The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL

The INFLUENCE OF FINANCIAL MARKETS ON INVESTMENT IN VENTURE CAPITAL
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The INFLUENCE OF FINANCIAL MARKETS ON the INVESTMENT
IN VENTURE CAPITAL
DISSERTATION: 2ND
YEAR MASTER EMPIRICAL FINANCE AND
ACCOUNTING
Presented by SECK BABACAR
Supervised by PASCAL DUMONTIER
2012║2013

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SUMMARY:
I-LITERATURE REVIEW: …………………………………………………………………...5
II- PRESENTATION OF VENTURE CAPITAL AND EXIT MODALITIES................ 6
II-1- Presentation of Private equity and its various categories...............................................6
II-2: Cycle of investment and exit in the financial markets.................................................. 8
II-2-1: The Investment Cycle................................................................................................ 8
II-2-2: Exit via IPO.................................................................................................................... 11
III Empirical analysis of the relationship between financial markets and American investment in
venture capital...................................................................................................................... 13
III-1: Data Presentation............................................................................................................. 13
III-2 Evolution of the number of exit of U.S. venture capital companies in financial markets 15
III-3 Amounts invested by venture capital................................................................................ 20
A- The volume of the investments of the American venture capital................................. 20
B- The European capital investment..................................................................................23
IV- The simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S
and Europe……………………………………………………………………………….24
V- How to explain the differences in investment behavior in the European and U.S. markets?
………………………………………………………………………………………………...26
V-1: Institutional and contractual characteristics of the European Venture Capital……….. 26
V- 2 -Behavior guided by a "limited" rationality…………………………………………... 32
VI- The volume of French venture capital investments............................................................ 33
Conclusion............................................................................................................................... 36

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“Venture capital is now an island of tranquillity in an ocean of stock-exchange
disturbances",
Christophe Chausson, president of Chausson Finance

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ABSTRACT:
This paper examines the influence of financial markets on the investment in venture
capital. It highlights the evolution of the number of exit of U.S. venture capital companies
in financial markets as well as the European one. Moreover it sheds the light the
simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S
and Europe. The study focuses on a range of data on US and European venture capital
firms covering the period of 1984 to the first quarter of 2012. It relies on the
VentureXpert private equity and venture capital performance database, maintained by
Thomson Financial data for American Venture Capital markets, and Chausson finance
indicator for French venture capital market. It also considers developments in the venture
capital markets in Europe and the United States. Indeed our analysis shows that
favourable anticipations of Initial public offerings, synonyms for significant capital gains
for venture capitalists, are key incentives for the venture capital market. However, when
considering the recent investment behavior of European venture capitalists, the
relationship between financial markets and venture capital activity is much less clear: the
invested amounts seem to be significantly and permanently disconnected from the
evolution of financial markets.
Keywords: Venture Capital; Private equity; IPO; M&A; Exit; financial market; Cycle;
profitability, performance.

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INTRODUCTION:
Capital investment or private equity plays a key role in the development of the economic activity.
For companies that do not involve public offering, it is a substantial support to finance their
development for their entire cycle. Thus it contributes dramatically to the promotion of
entrepreneurship through the creation of innovative companies, to the renewal of the economic
fabric and on the rebound to the growth.
Indeed, the private equity business lies substantially in equity stake in unlisted SME (Small and
Medium-Sized Enterprise). This acquisition of holdings can be made especially in a minority or
majority way in order to finance them during all their life cycle both in start-up phase, growth,
transmission and in a situation of recovery.
It carries through four segments that are venture capital in the start-up phase of the business;
capital development in order to support the growth of the company; buyout or LBO finally
distressed investment to help unprofitable companies improve their operations to attain
profitability.
Indeed, the venture capital which is the object of our study can be considered as a source
of funds from professional investors bound for young innovative companies or "start-up", in a
strong innovative capacity and which has a fast capacity of growth.
Venture capital so allows to substantially improve the financing of "start-up" and allows
these companies to grow, but the time horizon of the investment is limited between three and ten
years at most.
Indeed, understanding the cycle of venture capital is essential for understanding the influence of
financial markets on its business. « To understand the venture capital industry, one must
understand the whole venture cycle. The venture capital cycle starts with raising a venture fund;
proceeds through the investment in, monitoring of, and adding value to firms; continues as the
renews itself with the venture capitalist raising additional funds » (Gompers et Lerner, 2001).
According to these two authors, the activity of venture capital is analyzed as a cycle of
investment including three main phases: the first phase corresponds to the fund raising, then the
phase of investment strictly speaking and ultimately the exit which is characterized by an initial

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public offering ( IPO), or negotiated within the framework of a merger or acquisition procedure.
This last phase is therefore a very important step in assessing the value created by the company of
venture capital which value would allow repaying the amounts advanced by institutional
investors during the phase of fundraising and the appreciation of the relevance of procedures for
selecting and monitoring. Then another equally important element assessed by the exit phase is
the end of the investment cycle.
Indeed “The venture capital market is self-sustaining partially. The successes of today
foreshadow the future volume of financial resources. The favourable reception of start-ups, either
by entering on the financial market or by the repurchase by a large company, directs new funds
to this activity and leads investors to invest capital in new projects” Dixit Dubocage 2004. In
other words, a new fundraising for implementing a new investment cycle will be caused by the
performances realized in t.
However, how financial markets influence the number of operations and the value of funds raised
by venture capital firms? And what explain the differences observed in investment behavior in
the European and U.S. markets?
The analysis to bring an answer to these questions starts by introducing theoretical and empirical
arguments of the literature that underpin the existence of a relationship between the situation on
the financial markets and investments in venture capital. Section 2 introduces the functioning of
venture capital and its different modalities of exit. Section 3 presents the empirical analysis of the
relationship between financial markets and American investment in venture capital. It is followed
by the simultaneous evolutions of fund raising of venture capital and stock indexes in the U.S and
Europe in section IV. Then we try to explain the differences in investment behavior in the
European and U.S. markets in section V. Finally section VI contains the analysis of the volume of
French venture capital investments.
I-LITERATURE REVIEW:
The link between financial market and the investment in venture capital has been examined by a
large literature. The primary insight from theoretical work is the importance of exit by the
venture capital fund.
With respect to the literature the most attractive option to liquidate a fund is through an IPO. The
empirical research led by Venture Economics in 1988 confirms this thesis and shows that

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US$1.00 invested in a firm that eventually goes public yields a 195% average return for a 4.2-
year average holding period. In terms of an acquired firm the same investment yields solely on
average an estimated return of 40% over a 3.7-year average holding period.
As far as are concerned Black and Gilson (1997), the first step in understanding the link between
the stock market and the venture capital market involves the importance of exit by the venture
capital fund from its investments.
They also argue that, an exit mechanism allows the managers the possibility to have a call option
on control of the firm, since venture capitalists relinquish control at the time of the IPO. This
finding is also consistent to the one of Jeng and Wells (2000) who support by using a panel data
set of 15 countries that an increased volume of IPOs should have a positive effect on both the
demand and supply of venture capital funds. For them, “On the demand side, the existence of an
exit mechanism gives entrepreneurs an additional incentive to start a company. On the supply
side, the effect is essentially the same; large investors are more willing to supply funds to venture
capital firms if they feel that they can later recoup their investment”1
.
The literature shed also the light to the fact that venture capital can be impacted by the economic
conditions of the country. The findings of Acs and Audretsch (1994) show that macroeconomic
fluctuations influence startup activity in general.
Furthermore, in terms of driving forces of Venture Capital Investments Schertler (2003) by using
dynamic panel estimators with stock market capitalization as a proxy for the liquidity of stock
markets finds that the liquidity of stock markets has a significant positive impact on early stage
investments. In the same vein Black and Gilson argue that a liquid stock market offers venture
capitalists and entrepreneurs who want to start high-technology enterprises the opportunity to
enter into an implicit contract over control.
II- PRESENTATION OF VENTURE CAPITAL
AND EXIT MODALITIES:
II-1- Presentation of Private equity and its various categories:
► Capital-investissement in the broad sense:
1
Cf. The determinants of venture capital funding: evidence across countries (Journal of Corporate Finance 6 _2000. 241–289)

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During their life cycle, firms face many funding opportunities which may occur during the
early stages of their life cycle. It’s in this context that comes into play the venture capital
which is one element of private equity. By definition, Private equity consists of investors and
funds that make investments directly into private companies or conduct buyouts of public
companies that result in a delisting of public equity. Capital for private equity is raised from
retail and institutional investors, and can be used to fund new technologies, expand working
capital within an owned company, make acquisitions, or to strengthen a balance sheet. The
private equity business is divided into three major areas: venture capital whose mission is to
provide funding for the creation and development of new businesses, especially in new
technologies, growth or expansion capital that accompany business growth and finally
turnaround capital which contributes to the financing of firms already established.
► Venture capital strictly speaking :
The venture capital which is the object of our study is used within the framework of financing
of young innovative companies. These companies are mainly specialized in new technologies
and often in the early stages of their development for the major part.
Thus, it becomes necessary to mobilize significant resources in the context of financing the
expansion of their products, or for some of them to finance their growth, that traditional
financial intermediation cannot satisfy.
Even though they are considered as companies which indicators reveal that they have a high
growth potential, it remains that they pose a significant risk to potential creditors with respect
to their assets unable to provide guarantees necessary in order to borrow money because
being generally intangible. Hence the relevance to appeal to venture capital is more than
essential to overcome this odd. Consequently, the activity of venture capital can be
considered as a form of financial intermediation because encompassing its essential qualities.
In the same vein, three main actors between whom circulates a certain number of flows
develop this kind of "intermediation".
Indeed, the first type of actor which are funds have for main role the mobilization of the
promises of contributions and constitute in the same way the place of deposits of called-up
capital before their use by corporate managers of venture capital, which companies are the
eponymous of the actors of the second type and administer these funds in order to finance
selected businesses. The latter represent the third actor.

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However, even though they are often minority shareholders show a strong involvement in the
corporate policy. Indeed, the study of this type of financing brings out three distinctive
elements that are the seed capital and as the name suggests, provides funding for research
and development of an initial concept therefore occurs at the beginning of the business start-
up. This fund raising aims at proving the feasibility of the project. Then comes the creative
capital which is the supporting role of the venture capital and represent the financing of the
development of the product. It is the "first round financing"2
.
Finally, we have the first growth phase ("early stage") or phase funding of post boot. In this
case, the company can already justify a finished product.
II-2: Cycle of investment and exit in the financial
markets:
II-2-1: The Investment Cycle:
Private equity3
is analyzed by the doctrine as a cyclic activity (Gompers et Lerner, 2001 ;
Kaplan et Schoar, 2005 ; Ljungqvist et Richardson, 2003 ; Axelson et al. 2007). The analysis
in this prism allows to better understanding the influence of financial markets on the activity
of venture capital (see fig. 1). This cycle has three phases:
2
First round financing is the first investment in a company made by external investors. First round financing typically
follows the startup phase. First round funding or "venture capital" typically follows seed and early stage capital that was used
to build the business' full-time management team, develop the business' first saleable product, and demonstrate that the
business is very likely to be profitable. Source: http://www.businessfinance.com
3
Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly
into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is
raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned
company, make acquisitions, or to strengthen a balance sheet. Source: http://www.investopedia.com

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The first stage: It is the one of the fund raising of the venture capitalists from economic
agents who willing to invest in developing societies which are not listed. The nature of this
investment can be diverse and varied because being able to be spending in R & D, building a
prototype, written a business plan and tutti quanti.
The second stage: this second step is about investing in the strict sense or investment post
creation and development. But in order to attend this phase the project must be economically
viable. In other words firstly the product must be technically feasible and finally there is a
real demand. Therefore, the venture capitalist supports the contribution of funds by
establishing control procedures to minimize the risk of its portfolio as well as conflicts of
interest may arise in the context of the agency relationship between the managers of the
business financed.
The third stage: This phase corresponds to the exit. However, this exit is difficult because of
the absence of trading on a market that can make the sale of shares at any time. So there are
four modalities of exit for investors. The most known is the stock exchange listing. It is

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possible when financial markets are able to absorb smaller companies as in the UK with
l’Alternative Investment Market4
. The second alternative in terms of exit and is also the most
commonly used is the sale to an industrialist. Then the sale to another investor, possibly
through an LBO is the third possibility of exit. And finally, the last alternative for venture
capitalists is to sell its shares to the management team. Empirical findings show that the
presence of a capital market investment well organized and the existence of strong financial
markets through its specialized markets such as NASDAQ5
with the ability to absorb the
IPOs explains the plurality of exit choices.
Indeed, the hierarchy with respect to the privileged way of exit is not accidental, because the
most successful companies use the IPO, those who are less active are sold through a merger
and acquisition, and non productive investments or those which have been failed do not make
an exit. Thus, initial public offerings seem in many respects, to be the "most glamorous"
mode of exit with regard to the investors and the most appreciated because offering more
advantages both from the point of view of the yields and from the point of view of the
reputation (see fig 2).
4
AIM is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses
including early stage, venture capital backed as well as more established companies join AIM seeking access to growth
capital. Source: http://www.londonstockexchange.com
5
A computerized system that facilitates trading and provides price quotations on more than 5,000 of the more actively traded over
the counter stocks. Created in 1971, the Nasdaq was the world's first electronic stock market. Source:
http://www.investopedia.com.

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Figure2: the various types of exit of the private equity (Delage, Horizon Growth, on 2005)
II-2-2: Exit via IPO:
The emergence of new technologies has coexisted with an exceptionally euphoric period on
financial markets leaving in the shadow the other possibilities of exit and allowing the financing
of this “new economy” by the private equity in the middle of the 90s.
The operations of initial public offering are not made without consequence on the private equity.
In fact, these operations are the result of the cyclicality of private equity and more specifically
venture capital. Empirical studies show that the operations of stock exchange listing activities are
highly pro-cyclical. This is due to timing factor which is an essential element for this kind of
activity.

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Thus in the presence of weak financial markets a small number of firms are inclined to go on
public contrary to a financial period when markets are characterised by a high liquidity. In this
situation initial public offerings are very numerous. In other words, the dynamism of the venture
capital is consubstantial with a developed financial market. The more the stock-exchange
valuation is important the more exits via IPO are important for investors.
Moreover, to illustrate our comments we noticed some countries trying to establish a model of
private equity system as the one of the U.S, have failed because of not mature and undeveloped
financial markets: « Other countries have openly envied the U.S venture capital market and have
unsuccessfully sought to replicate it. We offer an explanation for this failure: We argue that a
well developed stock market that permits venture capitalists to exit through an initial public
offering (IPO) is critical to the existence of a vibrant venture capital market » (Black and Gilson
1999). Consistent to prior study we find that the adoption of a positive connection between the
stream to the venture capital and the situation on the financial markets is the best thesis shared
among researchers.
Indeed, from the perspective of demand, entrepreneurs have a propensity to create new
businesses as long as this way of exit exists. In the same vein, the exit via IPO is also worth its
weight in gold on the supply side by the fact that most providers of funds are more likely to
provide capital to Venture Capitalists if they anticipate a significant revaluation by an IPO.
According to the findings of Gompers, the observed market valuations from the moment they are
bullish, show that firms are on a potentially strong growth. This is the traditional approach by
Tobin's Q6
, which depends on the investment firms of the difference between the market price
and the replacement value of their capital. It is the consequence of the acquisition of holdings of
the investors both in listed companies than those that are not on public.
In the same vein, the exit on the financial markets compared to other modalities of exit (see
above) is more profitable for investment funds in venture capital that’s the reason why it is
referred to as being "the royal road "for investment outflows by Schwienbacher (2006).
6
A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the
combined market value of all the companies on the stock market should be about equal to their replacement costs.
The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets:

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Nevertheless, even though the IPO exit is considered as the "royal road" in terms of exit thanks
to its superior performance, the exit by acquisition in some cases could be more efficient
specifically in the case of the sale of the start-up to a holding in which the activity of production
and / or promotion will be better performed. In addition, this exit does not have purely financial
purposes, as it is sometimes used by some investors as a marketing tool for attracting new
investments during the next rounds of financing.
In addition, for the manager of the start-up, IPO confers him some advantages beyond the profit
maximization purely pecuniary permitting to expand the circle of shareholders to change its
structure funding. Especially a very important aspect which brings the exit by IPO is the
improvement of the reputation of the company on the financial and commercial plan, in particular
a contribution of international credibility.
Therefore, the exit on the financial markets (IPO) is inherently flexible and convenient because
providing to the manager-founder some autonomy substantially in terms of management vis-à-vis
of new shareholders as well as an opportunity to increase the financial resources of the company
by exercising potential stock options outside the horizon of Lock-up7
III Empirical analysis of the relationship between
financial markets and American investment in venture
capital
III-1: Data Presentation:
In this empirical study we have used Venture Expert database which is a product currently
marketed by Thomson Financial Data. Indeed, this database is best in search of statistical
information on the venture capital and more broadly on private equity.
This product offers a dichotomous possibility of consultation: the first is made via a standard
computer language by SQL request which gives the possibility to consult all the existing
information in the database questioned. Then, by the web system that we have used in which the
7
A contractual caveat referring to a period of time after a company has initially gone public, usually between 90 to 180
days. During these initial days of trading, company insiders or those holding majority stakes in the company are
forbidden to sell any of their shares. Once the lock-up period ends, most trading restrictions are removed. Source:
http://www.investopedia.com

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consultation takes place naturally in pre-set formats allowing only access to not exhaustive
information.
Being confronted with this handicap for the realization of our study, I decided to establish a direct
correspondence relationship with Thomson Reuters and more specifically with Lauren Herman
who is in charge of corporate venture capital statistical release in order to have more exhaustive
and more recent information to carry out this study. His contribution was very interesting because
the links he sent me was essentially the basis of this work.
Our study focuses on a range of data on US venture capital firms covering the period of 1984 to
the first quarter of 2012. This database highlights the total number of start-ups that have made an
exit on the financial markets (IPO), and the average amount of the repurchases.
In the same way it informs us about the exits by mergers and acquisitions (M&A) both on the
number of realized operations and on their average values (see table).

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III-2 Evolution of the number of exit of U.S. venture
capital companies in financial markets:
At first glance, the analysis brings out two trends corroborating our theoretical observations
mainly inspired by the literature that is, a strong fluctuation from one year to the other giving the
feeling of a cyclical dynamics and the influence of the instability of financial markets.
Indeed, if we analyze the number of exits of the venture capital companies by an initial public
offering between 1984 and 2012 we find an unstable evolution. Good times are coinciding with
the euphoric situations on financial markets especially in times of financial bubbles constitutions
as the Internet bubble of the 90s. Indeed, under our curve, we realize the start of a bull cycle in
the early 90s and is going to experience its peak in 1996 with 276 IPOs. This period coincides

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with the rise of high valuations of technology stocks in the financial markets with a disconnection
of the real value of shares relative to the market value. The IPO of Netscape, one of the most
promising start-up at that time is the obvious example to testify it. In fact it’s the day of Netscape
IPO in August 1995, which the Internet bubble started. Indeed, from the first trading day, the
share of Netscape flies from 28 USD to 75 USD before being assessed at the close to $ 58.25
which represents an increase of 108% and exceed the market capitalization of Delta Airlines on
the day of his baptism of fire in the sphere of "listed companies». Moreover, spurred Netscape,
many start-ups are IPO between 1995 and 2001, with extravagant valuations.
A good indicator of this "fever" is the evolution of trading on the first day.
Since that date the NASDAQ index has continued to raise, while culminated in 1000 points on
the day of Netscape's IPO, it was multiplied by 5 in 5 years and peaked at more than 5000 points
in 2000. Several factors explain this situation:
→ A strong surplus of savings (pensions of the baby boomers)
→ An accommodating monetary policy of the FED (moderate cost of the credit for the investors,
in particular the VCs)
→ Macroeconomic change (opening of the market of the telecom, the emergence of the
competition and the consolidation of the sector, companies are investing in IT)
→ The rapid spread of the Internet persuades the emergence of a "fourth" Industrial revolution.
The bubble burst in April 2000 gave the exits of start-up on financial markets increasingly rare
where the pace of our bearish chart between this period and 2004.
Furthermore as shown by the curve, the year 2007 was also marked by a sharp increase in U.S.
financial markets with the real estate bubble which is the consequence of a relatively large
number of exits of start-up via financial markets.

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Indeed, the bankruptcy of Lehman Brother on September 15th, 2008 impacted the whole global
financial system and by extension the exit of venture capital firms in the market reaching the
lowest levels with no exit recorded for the first and last quarter on the same year.
Source : Personal calculation based on data Venture Expert.
Besides, if we make a comparison for the same period between the exits by IPO and the exits by
mergers and acquisitions we find that the latter is more than a credible alternative for the venture
capitalists. In fact, we realize that the exits by mergers and acquisitions are significantly higher
than those done on financial markets. However, we realize that they evolve in the same way and
in a period of turmoil in financial markets, as in 2008 the venture capital companies prefer exits
by merger or acquisition to the detriment of the financial markets.
In addition as we notice it on the curve of evolution, year 2010 shows that the American venture
capital business has recovered following the dynamism of markets. We observe for the first three
quarters of this year, a significant increase of IPO of about 40 exits or 333% compared to the last
half of 2009. However, despite this trend observed over the two periods, it does not reach the
levels of the year 90s due to the extension of the duration of investment.
Indeed, the exit by initial public offering was on average from 4 to 5 years in the middle of the
90s, while now investment funds in venture capital stay at least 8 years on average before
envisaging an IPO causing a sharp decline of exits in stock exchange. However, this decrease is
Evolution of the number of IPO exit by venture capital companies
0
50
100
150
200
250
300
1984 1986 1988 1990 1992 1994 1996 2005 2007 2009 2011
Periods
Number of exit

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not prohibitive for investment funds in venture capital because the return on investment increases
linearly with the time investment. The most obvious example is the Facebook IPO on May 18th,
2012. This company created with venture capital had to stay nine years before being listed. This
long waiting period of the social networking champion was worth to him a 100 billion USD
valuation while the IPO of Google in 2004 was only 28 billion USD.
Furthermore, the other not financial element, but finding its source in the crisis of 2001, is the
prudent regulations specifically the "Sarbanes-Oxley Act8
". This Act regulates more drastically
the IPOs which is the consequence of the adjustment costs of IPO exit therefore encourages
managers of investment funds to expect that firms being more mature with a return on their
investment that can compensate the high costs of the IPO.
Source : Personal calculation based on data Venture Expert.
In 2010, a survey realized by Deloitte (2010 Global Venture Capital Survey) for the
NVCA, reveals that U.S. investors suffer IPO market and unfavorable tax environment for
8
An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities
by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from
corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early
2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required
an overhaul of regulatory standards. Source: http://www.investopedia.com
Comparison IPO exit and M&A exit of US venture capital
firms
0
50
100
150
200
250
300
350
400
450
500
2004 2005 2006 2007 2008 2009 2010 2011 2012-
1
Period
volume
Total M&A deals
Number of IPO

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business financing. Besides, limited partners are more likely to invest in emerging countries, such
as China, India and Brazil (investment funds consist of managing partners, who are responsible
for managing the funds they entrusted to them by limited partners).
However, despite the slowdown of the quotations, one can observe that the already listed
internet values goes well since 2009.
Source : Powershare Nasdaq Internet Portfolio (Bloomberg : PNQ/US) variations of 1 year.
One can observe, that the birth of social networks (by 2003) has not impacted as significantly the
venture capital market that the development of the Internet, despite a favorable economic
environment. This can be explained by a poor evaluation at that time, the economic potential of
the social web.
It is also necessary to recall that was needed some time for the social networks become more
democratic and that a “sustainable” business model is to develop (still remains an open question).
However, the emergence of "Social Networking" has accelerated dramatically since 2006, as a
reminder: Myspace - LinkedIn 2003 / Facebook - Flikr 2004/2006 Twitter / Zynga - Tumbr -
2007 LivingSocial / Groupon 2008/2009 FourSquare. To date, a lot of its young start-ups knew
only the crisis since 2008.
Another striking fact is that LinkedIn and Renren (Chinese Facebook), or still Pandora, are the
first Web 2.0 start-ups to launch an IPO.

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III-3 Amounts invested by venture capital:
C- The volume of the investments of the
American venture capital:
If we analyze the volume of U.S. venture capital investments between the implementation of this
kind of investment until today we find a big difference between these two periods with respect to
the amounts of funds raised.
Indeed, the curve shows that the venture capital began to take an important place in the financing
of the companies only from the 90s, because it’s from this period that the funds raised are really
starting to grow and far exceeding the volumes observed in the 70s. Indeed, two main reasons can
explain this phenomenon. The first comes from the fact that there is a real contrast between the
levels of economic activity observed between the two periods. The 70s were a period of recession
in the U.S., while the U.S. economic and financial activity was very prosperous towards the 90s.
Indeed, the too accommodating economic policy of the American Federal Reserve combined with
the opening of telecommunications markets has led to a frenzy of investors in technology stocks
which helped the astronomical sums raised to this new economy. Thus, only between 1998 and
2001, investments to technological start-up have been multiplied by five representing more than
USD 150 billion in the fourth quarter of this year, so 40% of the total amount invested all sectors
combined. With the bursting of the Internet bubble, we notice a slowdown in 2001, which has
halved the amount of investment.
This is explained by the fact that investment funds base their investment on the market's ability to
establish a good growth prospects.
But during periods of high market volatility as the case of 2001 crisis, which has decreased the
possibilities of exits but also caused the decline of quotations, the funds are naturally less likely
to invest. This fact was observed between 2002 and 2004, where the activity of venture capital
has been very slow. In 2004, the market experienced a slight increase until the subprime crisis of
2008 as reflected in the above graph. The year 2008 is a year of a sharp decline in the United
States venture capital regarding the amount of capital invested and the number of projects
supported. The volume of venture capital declines from 32 billion in 2007 to USD 27 billion in

22
2008 and USD 18.4 billion in 2009. In the same way at the level of the exits this reduction clearly
felt the effects fundamentally as regards the exits in stock exchange. In 2009, the IPO exits
financed by venture capital are down historic 62% compared to its level in 2007 and represented
only USD 15.2 billion. Other striking fact shown by the crisis of 2008 was the redeployment of
investment by sector. In fact at the end of the crisis, venture capitalists have provided the bulk of
their investments in the sectors of health, communication and environment. Now IT and web
services, medical instrumentation and alternative energy industry become the new darlings of
venture capitalists because inhaling more than 70% of the investments.
Notwithstanding, this sectorial concentration of investments is not made without disastrous
consequence because making more vulnerable the venture capital companies to the cyclic
reversals of the market.
In the same vein, the other important element which justifies the concentration of investments in
technology sectors is due to the fact that the return on investment is faster compared to other
sectors such as biotechnology including breakeven spreads on an a little longer temporal horizon
and remaining associated with high risks.
However, the software industry tops among those that attract the greatest number of equity.
This is explained by the fact that the deployment time of the fundraising is shorter and does not
require a big investment. In addition, there is a lesser risk of failure that seems attractive to risk-
averse investors.
Besides, we also observe in the United States since the subprime crisis a substantial reduction of
the amount invested and therefore leaving in the prospect the financing of about 5000 start-up of
the biotechnology sector.
In addition, as we see in our curve it is only from the second quarter of 2010 that things seem to
take in the right direction thanks mainly to the fact that large U.S. pharmaceutical companies now
use a new model for Research and development and commonly known under "R & D 2.0 model".
The upheaval caused by the new model due to the outsourcing of the research mainly regarding
the early stages of developing treatments made by the "Big Pharmas" encourage young
innovative companies in the sector. The latter compete in ingenuity and in originality in order to
seduce big groups so that they delegate them some of their research activities.
In addition the other influence operated by the collapse of the financial markets of 2008 is that
during the recovery phase in particular in 2010, "clean technology" is the only field of activity

23
which sizes the lion's share of investments, what reminded the most optimistic analysts a possible
birth of "bubble" as the number and volume of business were important.
Indeed, for the first three quarters of 2010, the "cleantech" received USD 3.1 billion or 18% of
total investment against only 9% in 2007. In the same vein, 72% of investments raised by U.S.
venture capital in 2010 are allocated to renewable energies and to biofuls. The reasons which
explain the "rush to clean technologies" are to be watched to the Keynesian stimulus undertaken
by the Obama administration after the crisis, which plan envisaged the creation of a vast modern
"intelligent" network of electricity called “smart grids9
” that took into account the production of
alternative energy.
Also in the same vein of justification of the correlation between financial markets and the
"venture capital", one observed according to the data from Thomson Reuters that between 2005
and 2010 which are both periods of recovering following the last two major crises of Wall Street,
the sectors that whet the appetite of venture capitalists today were in the past.
Indeed, the energy sector before 2005 represented 5 % against a little more than 15 % of the total
amount of the investments in 2010.
In the opposite direction at the same time there is a reduction of nearly 50% of the weight of
investments in telecommunications sector and in information systems. Regarding the software
industry and life sciences, we observed a relative steadiness of the capital raised.
Evolution curve of amounts invested in U.S. venture capital: Source: Venture Expert
9
A smart grid is an electrical grid that uses information and communications technology to gather and act on
information, such as information about the behaviours of suppliers and consumers, in an automated fashion to
improve the efficiency, reliability, economics, and sustainability of the production and distribution of electricity.

24
Moreover, the evolutions curve of French financing start-up follows the same trajectory as the
one observed in US.
D- The European capital investment:
The European capital investment market experienced since the mid 90s significant growth.
The investments made by private equity firms, size traditionally fairly smooth, grew rapidly and
rather regular, except for the peak in 2000. The considered amounts have increased from 7 billion
Euros in 1996 to 50 billion in 2006. The funds raised, more cyclical, have known a much more
chaotic evolution: the peak in 2000 is followed by a period of decline and stagnation until 2004.
The year 2005 has been synonymous with strong market recovery; the amounts raised reaching
72 billion Euros and 90 billion in 2006. France presented a profile of evolution rather similar to
that of the whole continent, albeit with somewhat larger investment and a slowdown of the funds
rose in 2006 movements. In trend, like the European statistics, the French market has risen
sharply over the past ten years.
The European market is dominated by the UK, which is the ideal place for raising and managing
private equity funds. In terms of statistic, funds rose in this country in 2005 so represented 63.3%
of total funds raised in Europe, ahead of France (15.8%), Germany (3.8%) and the Netherlands
(3.3%). Despite the strong growth of the European market, it remains generally down compared
to its counterpart in the United States. In 2006, the amounts of capital raised by U.S. funds have
thus amounted to nearly 100 billion Euros.
The leading position of the United States not only reflects the large size of its economy.
Financing channels of this country provide a significant role for the private equity since many
years. Several factors can be used in order to explain such a presence of the capital investment in
the United States (Gompers et Lerner, 1999; Baygan, 2003). It may for example include efforts
undertaken by the U.S. government through the implementation of the SBIC program (Small
Business Investment Company), of tax incentives or regulations to promote investment of pension
funds in illiquid securities (principle of prudent man of ERISA10
act). It seems that the latter has
also played a key role, since institutional investors are the main funders of the private equity
10
The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93–406, 88 Stat. 829, enacted
September 2, 1974, codified in part at 29 U.S.C. ch. 18) is a federal law which establishes minimum standards for
pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions
associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan
participants and their beneficiaries

25
market. Their geographic investment scope goes moreover beyond the only territory of the
United States, as many investments are made abroad, including the UK.
→What are the factors explaining the evolution of the European market?
The evolution of the funds raised in Europe since the middle of the decade ninety and the
substitution of capital transmission venture capital and development capital based on a number of
factors likely to both cyclical and structural. Changes in the macroeconomic and financial
environment during this period are a first explanatory factor. The slowdown in the economy from
2001, the bursting of the bubble in technology stocks and more generally poor performance of the
financial markets (until 2002) have helped to limit fundraising during the first part of decade
2000s, probably more in the venture capital segment than in the buyout.
The academic literature informs well this correspondence between the macro-financial
environment and the flows towards the capital investment (Gompers et al., 2005).
IV- The simultaneous evolutions of fund raising of
venture capital and stock indexes in the U.S and
Europe:
To better shed the light the link between stock market and the activity of venture capital we
present the evolution curve of fundraising on web companies comparatively with the stock
indexes in France and in USA.
In the table 1, we show the evolution of fundraising on web companies and ITCAC index which
represents the “technological” securities belonging to the SBF 250 index. The time horizon is
between January 1st, 1999 and September 30th, 2006.

26
Table1: Evolution of ITCAC and internet fund raising in France11
The ITCAC is divided by 1000 and the funds raised on internet sector are estimated in millions of
Euros in order to put the two statistics on the same scale.
In addition, we represent on table 2 fund raising allocated to the internet sector and the NASDAQ
index for the same time horizon than on table 1. The index is shown on a raw level and
fundraising are measured in units of $ 250,000 in order to obtain comparable data scale.
Table2: Evolution of the NASDAQ and fundraising in the U.S12
.
11
Source : Journaldunet.org

27
The comparison of the two patterns shows interesting results. Indeed, we observe without
surprise a very strong growth in fundraising during the Internet bubble followed by a reversal
from the first quarter of 2000 in both countries. However, it’s from 2003 that the two tables show
different trends.
While the slow recovery of the NASDAQ is accompanied by a regular increase in fund-raising in
the United States, in the case of France the recovery of ITCAC is not followed by a steady
increase in fundraising. In other words since the burst of the internet bubble and more precisely
from 2003, the French investment in Venture capital in the internet sector is no longer connected
to the evolution of financial markets.
V- How to explain the differences in investment
behavior in the European and U.S. markets?
The existence of appreciably different behavior of investment in venture capital in Europe and in
the United States is often attributed to the existence of institutional and contractual specificities.
We show that these characteristics determine the form of rationality adopted by venture
capitalists in their investment choices, which partly explains the recent disconnection between
observed investments in venture capital and financial market conditions in the European case.
V-1: Institutional and contractual characteristics of the
European Venture Capital
▬ Stock market exits and venture capital investments.
One of the major differences between French and US markets was the scarcity of IPOs in France
between 2002 and 2005. Moreover, this movement was combined with the withdrawal of family
companies of the stock Exchange and has led to a marked reduction in the number of listed
companies. It’s just after the creation of Alternext in 2005, which is the compartment to rate
innovative small companies that we observed a restart of IPOs.
12
Source National Venture Capital Association nvca.org

28
▬ Exits and profitability of venture capital investments.
The study of the profitability of the venture capital is a difficult task for several reasons: the
diversity of its forms, the diversity of outputs, the fragmentary nature of the information available
and the fact that there is no unified market for a valuation on a common basis. In addition to this,
the profitability is of course highly dependent on periods on which it is calculated and that the use
of actuarial rates of return, made necessary by the characteristics of venture capital financing in
the form of successive outlays prior the simple payback on the date of the exit, make the
comparison of its performance with that of other hard assets. A reading of the literature on these
questions appears on the one hand the low profitability of venture capital operations with regard
to the operations of development capital and especially buyout, and on the other hand, a historical
trend to a lower profitability of the European financing with regard to the American financing.
The low profitability of venture capital transactions is highlighted by the Artus and
Teiletche (2004) study. The authors show that compared to the other forms of intervention in
capital, venture capital is characterized by a low average yield associated with high volatility. At
the same time, this performance proved highly correlated with changes in the stock market and
the Internet bubble: growth, collapse and recovery trend. As far as is concerned a study of Crédit
Agricole Asset Management, 2006: this feature is due to a tendency for investors to favor other
forms of intervention in capital.
On the other hand, the returns of French venture capital are historically low compared to
the yields of such investment in the U.S. But performance comparison is difficult. Sources are
indeed different. We can mention here three statistics: a Europe / USA comparison, an analysis of
the performance in France and an analysis of the performance in the U.S

29
Source : Dantas, Machado and Raade (2006)
The analysis of the chart shows that during the period 1983-1998 US venture funds has during all
this period better returns than European one. Moreover in terms of profitability differential
between European and US funds the results show that it’s unfavorable for Europe for most of the
time period for which performance data is available. In addition, it sheds the light on the fact that
despite the fact that the better relative performance of European funds may turn out to be
unsustainable due to a high proportion of unproven funds on the vintage series 1999-2001. Also
because of their smallness the samples for the two latest vintages are less reliable. Another
interesting pattern shown by the chart is that the performance gap between Europe and the US
was more striking for funds formed in the nineties, among which it varies between 8% (1990
vintage) and 67% (1996 vintage). The reason of this pattern is the technology bubble. Indeed as
far as are concerned Dantas, Machado and Raade (2006):” European funds do not appear to have
benefited from the technology boom the same way as US funds. It could be that it was very
closely associated with US centers, such as the Silicon Valley, leaving European players at a
disadvantage in accessing opportunities, whether for investments or exits”.

30
Furthermore, as mentioned by Hellmann and Puri, 2000, Kaplan et Strömberg, 2003a
beyond simply providing funds, venture capital firms contribute to the growth of firms mainly
through non-financial factors that is to say thanks to their ability to appraise and monitor
management decisions.
Indeed, these companies operate at three different levels: in the assessment and selection of
corporate finance in the development of contracts and finally, in their control throughout the
development of the activity. These interventions are closely linked. During the evaluation phase
of firms, the venture capital firm seeks to identify areas where it can add value by exercising
effective control.
Moreover, it is the signing of the contract that the venture capital’s company allocates rights to
facilitate him later control of the firm and to minimize the risks it has identified.
The contracts concluded by European VCs are significantly different to contracts
governing funding relationships in the U.S. equity market. These differences concern mainly the
intervention stage of venture capitalist, the contingent character of the financing, the syndication
of the investments and even the nature of venture capital firms.
The intervention stage of venture capitalist: In Europe, venture capital firms favor long-term
relationships by participating in successive rounds. In contrast, the U.S. venture capital firms
involved in specific stages of development of the firm, the stage where they know they can help
create value through their expertise.
In addition, the U.S. venture capital firms often associate companies with their investment
operations. Business participation in these operations in Europe is twice lower.
This highlights a better ability of U.S. venture capital firms to enlist the expertise of the industry
and to facilitate probably the inclusion of projects in the industrial sector.
Funding contingent on the results of the firm:
Several studies have analyzed the impact of measures making funding contingent on
performance. More precisely, it appears that the financing stage is the necessary element for the
credibility of a potential investor withdrawal. At the same time, this arrangement allows to avoid
a significant portion of the agency problems venture capitalists and managers.
Cornelli and Yosha (2003), for example, highlighted the temptation exists for the contractor to
handle their accounts, at least in the short term and they show that the provisions aimed at
making funding conditional to the achievement of certain performance can greatly reduce the

31
agency problem. For a study realized by Bergemann and Hedge in 2003, the financing by stage,
by reducing the informational rent of the entrepreneur, stimulates its effort and reduces financial
constraints. Most of the time, to be effective these provisions should be included explicitly in the
contract. Because, the use of an implicit contract can have for bias to worry the entrepreneur
about tits risk of expropriation and reduce its incentive to the effort in the management of the
firm.
Moreover, Hege and al. (2006) show that in the United States, venture capital firms by making
systematically (re-) financing contingent on the results of firms elicit a positive response from
companies: specifically, the performance of firms reacts positively to the reduction of the
intervals of financing. This difference between the U.S. and Europe would be largely due to the
structure of the venture capital industry. Indeed, for Hirsch and Walz, 2006, the part of venture
capital associated with government agencies and banks are generally more important in Europe,
especially in France and Germany. But this kind of society does not strictly determine those (re-)
financing to firm performance.
Syndicated operations: This type of financial arrangement carries many advantages. The first
known benefit of the syndication of investments is to allow a diversification of the risk.
However, we find in the literature other reasons such as finding of a better assessment of the firm
through a second opinion on the audit, the exploitation of complementarities in the control and
the council of these firms, finally the pooling of information and contacts that will be essential to
better manage the exit phase.
Hochberg, Ljungqvist and Lu (2005) have also shown that venture capital firms that get the best
performance are those that benefit from a favored position within networks syndication.
Besides, these syndicated operations appear as the best way to integrate the participation of big
firms into the financing of these activities (Hege and al. 2006).
This ensures expertise and additional network and also ensures a little more against the risk of
hold-up. In 2005, in France, 63% of the amount invested (which corresponds to 50% of
investment operations) does not correspond to syndicated operations. Generally, the proportion of
syndicated operations is capped at 50%. Hege et al. (2006) shows that in the United States, the
investors in venture capital use more efficiently syndication strategies, the part of these joint
funds increasing in time, what does not come true in Europe. More generally, these syndicated
operations can integrate in these pools of investors more specialized venture capitalists but also

32
companies. This result is consistent with the observation made earlier that the European venture
capital firms seem to favor long-term relationship rather than an investment in a particular stage
of development of the firm.
Nature of venture capital firms and types of contracts:
The relationship between venture capital firms and the companies that constitute their portfolio
attract a great interest on behalf of the practitioners as academic circles. Therefore, appears the
question of the existence of an optimal governance structure. Of course, the diversity of national
financial systems led to believe that there are different forms of governance but empirical studies
all seem to converge to demonstrate the superiority of the Anglo-Saxon model in terms of firm
performance. Recently, Hirsch and Walz (2006) examined the differences that may occur in the
contracts between the venture capitalists to their portfolio companies. Their work highlights the
contractual differences depending on the nature of venture capital i.e. it then distinguishes
venture capital firms associated with banks, those associated with public agencies, or independent
venture capital firms. The venture capital market is particularly segmented firms with the most
innovative projects and therefore riskier, are usually funded by independent venture capital firms.
This matching can be explained both by specific strategic considerations to this type of
venture capital but also by the specific expertise that these firms need. Moreover, towards the
same firm, independent venture capital companies would more turn to contractual mechanisms
allowing them to participate more actively in the management of the firms and the project than do
firms associated with banks. However, that’s the funds backed by the government agencies that
intervene least in the management of the financed companies.
This remark opens perspectives to understand the relatively poor performance of venture
capital in France compared to yields across the Atlantic, while the French venture capital remains
one of the most dynamic in Europe (AFIC, 2006a). Indeed, the banks remain in France the main
funder and although they have always overwhelmingly supported venture capital, they occupy
this place for the second consecutive year. This observation leads to the conclusion that the
observed differences in the contracts would take much more to the nature of venture capital firms
to real differences in the behavior of venture capital firms from one country to another. Thus, the
differences in performance of venture capital between the United States and continental Europe
would not be inconsistent with the observed convergence of financing contracts but would the
relative weights of different types of venture capital firms.

33
V- 2 -Behavior guided by a "limited" rationality:
From the previous argument, we draw two important consequences:
→ the specific institutional structure of the European venture capital makes the signals emitted
by the financial markets much less significant for European venture capitalists than their U.S.
counterparts.
→ Because of the particular structure of the European Venture capital - in particular from the
relatively important part of the venture capital companies connected to banks or to public bodies -
the contractual relationship between venture capitalists and entrepreneurs existing in the
European countries does not seem so adapted to the management of the information asymmetries
and the possible conflicts of interests than it is in USA.
We can deduce that the level of imperfection of the information and the uncertainty
existing in the European venture capital market is higher than that prevailing in the U.S. market.
In other words the European venture capitalists have more difficulties to interpret the changes in
their environment and, more specifically the signals emitted by the capital markets.
One can consider that the behavior adopted by U.S. venture capital relatively well suited
to an analysis assuming that economic agents have a sufficiently accurate knowledge of their
environment that still allows them to determine if the time is right to change their behavior.
It’s this reasoning that is used when we study the behavior of an economic agent operating in a
policy environment simple probabilistic risk and acting in accordance with the hypothesis of
rational expectations (Muth, 1961). This agent has “rationally” a highly irregular behavior
because, being totally flexible in its choice, it reacts immediately to any disturbance of the
environment to get back into the optimal state. In this analytical framework, a venture capitalist
will react in a frequent and fast way to the changes of his environment. In particular, the
investment behavior will be characterized by a high sensitivity to signals from the financial
markets.
However, the behavior observed in the European venture capital market need to use a
different analytical framework where we reason under uncertainty, incomplete knowledge and
rationality "limited." In this environment, the economic agents receive signals which they
interpret with difficulty. So happen, what Heiner (1983) identifies as a gap between the cognitive

34
capacities of the agent and the complexity of the environment with which he is confronted
[competence-difficulty ("C-D") gap]. This gap ensues from unexpected changes that affect the
environment as well as the limited ability of the agents to respond appropriately to these changes.
It is this gap that introduces uncertainty in the analysis of choice. But, according to Heiner, it is
precisely this uncertainty, as the CD gap, which is the origin of the patterns and thus the
predictability of economic behavior.
Indeed, if such a gap exists, it is interesting to modify its normal behavior if this change
leads to substantial expected gains; that is to say when the gains associated with the change of
behavior (or
Net gains compared with the situation of not changing its behavior) and their likelihood
are high. In this decision making environment, the behavior of the venture capitalist will result in
some form of strength vis-à-vis of the information received, including signals from the financial
markets.
VI- The volume of French venture capital
investments:
The analysis of trends in the amounts invested by the French venture capital follows a cycle
characterized by periods of expansion and recession phases compared to the United States.
However, even though that this activity depends on the evolution of stock markets, it is less
striking than in the United States. The analysis of the evolution curve of the amounts invested by
the French venture capital shows significant investments between 1998 and 2000 with a peak
reaching the 1.5 billion Euros of funds rose for the single year 2000. As far as concerned the
Chausson finance indicator13
, the amounts invested in the second half of 2000 decreased by 24%.
The decline was so striking and dramatic for the first that time since 1998, the value of capital
raised by investment funds was lower compared to the previous semesters.
Therefore, this decline in the second half of 2000, destroyed the linear increase made by the
French venture capital for five semesters, this increase had increased the amount of capital
invested from 100 million Euros in 1998 to 1.5 billion Euros in the second half of 2000. Indeed,
13
Chausson Finance Indicator identifies investments every six months made by French venture capital in French
start-up and European new technologies.

35
according to the statistics published by chausson finance the financing concerned 225 French
start-ups during that period against 263 during the first six months of the same year.
However, this decline during the second half of 2000 is the tree that hides the forest because it
obscures the fact that throughout the year, the funds raised had reached a record level, with an
historical increase of 250% over the previous year.
Overall still on the same source 489 start-ups have benefited from these funds against 281 the
previous year. In addition, the average investment undertaken by start-ups on the same horizon
increases by 52%. These investments have benefited the most to innovative companies in the
healthcare and telecom sector.
Nevertheless, if we focus only on investments related to the internet, we see a loss of over 50%
for this period. As in the United States, the weakness of financial markets and the decrease of
initial public offering have negatively impacted the internet start-up.
The observed frenzy of investment funds in venture capital in this sector during the first quarter
left now up sector traditionally sought by venture capital: technology.
We observed a decrease of 56% of investments in e-commerce and Internet content while the
health sector / biotech remained stable, so the drop was not of the same magnitude compared to
the United States where it has been greater.
Then with the bursting of the Internet bubble, which also influenced the European financial
markets, there has been a steady decline in uninterrupted of this amount until the second half of
2003 period which saw the blurred this downward spiral with the key to an increase of 27%
representing the highest growth of the other half since 2000. For the full year 2003, the amounts
allocated to venture capital are estimated at € 483 million, which amount was for 391 companies.
But the average amount invested per company is stable and amounted at that time to 1.2 million.
In France, the consequence of the bursting of the speculative bubble of the 2000s technology
stocks has resulted in a redistribution of the cards in the sectors financed. Indeed, in terms of
statistics during the second half of 2003, we note that the healthcare sector has supplanted the
internet as the first sector investment. The amount of money raised for this sector represents 32%
of total investment. This sector is the first sector concurrently regarding the quantum of the
amounts invested and who demonstrates the highest growth with an increase of 26% compared to
the previous year. Then as second sectors that whet the appetite of investors in venture capital:
we find software sector with an increase of 9%.

36
Regarding the field of internet and online sales, it accused a sharp drop of about 43% and now
represents only 3% of the total investment. At the same time we see an increase in volumes
allocated to the telecom sector result of the net growth estimated at 18% (see graph).
Source: personal calculation from the Chausson finance index :
In the same vein, another aspect raised by the recovery from the bursting of the Internet
bubble and the collapse of financial markets is the impact of investments on the developmental
stages of start-up. Indeed, as early recovery of economic activity after a period of disturbance,
investors naturally become more risk averse.
This recovery continued until the 2008 financial crisis period in which there has been a
slight decline in capital invested in venture capital in France. Capital raised in the first half of this
year is about $ 470 million, representing a decrease of 17% compared to last semester.
This decline seems to us altogether regarding the magnitude of the crisis in which was the
European finance system but also compared to the fall in investment in the United States for the
same period. Therefore indicates a low correlation between the French venture capital and
financial market cycle. This is all the more striking that the French venture capital recorded an
increase of 18% in the second semester of 2008 with 556 million Euros of investment. This
shows the robustness of the sector and its resilience to volatility in financial markets despite the
fact that it is less mature than the U.S. venture capital. Moreover, it is in 2008 that venture capital
investments exceeded the French bar history € 1 billion investment for the first time in eight
years.
Allotement by sector
Biotechnologies
26%
Medical Devices
6%
Softwares
29%
Otherss
22%
Internet & e-
commerce
3%
Telecom
14%
Biotechnologies
Medical Devices
Softwares
Others
Internet & e-
commerce
Télécom

37
Conclusion:
As suggested by our analysis, venture capital is crucial for the financing of innovation in the
United States and in France and more broadly in Europe. This is all the more compelling that
according to the "Wall Street Journal," Americans believe that its French inventor Georges
Doriot14
is one of the ten people who have changed the business world in the last century.
As we one can see through our analysis, venture capital remains and is further strengthened
despite the extreme volatility of financial markets thanks to its adaptability to all these
disturbances.
Thus, upon prevailing financial markets American and French companies will undoubtedly allow
14
Georges Frederic Doriot (September 1899 – June 1987) was one of the first American venture capitalists. An
émigré from France, Doriot became director of the U.S. Army's Military Planning Division, Quartermaster General,
during World War II, eventually being promoted to brigadier general. In 1946, he founded American Research and
Development Corporation, the world's first publicly owned venture capital firm, earning him the sobriquet "father of
venture capitalism". In 1957, he founded INSEAD, a top tier business school with campuses
in Fontainebleau (France),Singapore and Abu Dhabi. Source : Wikipedia

38
capital companies to cooperate further with the aim of pooling of risks and strengthening in order
to have the ability to absorb the repercussions of the financial markets constantly redial.
This upheaval will probably allows as predicted by the Harvard Business Review in its edition of
June 2010, the coming into play of new platforms of mobile and 'cloud computing' that are
already interested in more than 35% of the managers of the largest firms world.
This study is a contribution to the literature by helping to understand the disconnection in recent
years in Europe between the amount of investments and one of the economic indicators usually
considered essential for the activity of venture capital, the evolution of financial markets.

39
APPENDIX :
►U.S VENTURE CAPITAL STATISTICS

40

41

42

43

44
►FRENCH VENTURE CAPITAL STATISTICS

45
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Ueda M. (2004), « Banks versus venture capital: Project evaluation, screening, and
expropriation », Journal of Finance, 59, pp. 601-621.
Shleifer A. et Vishny R. (1997), « A Survey of Corporate Governance », The Journal of
Finance, vol. 52, n° 2, juin, pp. 737-783.
Shleifer, A. et Vishny R. W. (1988), "Value- Maximization and the Acquisition Process,"
Journal of Economic Perspectives, Vol. 2, pp. 7-20.
Smart S.B. et Waldfogel J. (1994), « Measuring the Effect of Restructuring on Corporate
Performance: The Case of Management Buyouts », The Review of Economics and

46
Statistics, MIT Press, vol. 76(3), pp. 503-11
Smith A. (1990), « Corporate Ownership Structure and Performance: the Case of
Management Buyouts », Journal of Financial Economics, vol. 27, pp. 143-164.
AFIC (2006a), Rapport sur l’Activité du Capital-investissement en France, Année 2005, Etude
AFIC et Pricewaterhousecoopers.
Black B. & Gilson R., [1998], «Venture Capital and the Structure of Capital Markets:
Bank versus Capital Markets», Journal of Financial Economics
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The determinants of venture capital funding: evidence across countries Leslie A. Jeng a,),
Philippe C. Wells
Driving Forces of Venture Capital Investments in Europe: A Dynamic Panel Data Analysis by
Andrea Schertler June 2003
Rapport sur l'activité du Capital Investissement en France - Année 2006 - Etude AFIC et
PricewaterhouseCoopers
Harvard Business Review june 2010
LE CAPITAL INVESTISSEMENT EN EUROPE : QUELLE PHYSIONOMIE À TERME
POUR CE MARCHÉ EN CROISSANCE ACCÉLÉRÉE ? Fabrice PANSARD. Juin 2007
Gompers P., Lerner J. (2000), "Money Chasing Deals? The Impact of Fund Inflows on Private
Equity Valuation", Journal of Financial Economic

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