Determinants of venture capital’s success on entrepreneurial firm performance 1. Venture capital syndication

Syndication is one of the highlight features of venture capital financing when at least two venture capitalists cooperate in financing a given entrepreneurial firm, especially when the capital needed is quite modest compared to that of each separate venture capitalist’s contribution. There has been a continuing debate on which is more prominent in explaining motives for venture capital, the selection or the value-added hypothesis. The selection hypothesis supports the idea that two or more venture capitalists participating in choosing projects improves the effectiveness of the screening process when one partner can learn from the others’ evaluation (Lerner, 1994). The value-added hypothesis, on the other hand, is justified by a study of Brander et al. (2002) who conducted research on the removal of 584 Canadian venture capitalists from startups. The study showed that on average, the syndicated venture investments had higher rates of return than those in standalone investments. These rates are the results of venture capitalists’ likelihood to engage in managerial activities of an entrepreneur to enhance investment performance, thus, supporting the value-added hypothesis. Likewise, Tian (2011a) argued that syndicate-backed entrepreneurial firms can enhance both product and financial market value through support from various venture capitalists. Regarding the product market value, syndicated venture capitalists have a broad range of skills, industry expertise, information advantages, and networks. Therefore, entrepreneurs can benefit from one venture capitalist’s network to employ staff, maintain relationships with suppliers and customers while taking another venture capitalist’s advantages of fundraising and obtaining sufficient financial resources. Consequently, venture capital syndicates can intensify innovation and operating performance of entrepreneurial firms. According to Tian (2011a), venture capital syndicates can bridge the information gap by guaranteeing and conveying favorable information about entrepreneurs to the public. Hence, syndicate-backed entrepreneurs can achieve higher exit outcome via lower underpricing and higher market stock return.

1.3.2. Venture capital stage financing

Venture capitalists can allocate the capital under many financing rounds as a mechanism to intervene in entrepreneurial firm performance. Existing literature illustrates three main motives for venture capital staging, monitoring, preventing hold-up problem and learning opportunities. The underlying view behind these three motives is the ability to mitigate the agency problem. By setting targets for each financing round, venture capitalists can monitor entrepreneurs following these targets, reduce investment amount in any stage or even abandon those firms, which do not fulfill the stage targets (Kaplan and Stromberg, 2003: Tian, 2011b). This not only prevents entrepreneurs from overinvesting capital, originally generated

from agency conflicts between managers and investors, but also avoids entrepreneurs from leaving firms for better careers as seen in the hold-up problem. Additionally, what venture capitalists learn from the investees through each stage of capital infusion will influence the level of commitment to entrepreneurs.

Tian (2011b) studied 27,460 entrepreneurial firms in the US from 1980 to 2016 and found evidence that supports the monitoring hypothesis through the causes and consequences of venture capital staging.

Accordingly, venture capitalists that are located far away from entrepreneurial firms experience higher numbers of financing stages, smaller amounts of capital invested as well as shorter duration between each round. This is aligned with the monitoring hypothesis, caused by increased geographic distance. Venture capitalists of this nature need to keep investees under stricter discipline. Subsequently, according to Tian (2011b) the number of venture capital stages also positively affects an entrepreneurial firm’s performance regarding the probability to go public, operating performance, and survival in the post-IPO period.

1.3.3. Governmental or independent or bank-affiliated venture capital

Previous literature on governmental venture capital (GVC, hereafter) argues that GVC entrepreneurial firms perform worse than those of independent venture capital (IVC). GVC is determined by regulators; therefore, venture capitalists may have to deal with more political pressure than IVC. GVC pursues politically related and non-financial goals such as social welfare maximization whose benefits are not substantial enough to offset costs generated. According to Cumming et al. (2017), the limitations of GVC compared with IVC are covenants, decision-making process or compensation plans, which are highly dependent on regulators and may be constant across managers, funds, operation, and performance. These issues may even increase the possibility for agency conflict between political forces in _GVC and managers of VC-backed firms regarding appropriate manager compensation. Cumming et al. (2017) also suggest the solution for the problem of GVC is IVC-GVC syndicated partnerships when independent venture capitalists can join in and mitigate the agency problem called by political pressure or inefficient compensation terms. In exchange, GVC can give entrepreneurial firms more opportunities to access government contacts that widen a firm’s network to government-related suppliers or customers and circumvent the political risks such as regulatory hurdles in business plan approvals.

Another type of venture capital worth mentioning is an affiliated VC firm. Different from an independent VC in which a close-end fund is established and provides capital from investors (normally institutional investors called limited partners), the affiliated VC firms refer to those, which are subsidies of larger firms, parent banks or insurance companies. While the independent VC seeks investment for corresponding investment return, the purpose of affiliated VC is to also fulfill long-term strategic interests of an affiliated company. Therefore, affiliated VC tends to focus more on finding potential entrepreneurs who are complementary to the parent firms’ activities than on raising capital, which can be easily accessed from a large pool of affiliates (Hellmann et al., 2007). Andrieu and Groh (2012) explore how the affiliation of VC influences entrepreneurial firms compared to those financed by independent VC. The authors indicated that independent VC provides better support for entrepreneurs regarding business and operation strategies and monitoring and management, while bank-affiliated VC is suitable for entrepreneurs who are seeking funds for an expansion stage. This is because of a bank-affiliated VC’s advantage of available capital and the ability to discard any moral hazard raised from outside investors.

1.3.4. Public policy and institutional factors

The study of Lerner (2009)- one of the most comprehensive studies on public policy, venture capital, and entrepreneurships tries to explain why, what, and how public efforts are implemented to boost the entrepreneurships and venture capital. The main purpose for public policy focused on entrepreneurships

72 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA and venture capital are to encourage investments that benefit both individuals and the society as a whole and to provide entrepreneurs with legitimacy (stamp of approval) to overcome capital constraints (Lerner 2009). _While knowledge spillovers hinder venture capital and entrepreneurs from investing in innovation due to fewer benefits compared to society. Information asymmetries also create obstacles for raising capital from external providers like banks. Hence, the government improves entrepreneurial climate and venture capital market attractiveness in order to enhance investment and overcome financial constraints.

Regarding entrepreneurial climate, the first focus of public policy is improving the legal system to boost entrepreneurial activities, such as well-defined legal frameworks and enforcement on complex contracts between venture capital and entrepreneurial firms. An example for such rules in the US is the allocation of control of entrepreneurial firms depending on how the investment performs and correspondingly, the issuance of convertible securities for investors. Lerner (2009) estimated that those venture capital funds active in the US legal system can experience 19% higher return than other typical funds. The second focus is how public policy creates cutting-edge technologies by commercializing technologies invented by universities or academic-based institutions. The final and more common focus is the tax policy for capital gain tax. Decreasing capital gain tax, increasing the difference between tax rates on capital gains and ordinary income, or offering special tax rates for investments in entrepreneurial firms are all underlying policies that boost entrepreneurs’ demand on capital, which in turn increases venture fundraising. Lerner (2009) gives outstanding examples of how the tax policy motivates entrepreneurial activities. In the US, venture capital operating under limited partnerships can exclude 50 percent of any capital gains from small businesses such as entrepreneurs, which means that the marginal tax rate is 14 percent compared with 28 percent in normal tax rate. Similarly, in the UK, the tax policy allows a decrease from 40 % to 10% of the effective tax rate for disposal of assets for those firms operating for two years or less, which boosts entrepreneurial activities (Lerner, 2009).

For the venture capital market, the public policy aims at increasing the attractiveness of this market by allowing true limited partnerships. Such limited partnerships attempt to limit the level of risks for investors, improve the local market aligned with IPO opportunities and utilize overseas labor force via pools of expatriates who can serve as angle investors, mentors, venture capitalists or consultants for policy markers (Lerner, 2009).

For institutional factors, Cumming and Johan (2013) identified various factors influencing the development of the venture capital market. For example, the legal origin which follows the common law tradition as in La Porta et al. (1997) usually provides better protection for private properties and offer more flexibility to new developments and governance; therefore, that legal origin is more suitable for venture capital development compared with those in civil law. Other levels of institutional quality according to La Porta et al. (1997), such as the rule of law, the efficiency of legal environments or the level of corruption, risk of expropriation or contract modification offer a better environment for venture capital. For example, higher legal quality offers well-defined contracts that are easily enforced faster implemented corporate governance in venture capital (Cumming and Johan, 2013). Likewise, other studies, such as Bruton et al.

(2009), explore how institutional differences influence the development of entrepreneurial ventures. The authors explored the strong impacts of the institutions with concentrated economic power on how venture capital chooses funded firms, how difficult it is for venture capital to monitor entrepreneurs compared with those in more diverse ownership structures, and how strategic sales of funds become the dominant exit strategy of venture capital.

1.4. Research on the relationship between venture capital and entrepreneurs in Vietnam and suggestion for future