The Function of Venture Capitalists Investing in New Technology Based Firms

Abstract

In this paper, I review the existing literature in order to elucidate the investment processes of venture capitalists from the pre-investment stage to the post-investment stage, with a focus on venture capitalists who invest in new technology based firms. Additionally, I discuss factors associated with growth stages and factors associated with technology separately, with regard to the function of these venture capitalists. With respect to investment processes of venture capitalists, Manigart et at al. claimed that the post-investment activities of venture capitalists will influence the rate of required return in pre-investment valuations. Bygrave and Timmons discussed the function of venture capitalists that revolves around the growth stages, and stated that venture capitalists that invest in early stage ventures must have, in addition to the astute ability to select promising portfolio firms, the ability to support and add value to the portfolio firms after investment. With respect to venture capitalists that invest in new technology based firms, Pfirrmann et al identified 3 types of risk; i.e. business risk, innovation risks and financial risks. Baum and Silverman maintain that venture capitalists investing in new technology based firms are likely to consistently combine both scouting for excellent technology as well as being able to coach by imparting management skills. With the rise of the developing nations, and the escalation of global economic competition, the commercialization and industrialization of new technologies such as biotechnology and nanotechnology is promising for the revitalization of the economies of Japan and other industrialized nations. The creation of ventures based on these new technologies is one of the important options for commercialization and industrialization, and it is desirable that during this creation process, venture capitalists not simply parasite high-tech entrepreneurs, but instead provide value to them and exercise originality.