Venture Capital in Germany and the U.S.: Differences and the Influence of Culture

Diplomarbeit von Lars Abraham

Introduction:

‘In today’s modern economy a country’s or region’s competitiveness lies in its capability to innovate. Whilst earlier old and established companies were reliable producers of innovation as well as jobs, that is changing. The big corporations are outsourcing and downsizing, and the new technologies are emerging from companies that did not exist 20 years ago’.

This quotation taken from the Handbook of Research on Venture Capital points out the increasing relevance of the Schumpeterian growth regime of today’s advanced economies which means that growth and wealth is unlikely to be maximized if most new business developments are carried out by old long-existing corporations. While in Europe only few global champions have been created in the past 50 years the United States economy seems to be capable of continuously creating great, leading-edge companies. Why is Europe lagging behind in enabling new ventures to become global champions? Why are successful high growth companies like Amazon, AMD, AOL, Apple, Cisco Systems, eBay, Genentech, Intel, Microsoft, Oracle, Sun Microsystems, Yahoo and recently Google all US based corporations and not of European or Japanese origin?

One reason is seen in the outstanding capability of the US economy to put innovative business ideas from individuals, universities and other research institutions into practice and thus create with the help of a well developed venture capital industry new global champions. A strong and sophisticated VC industry is widely recognised for providing a major contribution to turn innovation into (internationally) successful high-growth corporations and therewith foster economic growth.

Taking Germany as the largest economy in Europe this thesis will try to work out the main differences of the VC market in Germany - which is still considered as lagging behind - and its correspondent in the United States. While most of the previous comparative studies focus on single aspects of the VC market and the VC investment process this work will try to provide a brief but comprehensive empirical analysis of the entire venture capital investment process (from fundraising to exiting investments).

As business in general and the venture capital industry in particular is considered to be increasingly influenced by socio-economic and cultural factors this thesis draws special attention to differences related to the influence of culture on both VC markets. Hence it will be possible to improve understanding of socio-economic and cultural aspects like different attitudes towards entrepreneurship and the willingness to take risks.

Table of Contents:

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Kapitel 5.1, Venture Capital Demand, Entrepreneurship and Culture:

After having found some further evidence for a weaker venture capital demand side in Germany being probably the major reason for Germanys backwardness in terms of venture capital activity (see chapter 4) this chapter now tries, according to the cultural dimensions introduced in chapter 3, to work out the influence of culture on the demand of early stage venture capital.

Entrepreneurship and Entrepreneurial Orientation:

As early stage venture capital is typically demanded by individuals and teams who have founded a new firm it seems to be appropriate to look at the motives for undertaking a new venture and becoming an entrepreneur. As research in entrepreneurship is undertaken by various academic disciplines manifold definitions of entrepreneurship exist and therefore it seems to be impossible to provide a universally accepted all-in-one definition. According to Fritsch three different types of entrepreneurship can be identified: first, entrepreneurship as the creation of a new business/firm; second, entrepreneurship in general as entrepreneurial activity respectively independent employment (self-employment); third, entrepreneurship as dependent employment within an existing corporation (intrapreneurship). As the focus of this work is on early stage venture capital the first type is taken as underlying concept of entrepreneurship. This understanding of entrepreneurship is in line with authors like Kets de Vries who define entrepreneurship from the perspective of the entrepreneurial individual undertaking uncertainty and risk related activities. Following this perspective Zimmerer & Scarborough state:

An entrepreneur is one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on them. Although many people come up with great business ideas, most of them never act on their ideas. Entrepreneurs do.

Based on Lumpkin & Dess and according to Lee & Peterson entrepreneurial individuals apply certain processes, practices and decision-making activities which can be described as entrepreneurial orientation (EO). Lumpkin & Dess condensed five key dimensions to characterise entrepreneurial orientation: ‘a propensity to act autonomously, a willingness to innovate and take risks, and a tendency to be aggressive toward competitors and proactive relative to marketplace opportunities.” Keeping the perspective of entrepreneurial individuals and following Hofstede that culture influences the way people think and act entrepreneurial orientation can be regarded as link between national culture and entrepreneurship. Therefore subsequent to a description of the key dimensions of entrepreneurial orientation according to Lumpkin & Dess the influence of relevant cultural dimensions as introduced in chapter 3 onto these parameters will be analysed.

Autonomy:

Widely recognised as probably the most essential ingredient of entrepreneurship is the striving of individuals for freedom and independence. Those people are willing to leave secure positions and take risks in order to act independently, to keep personal control, and to seek opportunities by promoting new ideas and thus create new ventures. Autonomy also means that individuals and teams will bring forth an idea or vision outside the usual lines of authority by challenging existing rules, procedures and habits.

Innovativeness:

According to Schumpeter’s economic process of ‘creative destruction” innovativeness reflects a tendency to support and engage new ideas, novel solutions to problems, experimentation, and creative processes resulting in new goods or services. As such innovativeness represents a basic willingness of people to depart from existing practises and technologies and venture beyond the current state of the art.

Risk Taking:

This dimension describes the principal factor that entrepreneurial individuals bear higher levels of uncertainty and risk than hired employees. Those people leaving tried-and-true paths are willing to accept and tolerate ambiguity and uncertainty by venturing into the unknown. Risk taking behaviour is often characterised by ‘incurring heavy debt or making large resource commitments in the interest of obtaining high returns by seizing opportunities in the marketplace”.

Proactiveness:

Proactiveness emphasises the importance of initiative in the entrepreneurial process. As such it stands for taking a forward-looking perspective by acting in anticipation of future problems, needs, or changes and the exploitation of new emerging opportunities. Proactive entrepreneurial individuals understand it to seize initiative, act opportunistically and thus to a certain extend shape the environment to one’s own advantage by influencing trends and, perhaps, even creating demand. For further clarification it may be useful to understand proactiveness as opposite of passiveness rather than reactiveness. Insofar passiveness can be regarded as indifference or an inability to utilise on opportunities or to lead in the marketplace.

Competitive Aggressiveness:

In contrast to proactiveness competitive aggressiveness does not refer to how one relates to market opportunities it rather refers to how the entrepreneurial individual relates to competitors. Hence this dimension of entrepreneurial orientation is about the propensity to improve one’s own position by directly and intensely challenging competitors. It also reflects a willingness to adapt unconventional procedures and tactics to challenge traditional methods of competing to achieve competitive advantage. As start-ups are typically more likely to fail than established firms an aggressive attitude to undo the competitors rather than live and let live is considered to be critical to success and survival.

Although Lumpkin & Dess consider these dimensions of entrepreneurial orientation as salient traits of entrepreneurial firms they point out that new ventures may also be successful when only some of the above factors are operating. Finally, they state that these factors ‘may vary independently, depending on the environmental and organizational context’.