Does Venture Capital Spur Entrepreneurship?

A new paper by Steven Kreft and Russell Sobel, “Public Policy, Entrepreneurship, and Economic Freedom”(Cato Journal, Fall 2005), examines the causal relationship between venture capital (VC) and entrepreneurship. Do increases in venture funding lead to increases in entrepreneurial activity, or does VC flow to areas in which entrepreneurship is already taking place? Kreft and Sobel apply Granger causality testing to state-level panel data from 1992 to 2001 and conclude that VC follows, rather than leads, entrepreneurial activity.

I’m largely in agreement with the second part of their paper, showing that economic freedom (measured by a version of the Gwartney et al. index) is the primary determinant of state-level entrepreneurship. I have reservations about the main part, however. First, knowing the direction of Granger causality doesn’t necessarily tell us much about (what Roger Garrison calls) “Webster-causality.” Is there a reasonable explanation for the finding? One interpretation suggested by Kreft and Sobel is that VC is more mobile than labor, so the binding constraint on entrepreneurial is the availability of human, rather than financial, capital. But VC is heavily concentrated geographically (in the US, primarily on the East and West coasts), as isinnovation more generally, and it’s not clear that VC can flow freely to those areas that need it. Location matters, for obvious Hayekian and other reasons. Second, state-level measures of entrepreneurship and VC (and, for that matter, economic freedom) miss the within-state variation in entrepreneurship and VC, both of which are heavily concentrated in urban, rather than rural areas.

Third, the results contradict those in Samuel Kortum and Josh Lerner’s influential paper on the causal relationship between VC and innovation (“Assessing the Contribution of Venture Capital to Innovation,” Rand Journal of Economics, Winter 2000). Kortum and Lerner use a 1979 law allowing pension plans to invest in venture funds as an instrument for VC and find a significant effect of VC on patent rates. I find their instrumental-variables approach more convincing than Kreft and Sobel’s Granger causality test.

Tahir Masood
11K-3043

Venture Capital and Entrepreneurship by Jahanzaib (11K-3031)

Venture Capital and Entrepreneurship

         Dear readers, in my course of second semester “Academic Writing” my instructor provided me topic of "venture capital/Entrepreneurship". After reading some success stories related to “venture capital/Entrepreneurship” I rested on one story which make up my mind quite enhanced. I found out that how social vision secured venture capital. Helping man kind in the process of one’s business can take to the greater success.  Loyalty with the work is also one of core asset of one’s success. Hope this story settled our path that honesty, hard working and honesty with human kind can make you winner in your business.

 

Before move into the  success story we need to know about Venture Capitalism and Entrepreneurship.

Venture Capital:

“Capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.”

Funds flowing into a company, generally during pre-IPO process, in the form of an investment rather than a loan. Controlled by an individual or small group known as venture capitalists, these investments require a high rate of return and are secured by a substantial ownership position in the business.

Entrepreneurship:

The concept of entrepreneurship has a wide range of meanings. On the one extreme an entrepreneur is a person of very high aptitude who pioneers change, possessing characteristics found in only a very small fraction of the population. On the other extreme of definitions, anyone who wants to work for himself or herself is considered to be an entrepreneur.

The word entrepreneur originates from the French word, entreprendre, which means "to undertake." In a business context, it means to start a business. The Merriam-Webster Dictionary presents the definition of an entrepreneur as one who organizes, manages, and assumes the risks of a business or enterprise.

Success Story:

Fashion-forward friends Neil Blumenthal, David Gilboa, Andrew Hunt and Jeffrey Raider aren't your bargain-basement eyewear types. The four University of Pennsylvania Wharton School of business alumni always preferred designer frames and lenses that ran about $500 per pair--a fact they lamented.

"Most glasses are marked up between 10 and 20 times what they cost to manufacture, and that just didn't make any sense to us," Blumenthal says. So they set out to refocus the industry.

The four started New York-based Company Warby Parker (named for literary iconoclast Jack Kerouac's characters Zagg Parker and Warby Pepper) and set out to design, manufacture and distribute high-quality eyeglasses that would compete with those of major designers, with a retail price of only $95.

The former director of the New York nonprofit Vision Spring, Blumenthal had spent five years giving away glasses to impoverished people. Those industry contacts not only helped him line up manufacturing and distribution resources, but that philanthropic focus also led the partners to adopt a one-for-one donation model: For every pair of eyeglasses sold, one pair would be donated to someone in need.

Today, Warby Parker offers 50 upscale eyeglass and sunglass designs, plus one monocle design. The challenge over the past year has been keeping product in stock, according to Blumenthal. Editorial coverage in Vogue, Vanity Fair and GQ has helped orders to skyrocket, Gilboa says, as has word-of-mouth. In fact, more than 50 percent of new orders come through referrals.

But the team has resisted raising funding beyond its initial efforts from a variety of high-powered angel investors, including Joel Horowitz, former CEO of Tommy Hilfiger; Ashton Kutcher; Lady Gaga manager Troy Carter; and Ari Emanuel, CEO of talent agency William Morris Endeavor. Ironically, the more Warby Parker turned down venture interest, the more it was pursued, Gilboa says.

At the same time, Lee Fixel, managing director of New York VC firm Tiger Global Management, heard friends raving about Warby Parker. He reached out through his contacts and was impressed by Gilboa and Blumenthal. "They had developed great products and figured out new and cost-efficient ways to build and market them," Fixel says. "This is a large industry that has been starved for innovation."

In turn, the Warby Parker team was impressed with Tiger Global's experience with e-commerce companies. Tiger Global led Warby Parker's $12 million Series a funding round, which closed in September.

Gilboa says the money will be used to build out the company's technology, including enhancing the buying experience for customers. Investment will also be made in the supply chain, in a move to reduce delivery times and ensure that inventory keeps up with demand. The firm is working on forming "deep partnerships" with suppliers and has reduced the typical turnaround time for a new frame order from 150 days to half that, with ambitions to move even faster. Warby Parker is also working to ensure that suppliers have dedicated production facilities to meet the growing order volume.

Meanwhile, the company's philanthropic commitments remain strong:

It recently became a certified B Corporation and purports to be one of the few carbon-neutral eye wear brands in the world. "It was important to the four of us," Blumenthal says, "that if we were going to dedicate our life savings and our time to building an organization, we wanted to have a positive impact."

I hope you found this story an interesting one, provide your feedback.

Entrepreneurship

Entrepreneurship is defined as the process of making money, earning profits and increasing the wealth while posing characteristics such as risk taking, management, leadership and innovation. The term Entrepreneurship is a complicated term and gives various meaning depending on the situation. Nevertheless there are certain characteristics of Entrepreneurs differentiate them and those characteristics are explained below.

§  Entrepreneurship vs leadership-

Entrepreneurs need certain level of leadership skills to direct their employees to achieve goals and objectives to make money. But not all leaders are considered as Entrepreneurs. As an example. Mahathma Gandhi is a leader but not an Entrepreneur. His leadership can be seen as benevolent leadership which aimed at directing the society to make well-being of the society. On the other hand the aim of leadership practiced by Entrepreneurs is to make wealth for themselves.

§  Entrepreneurship vs management-

Entrepreneurs need managerial skills to run their business and make sure they create incremental wealth for themselves. On the other hand not all managers are Entrepreneurs. There are managers who manage businesses of others as employees of Entrepreneurs.

§  Entrepreneurs vs innovators-

Entrepreneurs need to have innovating skills to identify market opportunities and find out a way to make money out of them. They need to be innovative to come up with solutions for problems in the market to make profits. This is called Entrepreneurial innovation. On the other hand, not all innovators can be called Entrepreneurs. As an example Thomas Alva Edison is the greatest innovator of the 20th century who invented the electric bulb and his innovations were purely based on scientific motives. He did not have the motive of profit/making money and therefore he cannot be called as an Entrepreneur.

§  Entrepreneurship vs Risk Taking-

Entrepreneurs need to accept risk to exploit market opportunities to make money. They need to try different tactics which carries a risk component in it. But point to note is  that Entrepreneurs always accept calculated risk which is directly linked/pegged to the return they receive. Entrepreneurs are based on fundamental of “Higher the risk higher the return” and vice versa. On the other hand not all risk taker are Entrepreneurs. As an example, the biggest risk takers are gamblers but the risk they accept is not calculable and not directly pegged to the return they earn. In other words gambles do not make conscious decision about risk and accept large risks. The risk accepted by Entrepreneurs can be mitigated and absorbed by the Entrepreneur. (As opposed to gamblers, Entrepreneurs make conscious decision on risk where they know the limit of risk that they can absorb)

Venture Capital

What is venture capital?

Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalise a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business . Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner.

What kind of businesses are attractive to venture capitalists?

Venture capitalist prefer to invest in "entrepreneurial businesses". This does not necessarily mean small or new businesses. Rather, it is more about the investment's aspirations and potential for growth, rather than by current size. Such businesses are aiming to grow rapidly to a significant size. As a rule of thumb, unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a venture capital firm. Venture capital investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality.

For how long do venture capitalists invest in a business?

Venture capital firms usually look to retain their investment for between three and seven years or more. The term of the investment is often linked to the growth profile of the business. Investments in more mature businesses, where the business performance can be improved quicker and easier, are often sold sooner than 

investments in early-stage or technology companies where it takes time to develop the business model.

Where do venture capital firms obtain their money?

Just as management teams compete for finance, so do venture capital firms. They raise their funds from several sources. To obtain their funds, venture capital firms have to demonstrate a good track record and the prospect of producing returns greater than can be achieved through fixed interest or quoted equity investments. Most venture capital firms raise their funds for investment from external sources, mainly institutional investors, such as pension funds and insurance companies.

Venture capital firms' investment preferences may be affected by the source of their funds. Many funds raised from external sources are structured as Limited Partnerships and usually have a fixed life of 10 years. Within this period the funds invest the money committed to them and by the end of the 10 years they will have had to return the investors' original money, plus any additional returns made. This generally requires the investments to be sold, or to be in the form of quoted shares, before the end of the fund.

Venture Capital Trusts (VCT's) are quoted vehicles that aim to encourage investment in smaller unlisted (unquoted and AIM quoted companies) companies by offering private investors tax incentives in return for a five-year investment commitment.

What is involved in the investment process?

The investment process, from reviewing the business plan to actually investing in a proposition, can take a venture capitalist anything from one month to one year but typically it takes between 3 and 6 months. There are always exceptions to the rule and deals can be done in extremely short time frames. Much depends on the quality of information provided and made available.

The key stage of the investment process is the initial evaluation of a business plan. Most approaches to venture capitalists are rejected at this stage. In considering the business plan, the venture capitalist will consider several principal aspects:

• Is the product or service commercially viable? 
• Does the company have potential for sustained growth? 
• Does management have the ability to exploit this potential and control the company through the growth phases? 
• Does the possible reward justify the risk? 
• Does the potential financial return on the investment meet their investment criteria?

SUCCESS STORY

Najam Kidwai, is a young and vibrant personality and also a very successful businessman and entrepreneur. He is currently raising an early stage technology venture capital fund in Pakistan, called CleverThinking Ventures, which will be a $20M fund focused on making early stage investments in the enterprise software, medical devices, networking and wireless technologies.

Previously he has held a variety of roles such as CEO, VP, Director & General Manager with a sales focus and has built and launched a number of UK & US based technology companies in Europe and South East Asia. Najam has extensive experience in emerging technologies, specifically, wireless, CRM, Outsourcing iTV, enterprise software and natural-language.

Najam has raised over $55M in VC funds to date and has built and sold two technology/consulting companies for millions of dollars.

Najam was also heavily involved in the development of the first online funds supermarket of -www.egg.com (most successful online bank in the world)

Previously (1999 – 2002), a co-founder of AtomicTangerine (a Venture Consultancy and SRI International spin-off), Najam Kidwai led AtomicTangerine’s Commercialization practice and was responsible for taking the intellectual property from partner labs (SRI, Sarnoff, KRDL and alliances) and promising new business opportunities resulting in licensing the technology or creating new ventures to capitalize on the IP created. 

Najam Kidwai has been involved with many award-winning online businesses such as ESI (E*Trade UK) and Egg. In 2000/1, Najam Kidwai was instrumental in founding and building AtomicTangerine’s European operations, revenue ($10,000,000+ in UK).
As of December 2001, AtomicTangerine was acquired by RedSiren Technologies (www.redsiren.com). In June 2001, Najam Kidwai was responsible for facilitating and structuring the acquisition by BSG PLC of AtomicTangerine’s Experience Design Business, which he co-founded 

Najam Kidwai has a BSc(Hons) in Technology Management, an MSc in Business Innovation and is 34 years old. Najam Kidwai is a frequent speaker on technology issues and has presented at many global technology and venture capital conferences.

Najam Kidwai currently sits on the boards, as an advisor to www.primetext.co.uk, www.rockingfrog.com,www.ambientdevices.com,www.chicago.com and Epigraph Inc. Najam Kidwai is a member of the Institute of Directors, the British Computer Society and the Electronic Commerce Association.