scattered information;
c) owners’ responsibility;
d) increase in the liquidity of assets;
e) social ties development;
f) passportization of deals.
It is appropriate to notice, that from the list of effects which, according to the author [32], initiate and support the process of capital creation, none of them is directly
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connected with the tangible wealth and money. The tangible wealth and money as a resource can be used as an initial basis of cost increase, but are not the cause, the initiator of its increase. Hence, material and financial elements are potential resources, which alone are not sufficient for initiation and support the capital creation process though the capital cannot be obtained without them. The availability of material is necessary (restrictive), but not decisive (majoritarian) conditions of creation of the capital. It seems to us, that when comparing the capital with the energy the term «kinetic energy» is more suitable instead of the potential as supposed by De Soto. Because the potential is a static indicator and additional value is not generated in the statics. In other words, the capital – a category not of a reserve but of a flow.
The aforementioned analysis leads us to an idea, that the capital cannot be considered as the good (tangible material or intangible) as a resource, and it should characterize the state of the good (resource). That is more appropriate to speak not about the capital, and about the process of capitalization of the good, that is self-reproduction (according to K. Marx – «self-expansion of cost») [98, pp. 164-165]. If to take into account this, generally well-known, characteristic of the capital, then the six effects of the private property given by De Soto become more clear (and appropriate in respect to the capital «self-reproduction») [32, pp. 56-69].
The «human capital» term, having a rich history marked by names of A. Smith and K. Marx, continues to be used along with «human resource» and «human potential». We consider that this inconsistency in terminology is a matter of principle. As it was noted above, the human resource and the human potential can be identified with certain stretches with the human capital in economically advanced countries, but on no account in the developing post-Soviet countries. In the latter only the human resource is produced (the potential is accumulated), and it is capitalized mainly abroad in the mentioned highly developed countries – there, where more suitable conditions have been created for that. It is of importance to understand venture business.
Despite of the lack of terminology unification, the important issue in the venture business is the ownership of intellectual products of the person, as a part of a functional resource, on the one hand, and estimations of this product. Modern economists treat
«human potential» concept in different ways. But virtually all of them agree to that that human potential being capitalized is a driving economic force of a society, and that the state, and not just an individual alone, participates in capitalization of human potential.
The theory of human and intellectual potentials (capitals) is still being researched;
however it is of importance to understand the nature of venture business.
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Both the intellectual and human potentials are a necessary condition of qualitatively higher capitalization rate of achievements of science and education. That allows using more effectively the functioning potential and other positive external factors within the limits of overall manufacturing process (both material and nonproductive), first of all, by introduction of innovations, search for new, more improved forms of production and so forth. It was the given integration that became that mechanism, that basic economic foundation on basis of which from a capitalized financial resource another qualitatively new economic phenomenon of market economy - the venture capital emerged.
In the venture business one puts financial resources into projects related to the use of original ideas and knowledge which in the economy of knowledge turn into the intellectual potential of higher level, capable to be further capitalized. The latter is an independent factor of production by its nature and form of participation in a manufacturing process. It is herewith that the cost estimation of the intellectual potential influences the final cost of an intellectual product. By analogy with the aforementioned interpretation of the capital, together with the term «intellectual potential» the term
«intellectual capital» is widely used which, in our opinion, is less accurate than the first one, and has the limited sphere of reproduction: potential or resource under some conditions is capitalized, and under others - is not [109].
V.L. Inozemtsev defines the intellectual capital as «Information and knowledge, these specific factors, by their nature and forms of participation in manufacturing process, within the frameworks of firms assume the aspect of the intellectual capital.
The intellectual capital corresponds to something like "collective brain", accumulating scientific and everyday knowledge of employees, intellectual property and accumulated experience, communication and organizational structure, information networks and image of a firm» [56].
The components of the intellectual potential, according to V.L. Inosemtsev are:
1) the human capital embodied in employees of a company in the form of their experience, knowledge, skills, abilities to be innovative, and also to be perceptive to general culture, philosophy of a company, its internal values;
2) the structural capital including patents, licences, trade marks, organizational structure, databases, electronic networks [56].
B.B. Leontyev treats the intellectual potential of one or another subject as the cost of set of intellectual assets s/he has, including the intellectual property, one’s natural and acquired intellectual abilities and skills, as well as databases one stores and useful relationships with other subjects [83].
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An actual creative property of a separate person acts as a material basis of intellectual potential capitalization of oneself, of human association or a society as a whole. A social essence of the intellectual potential is nature of possession, disposal and use of these properties.
The venture business is closely related to the human factor and includes possibilities of financial and intellectual resources. A particular innovative transformative possibility of the venture capital consists in this. First, venture business shows itself in special intellectual work in those reproduced processes, where it acts as one of production drivers. Second, it is connected with an entrepreneurial activity representing innovating, inventive act along with readiness to risk one’s property, nonconventional motivations and so on. Functioning of venture business, its whole life cycle is accompanied by special system of so-called venture management: informational support, planning, organization, control, regulation. Creation of venture business from a financial resource, its functional isolating is related to integration thereof with a human resource. The given integration, in our opinion, acts as that basic economic foundation on basis of which from a financial resource qualitatively different economic phenomenon - the venture business emerges.
Functioning of venture business in sphere of intellectual production causes the creation of a unique product — knowledge. The significant amount of added value which is generated by intellectual work in manufacturing, under conditions of lower organic composition of the capital in comparison with traditional production in venture firms is a basis for venture entrepreneurs to get excess profits.
Basis of the economy of knowledge are investments into the human potential and information technologies and also creation of conditions for their capitalization. There is a number of theoretical developments in the area of evaluation of capacity for intellectual potential capitalization. For example, they propose to evaluate the intellectual capital (the intellectual potential and its capitalization capacity) by the Tobin's q ratio. It is determined as the ratio of a market value of assets (market capitalization) of a company to book (replacement) value of its assets. Thus for the intellectual capital this ratio is higher than 1 [39-187]. There is an offer to calculate the intellectual capital as the difference between a market value of a company, calculated as the product of the price of one share multiplied by their total number, and a book value of assets [188].
These and other approaches to determination of the intellectual capital cost reflect only its subjective individual estimations through the prices which have objectively established in the market. An institutional component as the state with its legislative
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framework, programs of the government support of innovative activity is excluded in these calculations. Undoubtedly, such approaches do not allow explaining obvious advantages of the intellectual potential and furthermore, of the human potential in efficiency of capitalization (added value creation), showing an objective basis of cost increase in the course of intellectual production.
In spite of the use of a significant amount of intangible factors in the intellectual production, the financial resources advanced in the venture business undergo all metamorphoses connected with capitalization of resources in the sphere of production and circulation.
The human potential is the basic production factor of the knowledge economy and gives a number of essential advantages to the one who has them to the owner of physical means of production. After sale of knowledge or passing of information about it to other people and organizations the knowledge itself remains at its immediate producers and the information about it those who have it can take to the market virtually any number of times. Moreover, knowledge is inexhaustible treasure, - and this is the main peculiarity of the human capital, - knowledge grows faster and in more quality as far as it is used in production. This phenomenon of knowledge predetermines special features of new cost creation in venture firms and corresponds to an objective basis of existence of venture business in the knowledge economy.
The given examples allow drawing a conclusion concerning an organic composition of production assets in the knowledge economy in comparison with traditional industrial economy. Owing to impossibility of objective estimations of intangible assets of innovative firms only indirect confirmation of such estimation is possible. The western statistics measures the human potential applied in production in man-hours. One should take into account that venture capitalists, as a rule, do not direct financial resources to the projects connected with purchase of an expensive and unique equipment, yielding this scope of activity to the state, and they use the equipment provided by technoparks, incubators, universities, corporations what allows them to save on fixed charges. In the knowledge economy the amount of attracted venture finances identical to applied in the traditional industrial sector of economy, allows creating the larger quantity of added value. This added value is caused by a low organic composition of the capital and creates an objective basis for higher rate of return which is received by venture investors compared with ordinary investors. For example, the average rate of profitability of investments in the economy of developed countries makes up 14-15%
while venture investors expect to get at least 25 %. At that it is necessary to notice, that the certain part of venture investors invests into small venture firms where the capital
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circulation term is 1.5-2 years, whereas on average in economy, for example, of the USA term of capital consumption makes up 3-6 years.
Relying on the experience of venture business development in the developed countries, first of all in the USA, it is possible to assert, that the venture business develops and functions on the basis of objective factors of development. By creation of the economy of knowledge, transformation of physical production means means the formation of venture business occurs. On the other hand, an important part of this problem is development of economic forms and institutes on the basis of the venture business which role increases through transformation of innovative production to leading social production sector.
Besides economic, investment or purely financial functions, the venture business also performs services related to contorl, marketing, and information service and so on.
Venture business provides for making of modern scientific and technological researches.
It occurs as it creates up-to-date forms of diversification, interfirm collaboration and cooperation, and also possibility of use of nonconventional funding sources of risk projects by small innovative firms.
Peculiarity of venture business functioning is its coherence first of all with orientation to the human factor. It is people, the mental potential who represents a basis of this market functioning. Among operators of this market it is necessary to single out two components in its organizational structure: small innovative firms and venture financing funds. To accelerate innovation processes in the USA they widely use quasi- risk venture organization forms on the basis of organizational separation of divisions for solution of concrete scientific and technical problems. The main feature of such innovative structures is a planned nature of their emergence and a centralized supply with resources.
Concerning peculiarities of the venture market functioning in Kazakhstan one should mention the lack of own financial means, qualified personnel to organize large- scale researches, a great risk when they are conducted. Impossibility of patenting of fundamental science results is typical too. The latter leads to that that companies join their efforts to make researches and developments.
A distinctive and specific form is organization of joint ventures of «new style»
where a small science-intensive firm and a large company unite. Within such an association the venture firm develops a new product, and the large company provides it with a financial assistance, research equipment, supplies with sales channels and caters for. Peculiarity of relations of large corporations and small venture firms is their contract form and both parties preserve their own economic and legal independence.
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Consortia with the participation of large industrial firms making scientific production can be the most effective ones, according to western experts. These are the consortia creating industrial corporations to conduct their own long-term research works of fundamental and applied nature (having own laboratories and research centers with permanent staff); consortia which are created for stimulation of research works
«elsewhere». As such participants, along with large corporations, universities act as well.
It is science parks that about 80% successful small firms originate from, in the meanwhile, only 20% such firms achieve success outside of industrial parks. An industrial park actually minimizes the risk of non-productive outlays for development and sale of science-intensive technologies and goods on the basis of small entrepreneurship.
By means of venture financing the technological niches, formed by the large monopoly capital, are occupied. Small innovative firms penetrate these technological niches. As a whole formation of structure and mechanism of the venture business market is a complex process connected with development of productive forces and STA.
Reproduction of public productive forces on a qualitatively new expanded basis is the result of production in the knowledge economy. Functioning of venture business is connected with exercise of ownership of the product of intellectual production by ensuring monopoly on knowledge and with acquisition of income by a venture businessman as a payment for risk. The monopoly of a venture businessman on knowledge acts as the cause of income formation, and the condition of creation of large amount of an added value in the innovation process where venture business was directed, is its low organic composition in sphere of intellectual production.
There is a lot of definitions of venture business, but nevertheless all of them boil down to its functional task: to assist the growth of concrete innovative business by provision of the certain amount of means in exchange for a share in a collective investment fund or some holding of stock.
Venture investment is made in the form of direct investments into companies which, as a rule, are at initial stages of development. Venture investments assume an increased degree of risk in exchange for prospect of profits higher than an average. In exchange for sharing in the risk, a venture capitalist can receive compensation in the form of profit, royalty, preferred stock, equity value growth and so on.
In an textbook of innovation management edited by S. Ilyenkova [189] - means invested by not only large companies, but also by banks, insurance, pension and other funds into an increased risk area, into a new business which has arisen, extends, or
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suffers from abrupt changes. Unlike other forms of investment the given form has a number of specific features:
investor’s share in company capital in the direct or indirect form;
investment of means for a long time;
investor’s participation in running of the company backed by him.
As a result of the analysis of the nature and essence of the venture business it is possible to define its economic substance as synergy of interaction of a financial resource with an intellectual human potential. Forming as a result of reproduction process in economy, the venture business is such an integration of the mentioned relations to which synergetic effect of influence on business activity in economic management systems by innovative activity development in them is inherent. All that gives the ground to consider the venture business as a special factor of an innovative economic growth transfer of economical systems to the innovative type of development, effective structural renewal of economy.
1.2. Main categories of venture entrepreneurship
The scientific and technological advance avoids virtually no sphere of socio- economic life. Application first of all of innovative knowledge and technologies under conditions of globalization promotes achievement of competitiveness of separate enterprises and branches of industry as a whole. At the same time development of innovative activity at industrial enterprises demands provision of special organizational and financial preconditions. On the one hand, innovative activity demands creation of creative atmosphere in collectives, generating of commercial ideas, expansions of formal authorities of heads of organizations; on the other hand – quality, deep marketing researches and check of such ideas with consideration of fast changing requirements of the market, provision for target and timely reception of required quality and volumes of financial, information, material and manpower resources. It is the absence of such conditions that restricts innovative activity development of the majority of enterprises.
In the world economic science they continue continuously to search for new, better methods of innovative activity control. Venture entrepreneurship should become one of ways of solution of financial and organizational questions of activization of innovative processes at domestic enterprises.
In the post-Soviet countries various ways of introduction of innovative solutions into economic management practice were generated for years of economy reformation.
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So, on the basis of an original division of labor between large corporations and small enterprises there emerged a special kind of entrepreneurship – financial and innovative.
At that small organizations which are called ventures deal with the activity on production and market advancement of new goods. However volumes of similar cooperation grow slowly.
Some scholars consider, that the word “venture" has appeared due to shortening of an English word adventure, by trancation of the particle ad, and ventures are called this way because of "adventurous" nature of their activity.
The review of literature concerning the problem [58, p. 387; 81, p. 28; 115, p. 170;
102, p. 285, etc.] allows drawing a conclusion that there is a lack of single agreed terms and concepts of venture entrepreneurship. Various sources give inaccurate, often inconsistent definitions of the same concepts. Therefore, considering special features of venture activity control, it is necessary to specify first of the content of basic venture entrepreneurship terms.
Venture entrepreneurship – initiative risk activity which is financed owing to attraction of the venture capital and is directed on a considerable growth of market values of the invested objects, including by reception, use and commercialization of results of scientific researches and developments, market launch of new competitive technologies, goods and services [115, p. 170; 147, p. 567].
The object of venture entrepreneurship is risk (venture) activity during which new technologies, goods and services are created and introduced. Objects of venture entrepreneurship include: intellectual property, innovative products (processes), and innovative programs, venture projects, contracts (agreements) between subjects of venture innovative activity, stock (shares) of innovative venture companies, new technologies, commodity output, raw materials and so forth.
Venture entrepreneurship as initiative risk activity reflects an integral system of financial relations concerning accumulation, attraction and putting of monetary funds (venture capital) into objects of investment to develop and commercialize results of scientific and technical researches, reception of incomes as a result of a considerable increase of market value of invested enterprises and getting of social effects.
Stages of venture activity provide for: searches for sources of investment means, formation and attraction of funds of the venture capital; venture investment, that is transformation of incoming financial (venture capital), material and intellectual resources to final products of venture activity; transformation of invested resources to increment (capitalization) of market values of the invested objects (enterprises);
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achievement of venture activity goals by way of reception of incomes (effects) by both venture investors and other subjects of venture entrepreneurship.
Venture programs – set of interdependent venture projects that provide for reception, use and commercialization of results of scientific researches and developments, market launch of new competitive technologies, goods and services.
A venture project – set of interdependent measures which are taken by means of attraction of the venture capital for introduction of results of scientific and technical knowledge, market launch of new goods, works and services.
However, let us mention: in the literature there is no single accurate definition of venture capital. Theoretical researches and the analysis of economics scholars’ opinions have shown that a new way of investment of means of large companies, banks, private investors, pension, insurance, investment funds into venture innovation projects is the venture (risk) capital reflecting system of relations between subjects of venture entrepreneurship. It provides for accumulation of available assets and investment of them into innovation projects to research, master and commercialize innovations. It is formed and subjected to redistribution with the participation and support of the state [58, p. 387; 81, p. 11; 96, p. 16; 115, p. 170; 10].
The venture capital – long-term direct financial investments of share nature. They are put mainly for 3-7 years by individual and institutional investors (venture capital funds) for creation and development of young innovative enterprises, independent divisions or isolated subsidiaries of large companies, financing of their reconstruction and modernization in exchange for shares of property of such enterprises, which, as a rule, less than controlling interests, but simultaneously ensure investors the rights of running the invested enterprises and a financial control over target use of funds to realize potentials of growth of recipient enterprises, to increase their market value and investors’ exit from business through sale of their shares of property.
This interpretation discovers the content of the venture capital concept in its broad,
"traditional” understanding. However in case of independent risk divisions of enterprises it is necessary to consider narrower understanding of the risk capital providing a share investment of means into innovation projects which can bring in returns (effects) to its investors due to commercial use of results of development works, with the right of participation in ownership of a potential enterprise in case of possible separation of division in a legally isolated enterprise.
In the course of venture investment there occurs not only an ordinary putting of financial resources into an enterprise, but also investing of other material and intangible resources of venture investors as software products, know-how, patents, licences, rights
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to property objects etc. Though not all investors make venture investments in their broad understanding, usually investing financial resources, but the fact itself of reception of the venture capital as financial resources is criterion of acquisition of venture status by an enterprise.
The subjects of venture entrepreneurship that perform risk activity and/or attract property and intellectual values invest their own or borrowed funds into realization of venture projects include:
1. Subjects-generators of innovative knowledge; they are physical persons – inventors and rationalizers, innovators and entrepreneurs, employees of higher educational establishments, of research and development institutes, having scientific and technical products (patents for inventions, test models, know-hows).
2. Venture investors – suppliers of the venture capital. They include individual investors who can independently put their own means into innovative enterprises (in the foreign literature they are called "business angels"), institutional investors: private and public companies, divisions of bond houses, large corporations, pension and insurance funds etc. Often they rate venture capital funds as venture investors, however the analysis of literature allowed drawing a conclusion: to put them in this group is inexpedient when they are separate organizations with an established structure of management and invest not their own means, but those of other organizations attracted on the shared basis of joint investment.
3. Organizations of venture innovation infrastructure. They include organizations which give various financial, information, manpower, material and technical resources to venture organizations directly occupying themselves with scientific and technical researches, development of novelties and commercialization of them. One recommends putting venture capital funds, venture capital companies in just this group of subjects of venture entrepreneurship. However in a case, when funds of the venture capital invest own means (funds of innovative enterprises, organizationally established family funds, corporate venture capital funds) one can rate them as venture investors.
4. Venture innovative organizations directly concerning themselves with scientific and technical researches, development of novelties and commercialization of them.
They are mostly small enterprises in technologically progressive branches of economy dependent or specialized divisions of large companies, complex innovative structures, connected by contract relations, receiving the venture capital for scientific researches, developments, for creation and introduction of innovations which organization is
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connected with an increased risk. Such organizations include: "independent" venture enterprises, internal ventures (spin-off and spin-out), external venture structures.
5. Subjects of both state and private regulation of venture innovative activity (associations of the venture capital, networks of business angels, and other associations that stimulate and regulate the activity of subjects of venture entrepreneurship).
6. Subjects of consumption of venture innovative production. They are natural and legal persons – consumers of venture activity products.
Let us consider in detail the essence and importance of venture entrepreneurship subjects in the venture activity.
Venture investors. Pension funds, insurance companies, large corporations, banks make a formal market of the venture capital. In a number of post-Soviet countries private pension and insurance funds cannot fully participate in formation of a domestic market of the venture capital because of legislative restrictions. So, private pension funds cannot form their assets out of securities of emitters which are not listed on a stock exchange or information trading system. Nonconventional sources of venture financing forming an informal market of the venture capital include well-to-do private individuals: in a business circle, they as was mentioned above are called business angels [142].
Set of enterprises, organizations, establishments and their associations, associations of various forms of property that render services to provide for venture activity is labeled as the venture entrepreneurship infrastructure. These are venture capital funds, companies of the venture capital, finance and credit institutions, scientific institutes, engineering companies, incubators, broker establishments, higher education establishments, state networks of the venture capital and other innovative intermediaries [58, p. 389; 147, pp. 566-567].
Thus, one should consider as innovative intermediaries organizations that do not take part directly in creation of innovations, and optimize directions of movement and volumes of financial, information, material and technical and human resources for commercialization of scientific and technical developments. They are consulting firms,
"headhunters", gatekeepers, asset management companies, auditor firms, innovation centers etc. [112].
Functions of innovative intermediaries include: evaluation of scientific and technical and commercial potential of new developments, rendering assistance in a legal registration of the rights to intellectual property, the market analysis and creation of a business plan of implementation of new technologies, search for prospective customers of intellectual property objects, legal support of purchase and sale transactions of
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intellectual property objects, administrative consulting for small technological innovative companies (STIC), search for and attraction of the venture capital for new projects, innovation projects control etc.
Intermediaries between investors who have decided to combine their capital and a venture enterprise where means are invested at a high risk level are venture capital funds – specialised dependent or independent organizations of the venture capital [3, p. 14; 4, p. 172; 7, p. 551; 8, p. 284; 9, p. 95; 10].
Investment managers control means of venture capital funds and venture capital companies. They can be natural persons and work for themselves (venture capitalists) or work as investment managers of assets management companies of venture funds.
Asset Management Companies (AMC) are legal bodies that perform asset management activity on the basis of a corresponding licence to carry out such activity.
The first modern venture capital management company was created in the Great Britain [17].
Considering the weight of criterion according to which innovative enterprises are ranked as venture ones, as well as discrepancies in the wording of the venture capital concept, we will notice: often they confuse concepts of "venture enterprise" and
"innovative enterprise". Considering that that the risk capital is the basic criterion to rank enterprises as venture ones, and also considering more accurate definition of the venture capital essence, we offer definition of "venture enterprises" concept.
Venture enterprises – these are young innovative enterprises, isolated divisions or subsidiaries of large companies, scientific and technical associations of enterprises which have potentials of growth and attract the venture capital to realize innovation projects, modernize and/or refit enterprises technically, launch new products (works, services), that favors substantial growth of market values of the invested enterprises.
Mechanisms of interaction of venture enterprises, venture capital funds, AMC and other intermediaries involved in venture financing, will be considered in detail in the following topics.
The circle of venture investments by stages of the venture activity and system of interaction of all subjects of venture entrepreneurship can be represented as a venture cycle.
System of interaction of all subjects of venture entrepreneurship – venture enterprises, venture investors and commodity producers of new competitive products (in a case when these organizations ensure production and sale of venture innovative production, but do not perform a venture innovative activity themselves) – owing to a
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developed infrastructure of venture entrepreneurship we suggest to call a sphere of venture (risk) activity.
Graphically the interaction (interrelation) of all subjects of venture entrepreneurship is shown in fig. 1.1).
Considering a variety of a network of organizations which participate in the venture activity, peculiarities of their creation, role and significance, functions and mechanisms of participation in venture processes by subjects of venture entrepreneurship we will consider in the following parts.
1.3. History of venture entrepreneurship development
There are various versions of history of venture entrepreneurship origin. Though not all of them have been grounded scientifically, the majority of them are of interest to become familiar with.
According to one of the versions venture, i.e. innovative initiative, adventurous, entrepreneurship emerged in XV century - during the Age of Discovery. In those far times in Europe there was a well-known prince of Portugal, Henry the Navigator Dom Enrique o Navigator (1394, Porto - 1460, Sagres) – expert in mathematics, physics, geography and other subjects. He financed expeditions for study of the western coast of Africa, but put not his own means, but money of the ecclesiastic knightly Order of Christ headed by him. For these means (and they were collected on the basis of contributions of participants) the prince established an observatory, a nautical school that at scientific level they developed a type of caravels for voyages round the world.
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That is scientific and educational developments were taken as a principle of distant voyages, highly educated people and inspirers of risky venturesome adventures financed and managed thereof who aimed at reception of significant profits in case of their successful completition although they risked a lot in case of failures of such projects.
Discovery of Madeira (1418-1419) and the Azores (1427-1431) was one of the results of the given expeditions.
Other opinions concerning history of emergence of venture projects dealt with geographical discoveries again. This time Christopher Columbus was the inspirer of a risky project (L. Christophorus Columbus, It. Cristoforo Colombo, Sp. Cristóbal Colón), world-famous by his discovery of America (1492). Having familiarized himself with scientific works and theoretical viewpoints of leading scientists about a spherical shape of the Earth, he decided to realize the idea of voyage to India. For this purpose he several times submitted "project" to consideration of well-known state bodies of Portugal (Council of mathematicians at court of King João II, the Commission of scientists in the structure of Chamber of Accounts at court of Queen Isabella in Castile, Council of the University of Salamanca). After several years of considerations all theoretical grounds of Ch. Columbus about that that the Earth is round, were rejected and they decided not to finance his idea of voyage to India. However, as a result, a royal family from Castile and Aragón agreed to finance the project. Thanks to their means Ch.
Columbus implemented his plan and the design of long standing [21].
The majority of lands discoveried by two aforementioned seafarers turned into colonies, and a military and political expansion together with an economic one led to an unprecedented enrichment of Portugal and Spain.
Venture entrepreneurship of new times originates in the USA in the mid-1950s of the XXth century. Development of a new kind of business began in Silicon Valley (California) – cradle of modern information and telecommunication technologies. Here for the first time a new alternative funding source of innovation projects at early stages of their development – the venture capital was attracted. "Venture capital" concept emerged owing to an investment manager an American Arthur Rock (Arthur Rock, b. in 1926). He used this term in 1957. This expert of an investment bank company supported an offer of a semiconductors production engineer at "Shokley Semiconductor Laboratories" Eugene Kleiner (1923-2003) to carry out an investment project. Being in search for financial resources, an inventor and innovator Kleiner and his several collegues wrote a letter to an investment manager A. Rock in order to attract the funds of a company where the latter worked, for realization inventors’ idea to manufacture silicon transistors of new type.
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The investment company used to disagree to finance such projects and did not allocate means to introduce in life ideas supported only by inventors’ enthusiasm. In spite of it, an experienced manager A. Rock liked the idea and he showed the letter to a partner, having convinced him to fly together to California for a more detailed study of Kleiner’s offer.
After their meeting it was decided that Rock would set to look for investors to collect US$ 1.5 mln for project financing. The manager addressed to 35 corporate investors, but nobody of them dared to participate in financing of the offered deal, although almost everybody showed interest to his offer.
In those days practice of creation of new firms for the purpose of realization of absolutely new ideas and of financing of projects in embryo was alien to conservative investors. Nobody agreed to allocate means for a theoretical project. It seemed that the undertaking was doomed to fail. However A. Rock and his collegues did not give up the project. A decisive point for foundation of the first venture firm and formation of mechanisms of venture financing of innovative ideas there was an acquaintance of A.
Rock with Sherman Fairchild (1896-1971).
The latter was an inventor and already had experience of creation of new technological companies. It was he who gave the required US$ 1.5 mln to finance the silicon transistor production project. So there emerged the first venture enterprise
"Fairchild Semiconductors" – initiator of all semi-conductor companies of Silicon Valley.
"Intel", "Apple Computer” was created by similar schemes of venture financing.
Rock’s name then became a synonym of success, and it was he who was given priority as for initiation of processes of the venture capital attraction and investment thereof into previously selected highly remunerative projects. A. Rock – the first venture capitalist who thanks to entrepreneurial abilities and business experience was able to choose a really attractive project, to collect means for its realization – the venture capital, and to carry out successfully silicon transistors production project. In a year and a half he returned to venture investors 20 mln of profit.
Thus by means of the syndicated investment mechanisms of venture financing were created. The first institutes of joint investment institutes (ISI) as investment companies were established in Belgium in 1822, and the first investment fund was created in the Great Britain in 1831. However it was in 1924 when a historical development of investment funds started when "mutual fund" ("Massachusetts Investment Trust", the USA) was established. Venture capital funds started to be called this way since 1957, after an expert of an investment bank company A. Rock
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used "venture capital” concept [17; 138]. The first venture capital fund was not set up as an organizationally established fund – it was only investors’ association.
"Traditional" venture capital fund was formed a little later: means from it were directed on development of ideas of new products production and creation of new enterprises to this purpose.
The first “traditional” venture capital fund organizationally established by A. Rock in 1961, made up US$ 5 mln, from which it was, invested only US$ 3 mln. Corporate investors were not interested to put means in obscure financial structures, but nevertheless results of performance of the fund turned out impressing: A. Rock having spent US$ 3 mln, in a short period of time returned to investors almost US$ 90 mln.
Another venture capitalist of the period of venture financing origin – Thomas Perkins (Thomas J. Perkins, b. in. 1932) is well-known too. He made a sufficiently risky deal at about the same time, as A. Rock did. While working in David Packard's company, one of co-owners of world famous nowadays company "Hewlett-Packard", T.
Perkins invented an inexpensive and easy-to-use laser with a gas pumping. All his savings – US$ 10 tsd put away to purchase a house, he invested into a new enterprise.
The product turned out successful: after a short spell T. Perkins was able to sell his firm to "Spectra-Physics" company. Together with Kleiner he fully devoted himself to venture business development.
The well-known venture capitalists of the XXth century - already mentioned A.
Rock and Thomas J. Davis, Jr. ( ) in San Francisco, Frederick R. Adler in New York and Franklin P. Johnson, Jr. ( and Bill Draper (William Henry Draper III) in California.
Distribution of mechanisms of venture financing was hindered by that that it was rather difficult to create new companies because of lack of qualified entrepreneurs and venture managers, absence of a developed venture infrastructure et al. Considering increased requirements to venture capitalists concerning an operational experience in the investment area, interfunctionality of their knowledge in technical sphere, area of business and the law, having intuition and a business image of the successful entrepreneur, there quite few of them and they could not help all inventors to carry out their projects.
A successful example of realization of venture schemes of financing and a rapid growth – "Cisco Systems” company, one of the world leaders of production of network routers and telecommunications facilities. In 1987 Don Valentine at "Sequoia Capital»
acquired for US$ 2.5 mln the holding of stock of "Cisco", and in a year the cost of his shareholding was US$ 3 bln.
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In the USA the venture capital formation was favored by development of new branches of economy, by growth of Americans’ consumer demand for new goods and services connected with development of US economy and increase of citizens’ well- being.
The modern giants of computer business "DEC", "Apple Computer",
"Compaq”,”Sun Microsystems","Microsoft","Lotus","Intel", "AOL", "e-Bay", "Google",
"Yahoo" became those what they are now, thanks to the venture capital. Besides, the venture capital promoted occurrence and development of new branches of industry – personal computers manufacture and biotechnology.
So, the venture financing emerged and brought the first successes in the USA.
Initial venture projects were directed on investment into instrument making enterprises and dealt with: silicon transistor development ("Fairchild Semiconductors" company – initiator of semiconductor companies of Silicon valley, as it has already been mentioned, headed by the venture capitalist Arthur Rock), a laser printer ("Spectra- Physics” company headed by the venture capitalist Tom Perkins), network routers and improvement of the telecommunication facilities (world leader in telecommunication equipment development "Cisco Systems” company, headed by Don Valentine) and other devices which appeared in the USA at support of the venture capital.
Let us summarize the considered material.
Venture entrepreneurship – initiative risk activity, financed owing to attraction of the venture capital and directed on a considerable growth of market values of the invested objects, including by reception, use and commercialization of results of scientific researches and developments, market launch of new competitive technologies, goods and services. The object of venture entrepreneurship is risk (venture) activity during which venture projects and programs are carried out. Subjects of the venture entrepreneurship are subjects-generators of innovative knowledge, venture investors, organizations of a venture innovative infrastructure, venture innovative organizations - recipients of the venture capital, subjects of both state and nongovernmental venture innovative activity regulation, subjects of consumption of venture innovative production.
Venture capital is considered as long-term direct financial investments of share nature that are put as a rule for 3-7 years by venture investors for creation and development of young enterprises having significant potentials of market growth, including due to development and introduction of objects of intellectual property.
Venture capital investors – individual persons (business angels) and institutional organizations. Intermediaries between venture investors and companies that need
