The expectations and realizations of non-financial value-added in portfolio companies

Abstract

THE EXPECTATIONS AND REALIZATIONS OF NON-FINANCIAL VALUE-ADDED IN PORTFOLIO COMPANIES

RESEARCH OBJECTIVES The purpose of the study is to examine how companies and entrepreneurs that have recently been funded by venture capital investors see the contribution of non-financial value-added provided by investors. This study shows what expectations venture-backed companies have towards value-added before the investments, how they have perceived the provided value-added and what kind of issues they consider to be important regarding the future investor and investee relationship. These findings derived from the entrepreneur perspective are then represented as common guidelines, best practices and detailed advice of how venture capital investors could increase the value of their portfolio companies via the desired type and degree of investor involvement.

DATA AND METHODOLOGY Data is acquired from in-depth interviews conducted within the entrepreneurs and company executives of Finnish venture-backed companies that had recently received funding from Finnish venture capital and private equity investors. Total number of in-depth interviews conducted in this study is 12.

RESEARCH RESULTS Findings of this study show that entrepreneurs in general have lack of expectations regarding the value-added before the investment takes place. Regarding the perceptions entrepreneurs emphasize the role of board work, professionalism and the financial guidance that investors have been able to provide for the companies. In addition most of the interviewees consider to have benefited from the increased credibility that investors have brought in. The results show compared to previous literature that entrepreneurs tend to value and be more satisfied in strategic input and professionalism of the investors than their overseas colleagues. Regarding how the investors could better contribute their portfolio companies, investors should express their future targets regarding the possible exit path, timing and valuation more openly and as early as possible. They should also express their likely non-financial contribution prior the investment. In addition venture capital directors should increase the communication between their own portfolio in order to share the best practices other companies have successfully executed as well as enhance their involvement and emphasis towards financial issues throughout the investment period.