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Revisiting the Role of Corporate Venture Capital

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Exploring the landscape of corporate venture capital: a systematic review of the entrepreneurial and finance literature

• Published: 15 March 2018
• Volume 68 , pages 279–319, ( 2018 )

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• Patrick Röhm   ORCID: orcid.org/0000-0003-4781-7053 1  

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The influence of corporate venture capital (CVC) investments within the venture capital industry, that is, equity stakes in high technology ventures, has stimulated the academic literature on this specific research area. Generally, CVC is strongly associated with the concept of corporate venturing and plays a vital role in the strategic renewal of established companies. Owing to the multifaceted nature of the CVC phenomenon, the existing literature is rather fragmented. Therefore, the purpose of this article is twofold: first, bibliographic coupling is introduced to the field of CVC to reveal the underlying structure of the current research front. Second, a content-related review is conducted to shed light on nascent research streams and shortcomings within the CVC literature that indicate promising avenues for future research. The systematic review of a comprehensive set of 65 articles reveals that the prevailing CVC literature is mainly driven by two dominant logics, management and finance, that tend to separate themselves from one another. Moreover, nascent research streams are identified that will broaden and enrich the academic discussion.

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The taxonomy is adopted from Keil ( 2000 ) and Sharma and Chrisman ( 1999 )

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During the data collection process, the following differences were identified: While the Strategic Management Journal is only available on Scopus for issues from 2011 onwards, Web of Science does not cover the following journals: Venture Capital: An International Journal of Entrepreneurial Finance , World Review of Entrepreneurship , Management and Sustainable Development and the Management Research Review .

Please note, counts are not mutually exclusive due to the fact that articles could apply several statistical methods simultaneously.

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I thank Andreas Kuckertz and Andreas Köhn, University of Hohenheim, for the assistance in the interrater reliability proceeding and valuable comments on prior versions of this paper.

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Röhm, P. Exploring the landscape of corporate venture capital: a systematic review of the entrepreneurial and finance literature. Manag Rev Q 68 , 279–319 (2018). https://doi.org/10.1007/s11301-018-0140-z

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The Study Of Venture Capital Financing - Process for reaching a VC and Factors impacting their decisions

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How to Develop Your Own Investment Thesis: A Critical Step for Aspiring Venture Capitalists

s an aspiring venture capitalist, you hold the key to unlock the untapped potential of startups, propelling them to soaring heights and reshaping industries. But in this electrifying landscape of opportunities, how do you navigate through the ever-changing tides? The answer lies in the essence of venture capital success: developing your own investment thesis.

What exactly is an Investment Thesis?

An investment thesis is your North Star, an illuminating beacon that guides you through the vast ocean of startups, helping you navigate toward the brightest prospects. It's a strategic framework, meticulously crafted to align your investment approach, criteria, and aspirations.

With an investment thesis, you define the types of companies you want to invest in, the industries you're interested in, and the stages of startups you believe have the most potential. It's like setting your preferences and priorities before you begin the journey.

Why is an investment thesis so critical for aspiring venture capitalists? The answer is simple—this well-defined roadmap sets you apart from the crowd and gives you the edge to thrive in this fiercely competitive world. It empowers you to make informed decisions, uncover hidden gems in the startup ecosystem, and unlock the true potential of visionary entrepreneurs.

In this blog post, we will explore the essential steps to create a compelling and potent investment thesis

Getting Started With Your Investment Thesis: Conducting Market Research

At the core of any successful investment thesis lies comprehensive market research. Understanding industry trends, evaluating market opportunities, and assessing the competitive landscape are vital steps to identify lucrative investment prospects. 

Keep a finger on the pulse of the business landscape and stay attuned to shifts and disruptions. Analyze the forces shaping various sectors, from cutting-edge technologies and regulatory changes to changes in consumer behavior. Identifying and understanding these trends will enable you to anticipate the future landscape, positioning you as an astute investor who can spot opportunities before they materialize.

With a keen understanding of industry trends, venture capitalists must evaluate market opportunities with a discerning eye. Look beyond the surface and assess the long-term growth potential of markets and industries. Identify white spaces and areas where innovation is likely to flourish. Be mindful of macroeconomic factors, such as GDP growth, inflation rates, and demographic shifts, as they can profoundly influence market dynamics. A comprehensive evaluation of market opportunities will empower you to focus your investments on ventures that have the potential to become tomorrow's industry leaders.

In the vibrant world of startups, competition is the norm. As such, to excel as a venture capitalist, you must also gain a panoramic view of the competitive landscape. Analyze existing players and their strengths, weaknesses, opportunities, and threats (SWOT analysis). Identify startups that have the potential to disrupt established markets and challenge the status quo. Furthermore, seek out market gaps, where unmet needs and underserved customer segments await innovative solutions. Investing in startups that address these gaps can lead to remarkable returns on investment and foster a positive impact on society.

Market research is not a mere exercise of intuition and speculation; it thrives on data-driven insights. Leverage data analytics, market reports, and industry research to augment your understanding of market trends. Embrace technology and data tools that can provide you with a wealth of information at your fingertips. By making data-driven decisions, you'll foster a more robust investment thesis and bolster your credibility as a venture capitalist.

While conducting market research, it's crucial to remember that the startup ecosystem is dynamic and ever-changing. Be prepared to pivot and adapt your investment thesis in response to new information and shifts in the market. Stay agile and flexible, allowing your investment strategy to evolve as you gain deeper insights. Successful venture capitalists are those who can navigate uncertainty, staying attuned to emerging trends and swiftly adjusting their course to capitalize on unforeseen opportunities.

Defining The Investment Criteria for your Investment Thesis

Once you've gathered market insights, now it’s the fun part - it's time to define your investment criteria. Determine the stages of startups you want to invest in, such as seed, early-stage, or late-stage companies. Consider the industries you're passionate about or have domain expertise in. 

Additionally, establish your preferred investment size and the level of diversification you aim to achieve within your portfolio. Having clear investment criteria will streamline your decision-making process and keep your investments focused on your goals.

Determining the Stages of Startups

Venture capitalists invest in startups at various stages of their lifecycle, each offering distinct opportunities and risks. Deciding which stage aligns best with your expertise and risk appetite is pivotal. Consider if you want to invest in seed-stage companies, which are in their infancy and require significant support, or if you prefer early-stage startups with a product and initial traction. Alternatively, you may focus on later-stage companies that are scaling and need capital to expand rapidly. Your chosen stage will dictate your involvement level and the potential return horizon of your investments.

Geographical Preferences and Target Industries

Venture capital is a global endeavor, and you can choose to invest locally, regionally, or even globally. Geographical preferences may be influenced by factors like your network, knowledge of specific markets, and comfort with regulatory environments. Moreover, identifying the industries you're passionate about or have domain expertise in is crucial. Investing in industries you understand well will allow you to provide strategic value to the startups you support, beyond just financial backing.

Investment Size and Portfolio Diversification

The size of your investments and portfolio diversification strategy are interlinked. Determine the average investment size you are comfortable with, as this will influence the types of startups you can back. Some venture capitalists prefer larger, concentrated bets on a select few startups, while others spread their investments across a broader range of smaller companies to diversify risk. Striking the right balance is key—too few investments can expose you to concentrated risk, while too many might dilute your ability to provide adequate support to each startup.

Alignment with Personal Values and Objectives

As an aspiring venture capitalist, your investment criteria should be in harmony with your personal values and long-term objectives. Consider what impact you want to make through your investments. Are you driven by social impact, environmental sustainability, or a particular mission? Aligning your investment criteria with your values will not only enhance your satisfaction as an investor but may also attract entrepreneurs who share your passion, fostering a mutually rewarding relationship.

Market Fit and Growth Potential

While defining your investment criteria, focus on identifying startups that exhibit strong market fit and immense growth potential. Market fit refers to the startup's ability to address a specific problem or need in the market effectively. Investigate whether the startup's product or service resonates with its target audience and has the potential for widespread adoption. Moreover, evaluate the scalability of the business model, as this will determine the startup's growth trajectory and its potential to become a market leader.

Synergy with Your Expertise and Network

Leverage your expertise and network to your advantage when defining your investment criteria. Aligning with startups that can benefit from your insights and connections will create a symbiotic relationship. As an investor, you can offer more than just financial support; your guidance and connections can be invaluable in helping startups navigate challenges and scale their businesses. Synergy with your expertise and network can significantly enhance your value proposition as a venture capitalist.

Balancing Risk and Return

Investing in startups inherently involves risk, and your investment criteria should reflect your risk appetite and tolerance. Strive for a balance between risk and potential return that aligns with your investment objectives. High-growth startups often carry higher risk, but they can also offer substantial rewards.

On the other hand, more established companies may provide a steadier return, albeit with potentially lower growth potential. Understanding this balance is essential in defining your investment criteria and building a well-rounded portfolio.

Balancing risk and potential returns is a fine art, and your investment thesis should outline how you plan to approach this delicate balance. Furthermore, learn to measure and quantify risk in the startup ecosystem using various risk assessment techniques to make informed investment choices.

Identifying Key Performance Indicators (KPIs) for Your Investment Thesis

Key Performance Indicators are quantifiable metrics that provide critical insights into the performance and achievements of a business. By tracking relevant KPIs, venture capitalists can assess the overall health and direction of a startup, enabling them to support portfolio companies effectively. Moreover, KPIs offer a basis for comparison, allowing you to benchmark a startup's progress against its peers and industry standards.

Tailoring KPIs to Startup Stages and Industries

While KPIs share a common goal of tracking performance, their significance can vary significantly based on the stage and industry of a startup. For example, early-stage companies might prioritize metrics related to customer acquisition, retention, and product-market fit. In contrast, late-stage startups might focus on revenue growth, customer lifetime value, and profitability. Tailoring KPIs to suit the unique needs and challenges of each startup stage and industry is vital for meaningful performance assessment.

Selecting Actionable and Measurable Metrics

When identifying KPIs, seek metrics that are both actionable and measurable. Actionable KPIs provide clear guidance on how to improve performance, helping startups identify areas that need attention and enhancement. Measurable KPIs, on the other hand, are quantifiable, allowing you to track progress and changes over time. The ability to take action based on KPIs and measure their impact ensures a proactive approach to enhancing a startup's performance.

Common KPIs in Venture Capital

While KPIs can be highly specific to individual startups and industries, certain metrics have proven valuable across the venture capital landscape. Some common KPIs include:

Customer Acquisition Cost (CAC): The cost to acquire a new customer, helping evaluate marketing efficiency.

Monthly Recurring Revenue (MRR): Provides insight into the company's predictable revenue stream.

Customer Churn Rate: Measures customer retention and the ability to maintain long-term 

relationships.

Burn Rate: Tracks how quickly a startup is spending its capital, indicating runway and sustainability.

Gross and Net Profit Margins: Assessing revenue generation and cost efficiency.

Customer Lifetime Value (CLV): Estimates the value of a customer over their entire engagement with the startup.

The Power of Data-Driven Decision Making

KPIs are not merely numbers on a dashboard; they fuel data-driven decision-making. By continuously monitoring KPIs, you can identify strengths, weaknesses, and potential roadblocks. Data-driven insights enable you to provide tailored guidance and support to your portfolio companies, helping them navigate challenges and seize growth opportunities.

Building a Well-defined Due Diligence Process

A well-structured due diligence process empowers you to make informed decisions, mitigates risks, and will help you identify the startups that align best with your investment thesis!

Let's delve deeper into the key steps involved in building an effective due diligence process so you can include it on your Investment Thesis:

1. Defining Your Due Diligence Objectives

Start by clarifying your objectives for the due diligence process. What key aspects do you want to evaluate in potential startups? Identify the critical areas of focus, such as market opportunity, team capabilities, competitive landscape, financials, and scalability. Setting clear objectives ensures that you leave no stone unturned while assessing potential investments.

2. Gathering Essential Information

Begin the process by collecting comprehensive data and information about the startup under consideration. Request financial statements, market research, business plans, and any other relevant documentation. Engage in one-on-one discussions with the startup's founders and management team to gain insights into their vision, strategy, and execution plans. Gathering essential information lays the groundwork for a detailed evaluation.

3. Market Analysis

Conduct a thorough market analysis to assess the startup's positioning within its industry. Analyze market trends, potential for growth, competitive landscape, and potential threats. Understanding the market dynamics helps you gauge the startup's competitive advantage and potential for success.

4. Team Evaluation

Evaluate the startup's team to understand their expertise, experience, and alignment with the company's vision. Assess the cohesiveness and complementarity of the team, as a strong and capable team is a significant factor in a startup's success.

5. Financial Due Diligence

Perform rigorous financial due diligence to examine the startup's financial health and viability. Analyze revenue streams, cost structures, cash flow, and projections. Scrutinize financial ratios and indicators to assess the startup's financial sustainability and growth potential.

6. Product and Technology Assessment

Evaluate the startup's product or technology to gauge its uniqueness and potential market fit. Understand the value proposition it offers to customers and how it addresses market needs. Assess the scalability and defensibility of the product or technology to ensure long-term competitiveness.

7. Legal and Regulatory Review

Conduct a legal and regulatory review to identify any potential legal risks or compliance issues. Scrutinize contracts, licenses, intellectual property rights, and any pending legal disputes. Ensuring the startup operates within legal bounds safeguards your investment from unnecessary risks.

8. Customer and Partner Feedback

Gather feedback from customers, partners, and industry experts to gain external perspectives on the startup's product or service. Their insights can validate the startup's market fit, customer satisfaction, and potential for growth.

9. Risk Analysis

Identify and assess potential risks associated with the investment. Consider market risks, operational risks, technological risks, and competitive risks. A thorough risk analysis helps you make informed decisions about risk-reward trade-offs.

10. Decision-Making and Post-Investment Monitoring

Based on the findings from the due diligence process, make data-driven decisions on whether to invest in the startup. If you decide to proceed, establish a monitoring plan to track the startup's progress and performance after the investment. Continuously monitor the startup's performance against the initially defined objectives and pivot if needed.

Refining Your Thesis and Iterating

It’s also important to keep in mind that an investment thesis should not be static; it should evolve with your experiences and the changing market dynamics. Embrace flexibility and adaptability, and be open to learning from both successful and unsuccessful investments. As you gain insights from your portfolio companies and the market, update and refine your investment thesis to enhance its effectiveness continually!

Developing your own investment thesis is a critical step for aspiring venture capitalists. It provides you with a structured approach to identify and seize opportunities in the dynamic startup ecosystem. 

Through comprehensive market research, clear investment criteria, risk assessment, and an adaptable approach, your investment thesis will act as a guiding force throughout your venture capital journey. Embrace the continuous learning process, and don't hesitate to iterate and refine your thesis as you gain experience in the thrilling world of venture capital.

Interested in the full research paper?

You might also like, mastering startup valuations: a comprehensive guide, venture capital mythbusters: dispelling 15 common misconceptions, the skills you need to be successful as an early-stage, late-stage, and growth equity investor, decoding pre-seed and seed funding: a comprehensive guide for entrepreneurs, space, the final frontier of vc: investing in the new space race, venturing into madtech: revolutionizing marketing tech, about goingvc.

GoingVC is built around the idea of making venture capital education, investing, networks, and talent more accessible to those with the desire to succeed.

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Ulu, Fatma. "VENTURE CAPITAL - Important factors for venture capital investment decisions." Thesis, Halmstad University, School of Business and Engineering (SET), 2008. http://urn.kb.se/resolve?urn=urn:nbn:se:hh:diva-1890.

The decision process of venture capitalists has received much attention from researchers and it is a complex and unclear process. There are plenty of factors that affect venture capitalists´ investment decisions. The purpose of this study is to find out the important factors in the due diligence process for the venture capital firms and venture capitalists during their investments. The authors find it interesting to find out factors that influence venture capitalists during their investment decisions according to due diligence process. Qualitative method was seen suitable for this study. Three phone interviews were conducted with three venture capital firms in Turkey named Is Private Equity, Ilab Ventures and Bosphorous Group. The authors find out management, market, location, product, industry and financial factors are important factors for venture capitalists to decide whether to invest or not.

Pfeffer, Mary Graves. "Venture Capital Investment and Protocol Analysis." Thesis, North Texas State University, 1987. https://digital.library.unt.edu/ark:/67531/metadc331014/.

Hellqvist, Ulf, and Maija Kraljevic. "Venture Capital : What factors lie at the basis for Venture Capital investment decisions?" Thesis, Jönköping University, JIBS, Business Administration, 2006. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-365.

Introduction:

Venture capital investment process is complex and different firms vary greatly in their investment practices. This has resulted in authors given several different factors that could be imperative for venture firms investment decisions. There is thus no consensus in the field of venture investing.

The purpose of this thesis is to list which factors are important for venture capital firms investment decisions in start-up firms.

The authors conducted structured phone interviews with seven venture capital firms in Sweden.

Conclusion:

The authors found the following factors to be important for venture firms investment decisions in start-up firms; Busienss plans that demonstrated the thinkings of the entrepreneur, communicate ideas, visions, product, market, competition, growth potential as well as the planned intentions with the recived funds. They also desired realistic, concreate, simple plans that explained the implementation process of the start-up firm. The second factor that was important was markets where large markets, market growth, market share, market entry and global markets were mentioned. The third factor of importance was product, in which uniqueness, simplicity, patents and time-to-market were listed. Management was the fourth factor of importance, in which sensibility, competence, technical skills, entrepreurial spirit, attitude, humbelness, determination, openness, drive, chemistry and confidence were included. The fifth factor of importamce financial embraced ROI, economioes of scale, valuation and the size of the investment. The last two important factors that the authors found to be important for the venture firms in the study were location and industry.

Beal, Wesley Martin. "Valuation and strategy in venture capital investment." Thesis, University of Manchester, 2000. http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.629695.

Stafford, D. (Daniel). "Cross-border venture capital investment decision making." Bachelor's thesis, University of Oulu, 2016. http://urn.fi/URN:NBN:fi:oulu-201605251912.

Sabbi, Enrico, and Triantafyllia Karampini. "Venture Capital & Green Ventures : Developing an Understanding of the Investment Decision." Thesis, Umeå universitet, Företagsekonomi, 2019. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-161360.

Pries, Fred. "Distinguishing successful from unsuccessful venture capital investments in technology-based new ventures: How investment decision criteria relate to deal performance." Thesis, University of Waterloo, 2001. http://hdl.handle.net/10012/821.

Guo, Di. "Venture capital institutions and venture capitalists' investment activities : an empirical study on China." Thesis, University of Edinburgh, 2010. http://hdl.handle.net/1842/3277.

Li, Feng. "Venture capital investment in China : monitoring and value-added." Thesis, Cardiff University, 2009. http://orca.cf.ac.uk/55848/.

Van, Heerden Stephanus Johannes Jacobus. "Venture capital shares : an investment analysis / S.J.J. van Heerden." Thesis, North-West University, 2004. http://hdl.handle.net/10394/655.

Vega, Paul. "Venture capital in China : investment processes and decision-making /." [S.l. : s.n.], 2004. http://swbplus.bsz-bw.de/bsz114353042inh.htm.

Weaver, Andrew 1968. "Venture capital investment patterns : implications for regional economic development." Thesis, Massachusetts Institute of Technology, 1998. http://hdl.handle.net/1721.1/70866.

DeGallier, Nicholas GR. "Venture Capital Investment Duration: Asia, Europe, and North America." Scholarship @ Claremont, 2019. https://scholarship.claremont.edu/cmc_theses/2051.

Pfeiffer, Carl Gustav, and Linnea Sehlberg. "Venture Capital - Investeringsprocessen i ett startup : En undersökning av investeringsprocessen och de viktigaste urvalskriterierna när ett venture capital bolag investerar i ett startup." Thesis, Linköpings universitet, Institutionen för ekonomisk och industriell utveckling, 2020. http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-167460.

Lang, Nils Konstantin. "Venture Capital Contracting in the Context of Young Venture Governance." Thesis, Lyon, 2020. http://www.theses.fr/2020LYSE3049.

Scalata, Maria Rosa Giovanna. "Inside the Philanthropic Venture Capital Investment Model: An exploratory comparative Study." Doctoral thesis, Universitat Ramon Llull, 2010. http://hdl.handle.net/10803/9182.

Möller, Eva, and Samuel Öquist. "Investing for a sustainable future : drivers and barriers for sustanable venture capital investement decisions." Thesis, Uppsala universitet, Företagsekonomiska institutionen, 2019. http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-388409.

Behrens, Jeffrey S. "Investment performance of life-science venture capital investment funds, persistence, and subsector analysis." Thesis, Massachusetts Institute of Technology, 2007. http://hdl.handle.net/1721.1/38334.

Prytz, Joakim, and Henrik Blommé. "Venture capital i spåren av kriserna : En studie i hur finans- och eurokrisen påverkat de svenska venture capital-bolagen och dess marknad." Thesis, Umeå universitet, Företagsekonomi, 2013. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-83685.

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Venture capital investments have become a major contributor the growth of start-up firms. Investing in start-up firms carries a substantial risk of failure, only a minority of start-ups is high-return investments. This put great responsibility to the valuation methods used by the venture capital firm. It is argued that when uncertainties about future pay-offs are high traditional valuation tools are of little help, they are said to be too static and not to comply with change. A valuation method that is alleged to act in accordance with a changing environment where uncertainty is high is real option which is said to consider these variables, thus giving a more accurate valuation. The structure of venture capital funding can be seen as well suited for real option valuation.

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A Systems View Across Time and Space

• Open access
• Published: 05 March 2022

Empirical examination of relationship between venture capital financing and profitability of portfolio companies in Uganda

• Ahmed I. Kato   ORCID: orcid.org/0000-0002-1811-6138 1 &
• Chiloane-Phetla E. Germinah 1  

Journal of Innovation and Entrepreneurship volume  11 , Article number:  30 ( 2022 ) Cite this article

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In recent times, venture capital (VC) financing has evolved as an alternative feasible funding model for young innovative companies. Existing studies focus on whether VC enhances profitability. While helpful, this body of work does not address a critical question: whether VC firms are more profitable than non-VC firms. The co-existence of both VC and non VC firms in Africa provides an opportunity to address this question. Accordingly, this paper sought to extend the understanding of the relationship between VC financing and the profitability of portfolio companies in Uganda, a rapidly growing VC market. We utilised a mixed methods approach, which involved quantitative data collected from 68 key VC stakeholders, and qualitative data collected from 16 semi-structured face-to-face interviews. The results confirm the superior performance of VC-financed enterprises when compared to non-VC-financed enterprises. The study makes a vital contribution by offering a diversified framework for enterprise success. The framework will assist VC firms in evaluating and customising funding programmes that can propel early-stage firms’ success in Uganda, and in similar emerging economies. Secondly, our results contribute to extant knowledge about recent developments in Uganda’s VC industry and how it influences the profitability trends of SMEs, also in similar emerging economies.

Introduction

In recent times, venture capital (VC) financing has evolved as the most feasible funding model for young innovative companies. VC firms provide the needed capital in exchange for equity shares in the portfolio companies (Amornsiripanitch et al., 2019 ; Gompers & Lerner, 1999 , Gompers et al., 2020 ; Hirukawa & Ueda, 2008 ; Kato & Tsoka, 2020 ; KPMG & EAVCA, 2019 ; Li & Zahra, 2012 ; SAVCA, 2011 ). Seen from a different standpoint, the contribution of VC to the profitability of early-stage enterprises has not been extensively deliberated among scholars in developing countries, therefore, inadequate evidence is available to acknowledge its impact on the growth of small firms (Ernst & Young, 2016 ; Shanthi et al., 2018 ). In this context, this paper sought to extend the understanding of the role VC in boosting the profitability of portfolio companies in Uganda.

Tykvova ( 2018 ) disclosed that the VC finance framework is not a one-size-fits-all framework. Venture capitalists (VCs) select only companies with high growth potential, and consequently, only a few start-up firms qualify for VC investment. While several studies highlight the benefit of VC investment to young companies, the relationship between VC financing and the profitability of the portfolio companies has been under-researched. As a result, a review of previous research offers inadequate conclusions to account for these differences in performance, moreover, many of these studies focused mainly on developed economies.

VC firms and practitioners typically utilise profitability as the principal financial measure to project the success of the portfolio companies (Emerah & Abomeh, 2020 ). However, some scholars criticise this approach to measuring business performance, because it is restricted to past performance. In addition, it is regarded as an unrealistic technique of treating depreciation and amortisation as part of the company expenses, yet it does not involve direct cash outflows. That said, small and medium-sized enterprises (SMEs) with demonstrated profits find it easy to inspire VC investors that are experienced in financing high-risk entrepreneurial firms. VCs make investments in portfolio companies in which they earn returns of between 20 and 30% from the invested capital (Gompers & Lerner, 1999 ). Nevertheless, the concept of VC financing has remained misunderstood in Uganda, despite the vital role it can play in the country’s economy.

Although VC has surged globally in the last 20 years, in, for instance, the United States of America (US), Europe, Canada and China, it has largely focused on the technological sectors, with a nominal allotment of funds to the manufacturing and agro-business sectors that form a colossal share of the SME ecosystem, especially in developing economies, such as Uganda (AVCA, 2020 ; Kato & Tsoka, 2020 ; SAVCA, 2014 ). Thus, only a few portfolio companies have the opportunity to be financed by VC investors, hence, widening the financing gap. Likewise, Ekanem et al. ( 2019 ) observed that VCs transplanted the Silicon Valley model to emerging markets without making meticulous adjustments to reflect the needs of their business environment. This VC myopia has been identified as hampering SMEs’ growth.

Furthermore, few empirical studies have engaged the mixed technique for data collection, moreover, a significant number of empirical studies were conducted 20 years into the past (Gompers & Lerner, 1999 ; Lerner, 2010 ). Prior literature suggests that most of the research assessing the impact of VC on the performance of SMEs essentially engaged business owners/ managers as the key respondents (Biney, 2018 ; Kwame, 2017 ). Therefore, the present study is distinct as it focuses on all the key players in the VC market. The research adopted a mixed method approach and presents a current understanding of the impact of VC on the profitability of the portfolio companies in the public domain. Worse still, these studies largely present results from advanced economies, henceforth, widening the literature gap that compels demand for future research in Africa. In addition, Uganda’s VC market is under-explored, with little evidence to explain how VC financing has influenced SMEs’ performance (Kato & Tsoka, 2020 ; UIA, 2016 ).

Therefore, we reviewed the current literature to identify existing gaps in our current understanding that may provide a foundation for this study. We also reviewed the successful experiences of the VC landscape from developed economies, and conflicting experiences of duplications globally. The paper was guided by two fundamental research questions:

Does venture capital financing spur the profitability growth of the portfolio companies?

How does the venture capitalists’ involvement influence the success of the portfolio companies?

This paper makes four major contributions: firstly, the paper highlights the demand for government to enhance VC supply to early-stage firms, as well as to create a favourable investment environment which will inspire foreign VC firms to invest in the country. This may involve government support to reduce the taxes levied on capital gains on the disposal of business assets during initial public offerings (IPOs) or trade sales. Secondly, the results from this study will benefit the VCs in their efforts to make ideal investment decisions to enhance VC market development. Thirdly, the study makes a vital contribution to knowledge by offering a diversified framework for enterprise success in emerging economies. The framework is expected to benefit the key players in the VC market in their efforts to evaluate and customise sufficient funding programmes that can propel the success of early-stage firms. Finally, this paper also extends our knowledge about recent developments in the VC industry and how it influences the profitability trends of SMEs in emerging economies, such as in Uganda.

The rest of the article is divided into five sections. The next section presents the theoretical literature review, while " Empirical literature review and hypotheses development " section discusses the empirical literature review and hypotheses development. " Research design " section describes the research design. Finally, " Empirical results and discussion " section presents the empirical results.

The theoretical literature review

Agency theory demonstrates the nexus between the VCs who are the principals in the VC contract and the business entrepreneurs (agents), delegated to work on behalf of the VCs. The principal–agent relationship (VC contract) is established when the entrepreneurs agree with VCs to invest in the start-up firms in exchange for equity shares (Bertoni et al., 2019 ; Cumming et al., 2017 ).

Hα1: The venture capitalists’ involvement in the portfolio companies influences their success

The principal–agent problem postulates interrelated conflicts of interest which could emerge in the execution of the contract. This often arises at the time when VCs exit the company through either trade sale or initial public offerings (IPOs), leading the agents into divergence from the best interests of the principal. However, VCs are aware of such barriers that may have behaviour or outcome-based impediments to their interests. Therefore, VC investors insist on stringent control measures and monitoring aspects to guard their business interests through secure minority seats on SMEs’ board of directors (BOD). They maintain a sound business and add value to portfolio companies to recover worthy return on investment (ROE) shares (Cumming & Johan, 2016 ). It is well documented that misunderstandings usually emerge at the exit of the VCs, particularly if this is not well managed from the inception stage. There is noticeable principal–agent conflict that emanates from information asymmetries and fear of the business owner losing control over their investments (Amit et al., 1998 ).

That being said, the VC contract is vital to guard against eventual disputes between the portfolio managers and VCs. The VC financing concept resonates well with the agency theory (Hellmann & Puri, 2002 . This certainly requires SMEs to agree with VCs in order to access the financing needed for their growth and expansion, thus, enforcing VC contracts to protect the interests of both parties.

Hα1: Venture capital financing model spurs the profitability growth of the portfolio companies

The principal–agent relationship concept has been proven to stimulate SMEs’ performance in terms of sales revenue profitability, return on equity (ROE) and return on assets (ROA). This theory provides a firm foundation for our research hypothesis. However, imperfections in the market indicate that this assumption is not fully valid. Pragmatic evidence has disclosed that start-up firms seek external financing sources only if their retained earnings are insufficient to meet their business needs (Myers & Majluf, 1984 ). In addition, some entrepreneurs may not welcome VCs in their business because it compromises their control power, hence they are compelled to depend on retained earnings although they may not sufficient to foster the SME’s growth. Therefore, it is not usually accurate for VCs to assume that the entrepreneur may not abide by the VC contract, and therefore, it may be unnecessary to set the stringent rules in VC contracts. That seemingly appears to be biased, having no consideration for the fears of the entrepreneurs, specifically in the appropriation of profits.

Empirical literature review and hypotheses development

This section delivers a detailed review of the extant literature that underwrites the relationship between VC finance and the profitability of portfolio companies to inform and elucidate our insights. The paper primarily describes the central concepts of VC and the theoretical framework underlying its influence on the performance of VC-financed companies, which provides the foundation for the study.

Venture capital and the profitability growth of portfolio companies

One of the very first studies assessing VC-financed enterprises’ performance, was piloted by the Venture Economics Incorporation for the US General Accounting Office in 1982. The study disclosed that VC-backed companies realised tremendous growth in sales turnover, employment creation, and tax payments, if compared to other companies. In line with the benefits of VC financing, the National Venture Capital Association (NVCA) ( 2021 ) discovered that the VC-backed companies grew faster than their national industry counterparts in terms of employment, sales, and wages. Similar results were also obtained in Europe (KPMG & EAVCA, 2019 ), where venture-backed companies achieved a yearly sales growth of 35%, compared to the 14% of other associated European public firms, and employment grew 30.5%. Therefore, such mixed conclusions necessitate a novel empirical study that would be able to fill these literature gaps.

Several researchers, mainly from technologically advanced economies, have confirmed that VC finance is a reality in augmenting the growth of SMEs (Deloitte & NVCA, 2009 ; Gompers & Lerner, 1998 ; Lerner, 2010 ). VC financing is connected to faster growth in early-stage firms, and that it is a precursor for innovation and the internationalisation of the portfolio companies (Kelly & Hankook, 2013 ; Mason, 2009 ; Bruton et al., 2015 ; Chemmanur et al., 2011 ). While there are various reasons for starting a commercial enterprise, profit maximisation is the primary objective (Kenawy & Abd-el Ghany, 2012 ). It is common knowledge that early-stage enterprises certainly need to earn profits to attract patient capital to ensure their continued commercial growth and expansion over time. Albeit VC finance has been extensively studied, its subsequent impact on the profitability of the portfolio companies is comparatively underexplored.

Profitability is a significant pointer to estimate the growth of SMEs, which is also a rising concern for VC investors. Audretsch and Lehmann ( 2004 ) and Chahine et al. ( 2012 ) discovered that VC-financed firms are highly associated with good profitability and market performance, if compared to non-VC-financed companies. However, some scholars present conflicting results, asserting that VC financing does not necessarily encourage enterprise growth. This is attributable to the selection criteria wherein VC investors identify high-growth potential firms that would probably have grown, even without receiving funding from the VC firms. Similarly, Tykvova ( 2018 ) reveals that the primary goal of the VC investors is to reap high returns from the funded companies, and SME growth is a spin-off to their primary purpose.

Furthermore, Puri and Zarutskie ( 2012 ), Kelly and Hankook ( 2013 ) and Paglia and Harjoto ( 2014 ) showed that VC financing positively influences the VC-funded companies’ profitability growth. Jaki et al. ( 2017 ) asserted that profitability growth changes progressively in the early stage of 3 to 5 years, and subsequently a decline is recognised when the VCs plan to exit. However, Harris et al., ( 2014 ) reported unsatisfactory results in terms of returns on invested capital. This ignited further studies of this kind to accentuate the critical role played by VC in enhancing the profitability of the investee companies.

While most literature paints an intriguing picture of VC investment, the reality is that VC is one of the riskiest investment models. VCs firms lose a third (1/3) on the entire investment, and then expect to get a third (1/3) of nominal investment returns, and expect to generate a third (1/3) on the bulk of the investment returns (Kato & Tsoka, 2020 ). Since many VCs do not want to expose their failed ventures, there is a lack of relevant data, especially in Africa. Therefore, such mixed conclusions necessitate a novel empirical study that would be able to fill these literature gaps.

Role of venture capitalists on the BOD and enterprise success

Several studies have documented that the VCs’ involvement on the BOD is fundamental for the success and growth of the VC-financed companies (Bertoni & Tykvová, 2015 ; Gompers et al., 2020 ; Hellmann & Puri, 2002 ).

Gompers & Lerner, ( 1999 ) and Hellmann and Puri ( 2002 ) disclosed that VCs enter into VC contracts with entrepreneurs as a way to deal with the moral hazards and information asymmetries. In addition, VCs bring with them technological transfers, coupled with superior skills in terms of human capital that would otherwise be inaccessible without their buoyant presence on the BOD. Similarly, Lerner ( 2010 ) and Gompers et al., ( 2020 ) reported VCs do not only provide VC funds, but also secure minority seats on the BOD to oversee their investments, detect financial risks to the companies at an early stage, undoubtedly close the knowledge gaps, and manage volatile markets. These findings conflict with the earlier conclusions of Gompers and Lerner ( 1998 ), where they submitted that the VC-backed industries are characterised by a potential conflict of interests that may compel the VCs to grandstand portfolio companies for IPOs or trade sale. This study was extended by Tykvova ( 2018 ) who alluded that the VCs aim to reap high returns on their VC investments.

Surprisingly, while several authors praise the VCs for their growing involvement in portfolio companies, Aldrich ( 2008 ) and Lee and Wahal ( 2004 ) disclosed that VC financing is not aimed at mediocre companies, nor is it designated for all commercial sectors. VC is not a one-size-fits-all framework because it only benefits a small number of the early-stage enterprises whereby, on average, two out 100 potential SME applicants qualify for VC funding (Deloitte & NVCA, 2009 ). The worst scenario is that VC investors target specific industries, for instance, high-tech industries, and concentrate in a few regions globally. Therefore, VC performance in emerging economies, such as in Uganda, has remained unclear.

In conclusion, prior literature confirms that VC financing stimulates the growth of start-up firms and is a sustainable solution for averting the problem of lack of access to external financing. However, there is little evidence to document VC performance in Uganda.

The literature review offered a firm foundation for crafting the research questions to assist in data collection and analysis. The next section discusses the research design approach.

Research design

Background to venture capital in uganda.

While the VC gauge has been exceptionally skewed to the US which by far is the leader in the VC industry, in the last decade, numerous countries including Uganda, have begun to tap into the possibilities that venture-backed companies can offer. In contrast, Uganda government has remained unclear about suitable policy frameworks to undertake (Kato & Tsoka, 2020 ), and considerable misapprehensions about this financial intermediary remain a big problem. Uganda’s VC market is under-explored, with little evidence to explain how VC financing has influenced SMEs’ performance (Kato & Tsoka, 2020 ; UIA, 2016 ). Against the backdrop of this discourse, we reviewed the existing literature and theoretical concepts to answer the research questions with a focus on Uganda.

Research methods

To obtain a better insight of the nexus between VC financing and profitability of the portfolio companies, we conducted a case study using a mixed method because it provided the author with the opportunity to obtain a more comprehensive understanding of the research problem. The quantitative method was more predominant in this study. Previous researchers have also used the mixed-method research approach (Kato & Tsoka, 2020 ; Kwame, 2017 ) and commended it for yielding reliable and valid datasets.

Population, sample size, and data collection

The primary data were collected from the Uganda Investment Authority’s (UIA) database comprising SMEs classified as the top-performing SMEs in 2018 and 2019. Since UIA did not maintain a segregated catalogue for VC-backed firms, we also used the profiles of active VC firms in Uganda to track their portfolio companies. Stratified random sampling was applied to obtain a sample size of 90 respondents from a total population of 300 SMEs. Our sample respondents were selected from the central business districts (CBD) with the highest concentration of SMEs situated in the Kampala, Wakiso, and Mukono and Jinja districts. The manufacturing agribusiness sectors were preferred because they contributed 21.6% and 67% to the total national revenue collections than the fast-moving consumer goods sector (URA, 2018 ). The key respondents included VC firms responsible for financing SMEs; government agencies in charge of regulating the business environment; business entrepreneurs/managers as the recipients of VC finance; and non-VC-backed firms. This choice aimed to match the performance of the VC-backed firms against the non VC-backed firms.

As it can be seen in Table 1 , the VC-funded and non-VC-funded enterprises contributed a higher percentage of 89% combined, because the major aim was to measure the SMEs’ growth in terms of profitability, ROE, ROA, and how government regulations impact the portfolio companies. In addition, VC firms and government agencies were included in the study because they do provide risk capital and determine the direction of the funded companies. This helped to gather reliable data in terms of SMEs’ performance.

Primary data were collected using 5-point Likert scale semi-structured questionnaires that were administered to 90 key respondents. This data collection instrument offered the respondents an opportunity to complete the questions at their convenience, since they comprised a customarily busy class.

The survey questionnaire involved multiple questions ranging from strongly disagree (1) to strongly agree (5) and an average score for agreeing ≥ 3.5. Out of the 90 questionnaires administered, 70 were returned and 2 were found not suitable for data analysis. Consequently, 68 responses from the questionnaires were used for data analysis.

Furthermore, we purposely selected 30 participants ( S  = 10% of 300) for face-to-face semi-structured interviews.

Table 2 shows a higher composition of SME management staff of 66.7%, followed by a 20% share of VCs/Business Angels. These groups were chosen because they compose the highest decision-making body of SMEs, and possess a wealth of knowledge and are the custodians of the data required for the study.

Measurement of independent and dependent variables

To measure the interdependence between independent variables and the dependent variables, we used a multiple regression model, wherein VC finance and profitability are designated as independent and dependent variables, respectively. We extracted data from the 68 survey questionnaires, this was organised into an Excel worksheet, thereafter exported to the SPSS computer-aided program to run the results. We also computed the sales turnover, ROE, and net income using the ratio analysis with the assistance of the audited and unaudited reports provided by the respondents.

Table 3 shows that out of the 90 questionnaires administered, 68 completed and returned questionnaires were appropriate for data analysis. This produced a response rate of 76%, higher than the comparative study of Memba et al. ( 2012 ) which had a response rate of 65%. These results are supported by Mundy ( 2002 ), who maintained that the higher the response rate, the better: 60% would be marginal, 70% would be reasonable, 80% would be good, and 90% would be excellent. As such, there is no justification not to accept a response rate of 76%, because it conveys reliable and valid results, and is representative of the entire population under study.

In the regression model yi denotes VC finance and VCs role in POs as the independent variables, then the dependent variables are denoted as \({X}_{1}\) … \({X}_{n}\) . To measure profitability, we used the following performance metrics: sales turnover, EBIT and ROE. Government regulations come as an intervening variable.

The multiple linear regression model is illustrated as:

where Y : is % of profitability that is measured as (sales, ROE, ROA, and EBIT); β 0: is the y -intercept wherein the value of y when \({X}_{j1}\) , \({X}_{j2}\dots {X}_{jk}\) are equal to 0; β 1 and β 2 are the regression coefficients that represent the change in y relative to a one-unit change in \({X}_{j1}\) , \({X}_{j2}\dots {X}_{jk}\) , respectively; Βk : is the slope coefficient for each independent variable; \({X}_{1}\) : venture capital finance as one of the independent variable; \({X}_{2}\) : VCs involvement on the BOD as the second independent variable; ϵj : is the model’s random error (residual) term.

The predictor variables are specified as a j and k matrix.

where J : is the number of observations, and K : is the number of predictor variables.

Each column of X denotes one independent variable, and each row represents one observation, while y is the response for the corresponding row of X .

The null hypothesis is that all of the population regression coefficients are zero. The alternate hypothesis is that at least one of the coefficients is not zero. This test is written in symbolic form for three independent variables as:

H0: β 1 =  β 2 =  β 3 = 0,

H1: Not all the β s = 0.

The VC-backed companies and non-VC-backed companies are binary variables that were allocated 1 to indicate they received VC financing, and 0 if they did not receive VC financing.

To confirm the research questionnaire for validity and reliability, Cronbach’s Alpha coefficient was applied to test the results, with a 95% significant confidence level and a 5% margin of error. The results showed a 98.4% confidence level of the survey questionnaire and a margin of error of 1.6% which was much lower than the estimated 5%. The statistical tests relied on the two-sided tests represented as 0.05 level of significance.

The interview data were collected from 16 respondents. This paper is unique in that it conveys the thoughts of the different players in the VC market, something that has not been reported in earlier studies. The recorded interview data, videos, audited accounts, financial reports, narrative reports, and researcher’s observations were transcribed, reviewed, and later exported to Atlas.ti version 25. We generated memos, groups, and networking linkages which facilitated a coherent content analysis of the data. Thereafter, the data were validated and triangulation was performed until a point of saturation was attained after 16 interviews. Saunders et al. ( 2009 ) argued that when the point of saturation is attained, the results are adequate as a true representation of the sample.

Ethical considerations

The study received approval from the Research Ethical clearance committee of the University of South Africa (UNISA) in August 2019. We also received prior approval from UIA and USSIA to access their databases. We further obtained prior consent from all the respondents before commencing the study, and they signed informed consent as confirmation for their involvement in the study. We signed Non-Disclosure Agreements (NDA) not to share any information to any third parties without prior management approval. The respondents had the liberty to decline to respond to some of the questions they found disturbing or which they perceived as uncomfortable.

Empirical results and discussion

The capacity of an enterprise to generate sufficient profits defines its financial stability to primarily enlarge the value of invested capital to meet its financial obligation as a going concern. The profitability approach has been extensively used as a popular and dependable approach, if compared to other methods (Myskova & Hajek, 2017 ; Du & Cai, 2020 ), since fund managers frequently search for firms that have previously demonstrated growth potential.

Profit analysis of VC-financed and non-VC-financed enterprises

We specifically evaluated the firms’ profitability fluctuations considering the variability in the taxes charged to the varied sectors, and the different accounting principles used. The paper used EBIT for a rational comparison, because the outcomes may be relatively diverse when earning after tax (EAT) is used.

Figure  1 uncovers that the VC-financed companies realised much higher profits of between 30 and 50%, compared to 15% to 24% for the non-VC-financed enterprises. The highest profits were reported in year 3, whereby the VC-backed firms realised 50%, compared to 24% for the non VC-backed firms. In view of these results, the VC-recipient companies doubled the companies financed by other sources. A company that earns higher profits suggests better performance and efficiency compared to the rivals in a similar business sector.

However, the study of Memba et al. ( 2012 ) revealed much higher profits of above 60% for the recipient companies. We observe that her study was done over 10 years ago when the presence of the VC firms was still insignificant, suggesting less competition in the VC industry at the time. This potency contributed to reaping high returns in a virgin VC industry. In addition, current research discloses that while there might be other objectives for setting up a company, the major objective is to make reasonable profits. Accordingly, we can confirm that increasing the VC supply to start-ups firms contributes to profitability growth. These results are consistent with prior literature, for instance, Biney ( 2018 ), Kato and Tsoka ( 2020 ) and Du and Cai ( 2020 ).

Considering that the financial statements used for this study from 2016–2018, were prepared based on book value, they do not reflect the current reality in the business and direction of the firm. Consequently, we further ran an ANOVA F -test to assess if the differences in mean values between the VC-backed and non-VC-backed firms are due to chance, or if they are indeed significantly different.

Based on the results from the ANOVA test presented in Table 4 , the F -value (3, 2.145) = 5.536 and a significant value of 0.02, which is much less than the 5% level of significance for the regression. This offers irresistible evidence that our model is well fit and valid. The outcomes from the ANOVA test confirm that there is a positive significant relationship between profitability as a dependent variable, and VC finance as a predictor variable. As can be seen, the results confirm that VC financing escalates profitability for the funded companies because the regression coefficient is not equal to zero. In contrast, our findings conflict with the study of Rosenbusch et al. ( 2013 ), who found that VC finance does not enhance the profitability of the funded firms.

These results were augmented with 16 face-to-face interviews conducted with the key players in the VC market who generally revealed attractive results. More compelling results were obtained from the VC fund managers. ‘T o maximise profits it is mostly about structuring not having a routine or monthly payments, this is the real framework that enhances profitability , DRS05’. The profitability growth of the funded companies shows that about 50% of the projects are doing very well, 30% are struggling, and 30% of the projects are completely failing to grow. They endorsed VC financing for its contribution to the growth of the funded firms.

Although previous studies have painted an intriguing picture of the success of all the VC-backed firms, The Kauffman Foundation (2017) uncovered that 62% of portfolio companies failed to exceed returns from the stock markets. That explains why the number of VC funds has shrunk by 30% in the past decade, according to NVCA ( 2020 ). Above and beyond, the current research of Seth ( 2020 ) reported that 65% of investment rounds fail to return 1× capital and only 4% return greater than 10× capital. Ultimately, the difference between the best performing and average performing firms are incredibly wide. Comparatively limited investments in the portfolios of VC funds harvest huge gains.

However, we discovered that principal–agent relationship was more predominant in the VC-industry setting and everyday life due to the potential problems of adverse selection and moral hazard. The VCs enter into VC contracts to defend their interests wherein entrepreneurial work as their agents. Our findings revealed that 100% of the respondents confirmed signing VC contracts and allowing at least one VC fund manager on their board structures. Certainly such arrangement brings in play the agency theory to mitigate the moral hazards and information asymmetry related to early-stage enterprises.

All in all, early-stage firms that can demonstrate the capacity to generate worthy profits have higher chances of attracting VC financing because this is the area of interest for any prospective investors. Fund managers primarily depend on profitability ratios to determine the financial health of a firm (Myskova & Hajek, 2017 ).

Pearson correlation coefficient test

The paper employed the Pearson correlation coefficient tests to determine if there is any relationship between ROA and VC financing. The higher the ROA number, the better, because the company is earning more money on less investment.

As shown in Table 5 , the test results display a correlation coefficient of ( r  = 0.336, P  ≤ 0.05) designating that there is a positive relationship, as P  ≤ 0.05. It can therefore be concluded that 33.6% (0.336) of changes in ROA can be explained by the use of VC finance. Particularly, firms that received VC financing recognised higher ROA than their non-VC-financed enterprises. Kwame ( 2017 ) concurs with these results. A higher percentage of ROA depicts sound financial health of an enterprise represented by its asset base’s capacity to produce profits with each dollar invested. Similarly, a dwindling ROA might indicate over-investment in the assets, or evidence of some of the assets not being productive in supporting revenue growth, which is an indicator of a failing business (Bloomsbury, 2009 ). ROA is not a flawless metric for measuring a company’s performance, nonetheless it has been observed to be the most effective, since it captures the fundamentals of business performance in a holistic way. ROA captures how well a company uses its assets to create value, and this is a fundamental area of interest to the VC investors.

Hα2: The venture capitalists’ involvement in the portfolio companies influences their success

To satisfactorily identify the impact of VC on the portfolio companies, we also ran descriptive statistics involving mean scores, standard deviation and skewness scores, to illustrate statistically the role of the VC fund managers on the BOD of the portfolio companies.

As seen in Table 6 , the descriptive statistics show a mean score of 4.0, and with a standard deviation of 0.7754, suggesting that changes in ROE for the portfolio companies was influenced by VC funding. Precisely 80% (54 of 68) of the respondents confirmed that the growth of ROE was escalated by VC financing. Similar results were reported from the structured face-to-face interviews, wherein all the interviewees (100%) admitted to recognising growth of their firms due to the consulted efforts from the VC fund managers. We can therefore conclude that it is not enough to issue VC finance but the VC’s presence on the board of portfolio companies is fundamental for their success. In addition, we also discovered that 87% (59 of 68) of the respondents lacked adequate knowledge about VC financing. This partly explains why the VC industry in Uganda has remained small. Our findings are consistent with contemporary literature, supporting VC for yielding higher returns.

Moreover, 69% of the interviewees confirmed enhanced growth of their companies arising from the superior skills of the VCs. This was manifested in access to new markets, financial management skills, innovations, and expanding their networks to other potential investors. Consistent with above results, ‘the rigorous due diligence alone is enough to encourage the growth of the business even if VCs do not provide patient capital , respondent DRS05 reported’ ; whereas, respondent DRS09 observed that the VCs involvement on the BOD assisted to quickly discover the financial hurdles at an early-stage hence mitigating against financial risks. Our findings conforms to earlier scholars who contended that value addition to the portfolio companies is essential for VC investment because it differentiates it from other sources of funds (Hellmann & Puri, 2002 ; Lerner, 2010 ).

We also surveyed the interviewees to determine whether there was evolution in ROE of the VC-backed firms after VC financing. The outcomes exposed 25–35% average increase in returns. ‘We are not only there to bring the cash on the table, but we also bring bigger networks to talents to help these companies grow, we bring experience from other markets in terms of how we scale businesses, One of the fund managers DRS06 emphasised’. The results were similar to the findings of Lerner ( 2010 ).

Regardless of the appealing results, VCs encounter problems which may undermine the success and growth of the early stage firms. ‘ One channel of exiting is when we come out of the business and we are ready to sell our stake, either to the business owners or to the equity market where there is an opportunity to list on the stock market, for which there has not been a great channel , respondent DRS06 stated ’. The point to make here is that VCs find it difficult to exit due to the undeveloped financial market in Uganda. In addition, we discovered the presence of VC myopia as the entrepreneurs fear losing control of their companies, arising from the temporal sharing of ownership. This partially explains the gradual uptake of VC investment in Uganda. Therefore, some business entrepreneurs remain sceptical of entering into VC deals because they do not know their destiny. Similar conclusions were presented by Tykvova ( 2018 ).

As we continue filling in the gaps in literature, this paper makes a vital contribution to novel knowledge by offering a diversified framework for enterprise success (Fig.  2 ). This framework will benefit the key players in the VC market to manipulate VC financing to enhance enterprise success. Although VC has been extensively studied, no study has developed a diversified framework for enterprise success that integrates exclusive performance variables like VC finance, government involvement, human capital and credible business plans to assess enterprise success. Our findings reveal that these variables significantly impact enterprise success, and this motivated the authors to develop a framework of this nature to account for these variables which have not been yet used in prior literature.

Diversified framework for enterprise success. Source: Authors’ own compilation

Accordingly, the interaction of these variables proved indispensable in enhancing enterprise success. Firstly, government involvement in the VC market is essential for making supportive regulations and enhancing co-investment funds into private equity firms. Secondly, VC finance was identified as a significant variable for stimulating enterprise success matched to conventional bank lending. Thirdly, credible business plans for potential entrepreneurs is a turning point for SME success. These performance variables are supported by evidence from semi-structured interviews that disclosed that only 2% of business plans pass the due diligence process to qualify for VC financing. Finally, human capital, encompassing VCs on the BOD and senior management, were identified as instrumental variables in encouraging the enterprises’ success.

This framework is reinforced with our empirical evidence from the quantitative results and interview results (Sects. 5.1 and 5.2). Therefore, the interaction of all these variables as illustrated in Fig.  2 , translates into enterprise success manifested in improved profitability, ROE, ROA and sales turnover. To the best of our knowledge, no previous study has ever applied this set of integrated variables to examine the performance of SMEs. On this basis, this framework was necessary to contribute to the body of knowledge and also pave a way for future investigation.

To improve the framework, the study suggests future research to investigate:

‘To what extent does government’s involvement in VC financing, the entrepreneurs’ credible business plans and the presence of the venture capitalists on the BOD enhance early-stage enterprise success in Uganda?’

The study examined the nexus between venture capital finance and profitability of the portfolio companies. The results confirm the superior performance of VC-financed enterprises when compared to non-VC-financed enterprises. Moreover, 63% of the respondents reported a positive impact of government regulations on the development of early-stage firms. We also discovered that only 50% of the VC-backed companies were exceedingly operating as expected, while 30% were struggling and 20% completely failed. Our findings were consistent with results of NVCA ( 2020 ). On this basis, increasing VC investment in Uganda and similar emerging economies would assist to close the financing gap which inhibits the success and growth of SMEs.

Furthermore, this paper makes four major contribution; Firstly, the paper highlights the demand for government to enhance VC supply to early-stage firms, as well as to create a favourable investment environment which will inspire foreign VC firms to invest in the country. This may involve government support to reduce the taxes levied on capital gains on the disposal of business assets during initial public offerings (IPOs) or trade sales. Secondly, the results from this study will benefit the VCs in their efforts to make ideal investment decisions to enhance VC market development. Thirdly, the study makes a vital contribution to knowledge by offering a diversified framework for enterprise success in emerging economies. The framework is expected to benefit the key players in the VC market in their efforts to evaluate and customise sufficient funding programmes that can propel the success of early-stage firms. Finally, this paper also extends our knowledge about recent developments in the VC industry and how it influences the profitability trends of SMEs in emerging economies, such as in Uganda.

However, this study encountered some drawback which may not be overlooked. The study was confined to agribusiness and manufacturing SMEs largely in the four major cities of Uganda. Therefore, the results ought to be used with caution as they may yield subjective results in the different sectors, like Fintech industries and generally, the service sector. Although VC financing appears exciting and is widely accepted to spur enterprise success and growth, only a handful of studies have examined the impact of VC financing on enterprise success. Therefore, future investigations in this area would complement this study and improve the diversified framework for enterprise success.

Availability of data and materials

The datasets generated and/or analysed during the current study are not publicly available due to the Non-Disclosure agreements we signed with the respondents, but are available from the corresponding author on reasonable request.

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Special thanks to the college of Economic and Managements for the financial support. We further extend our sincere gratitude to the handling editors and two anonymous reviewers whose intuitive remarks made this article superior.

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Ahmed I. Kato & Chiloane-Phetla E. Germinah

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AIK is the focal author of this article and CPEG is a co-author, who contributed technically as an advisor toward improving the article.

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Ahmed I. Kato is a Postdoctoral Research Fellow in the Department of Applied Management, University of South Africa, Pretoria. Ahmed has published several articles in accredited journals with special focus on venture capital, entrepreneurship and SME development. Moreover, he holds over 14 year’s vast experience in financial management and strengthening research capacity in the NGO sector.

Prof Chiloane-Phetla GE is a Professor of Entrepreneurship in Department of Applied Management, University of South Africa-Pretoria. Prof Chiloane has served in different academic position through her entire career and she has published several articles in accredited journals, written books and presented several papers in international conferences.

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Kato, A.I., Germinah, CP.E. Empirical examination of relationship between venture capital financing and profitability of portfolio companies in Uganda. J Innov Entrep 11 , 30 (2022). https://doi.org/10.1186/s13731-022-00216-5

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1. What is Your Venture Capital Investment Thesis

Pre-Curriculum 1: Use the leading Investment Thesis template to craft your investment focus

In order to build a strong venture capital fund, you start with a strong fund Thesis.

What is the fund Thesis?

A fund Thesis is the strategy by which a venture capital fund makes money for the fund investors, called Limited Partners or LPs. It identifies the stage, geography and focus of investments, as well as the unique differentiation of the firm.

A fund Thesis is not for public consumption. It is private for Limited Partners only.

How do you write a compelling fund Thesis?

There are multiple components to a compelling fund Thesis that we have compiled into a simple to follow format. The ideal Thesis should not be longer than 40 words , preferably 35 to 37 words.

“[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”

What are the key components of a fund thesis, naming your fund: [fund name] .

When getting started, we recommend using a last name or color, like ‘Ressi Ventures’ or ‘Orange Fund,’ since the Thesis will evolve many times over the first months. After you feel that you have a final Thesis, then choose a name that represents your Thesis.

Fund Size: [$x MM] 

This is the minimum size of committed capital by LPs to the fund. For new managers, the fund size should be no greater than $10 MM. Your goal is to oversubscribe whatever your target fund size is, so aim for a small number.

Investment Stage: [Stage] 

This is the stage of portfolio companies where the fund will enter most investments. Stage is usually based on the fund size and the manager deal access. Most new managers choose angel, pre-seed, or seed as the stage. Limited partners prefer a focused stage over multi-stage funds, especially larger limited partners.

Your Location: [Country / City] 

This is the city or country where the managers are living or plan to live while running the fund. Funds have a life of at least 10 years, so pick a city or country where the managers plan to be for some time. If you are living in a large country, then it is better to specify a city or region, such as “East Coast” versus the “United States.”

Geographic Focus: [Geography] 

This is the geography where the fund will invest in most portfolio companies. The majority of limited partners want a focused geography, such a single country, a set of countries, or a small geographic region. When investing in multiple countries, managers and limited partners face complex legal and tax issues on entering and exiting deals.

Sector Focus: [Sector / Market Companies] 

This is the sector or subsector that the fund will have the most portfolio companies. Target sectors or subsectors need to be in areas that most people understand, such as FinTech, digital health, SaaS, or marketplaces. Do not make up new sectors or phrases, such as “Lazy Tech” or “Innovation Origination.” The sector or subsectors of the Thesis are one of the most important ways to connect with limited partners.

Unique Selling Point: [with Secret Sauce] 

The secret sauce is the applied track record of the managers to the Thesis using metrics to quantify experience and success. The top secret sauce metrics are the following in order: 1. investment exits, 2. investment performance, 3. capital raised, 4. sales closed, 5. companies helped, 6. size of network, 7. years of experience. The secret sauce needs to show why the managers are uniquely qualified to run this fund.

What are some sample fund Theses?

Using the above template, here are some clear and concise thesis examples:

• Azure Capital is launching a $5 MM pre-seed fund in Toronto to back Canadian AI startups with the GP achieving 15+ successful exits for $3.5 B from a network of 500+ AI scientists.
• Green Ventures is starting a $7 MM seed fund in Berlin to back European sustainability companies based on a track record of 200% ROI over 5 years of investing in the space.
• Coral VC is creating a $10 MM angel fund in Sydney to back APAC e-commerce startups leveraging the managers experience helping 5 companies achieve 30% month over month revenue growth in ecommerce.
• Blue Investments is launching a $2 MM pre-seed fund in São Paulo to back Brazilian Agritech startups from manager’s network of 1,200 leaders built from 20 years as CEO of the leader Agritech supplier in LATAM.
• Pink Management is launching a $10 MM venture studio fund in Silicon Valley to back studio-created biotech hardware capitalizing on a history of raising over $500 MM for biotech startups and assisting in 20+ FDA approvals.

How specific should your fund Thesis be?

A compelling fund Thesis is very specific about stage, geography and focus to align with the allocation requirements of Limited Partners. A common problem is that New Managers are often afraid to be specific, since they feel it will limit their ability to do hot deals.

A Thesis states the intention of a firm to pursue certain kinds of investments, but is not legally binding in the firm or in the fund agreements. So, a fund Thesis has the effect of gravity. Venture capitalists often can do deals that are far away from the Thesis, but they have less attraction.

How do you refine your fund Thesis?

You will be refining your Thesis heavily for the first few months when forming your fund. A well-defined thesis is specific about stages, geographies, and focus, thus attracting the right LPs while allowing some flexibility. But the first person that you need to satisfy with your thesis is yourself.

Here is an initial exercise to get started that should take about 30 minutes to an hour.

• First, use the template above and try to write three versions of a potential venture fund thesis. As mentioned above, be as concise and specific as possible.
• Next, read each of them aloud while recording a video of yourself. Speak conversationally (in the same way you might casually pitch the idea to someone in an elevator), and in one video “take”. 
• Then, watch the videos and ask yourself if you would realistically invest in that thesis. How clear was the message? How confident was the delivery? What questions come to mind?
• Finally, revise the thesis and video until you are satisfied with your work. Resist the urge to make the one-sentence thesis a one-page thesis. Remember: brevity is the key. 

What are the next steps?

This is just one part of the first steps to starting a venture capital firm, which include: 

• What is your Venture Capital Fund Thesis
• How to Determine Your Venture Capital Fund Size
• How to Select a Venture Capital Firm Focus
• How to Determine your Venture Capital Secret Sauce

About The Author

Adeo Ressi is CEO of Decile Group, powering the next generation of venture capital firms worldwide with an integrated offering of training, tools, support, and funding. Decile Group is the parent of the VC Lab venture capital accelerator, which helped to launch nearly 50% of all new manager firms in 2022. Adeo is also Executive Chairman at the Founder Institute, a pre-seed accelerator with chapters in over 250 cities worldwide and over 5,000 portfolio companies.

Adeo has launched 14 venture capital funds and founded 11 startups, having nearly $2 billion in exits before 30. Adeo previously served on the Board of the X Prize foundation to pursue his interests in space exploration. He studied architecture and spent time living on a commune to explore his interests in designing better ways to live. Adeo is passionate about inspiring people to achieve their potential.

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Venture capital investment market report 2024, featuring sequoia capital, greylock, andreessen horowitz, accel, index ventures, union square ventures, founders fund and first round capital.

Dublin, May 08, 2024 (GLOBE NEWSWIRE) -- The "Global Venture Capital Investment Market: Analysis By Funding Type, By End User, By Region, Size and Trends with Impact of COVID-19 and Forecast up to 2029" report has been added to ResearchAndMarkets.com's offering. Following the unprecedented VC investment activity during the COVID-19 pandemic in 2021, concerns arose about potential weaknesses in 2022 and a substantial VC downturn in 2023. According to WIPO, there was apprehension that tighter monetary conditions could lead to a notable decline in venture capital, particularly affecting regions such as Latin America and Africa, which are underserved by VC funding.

The venture capital investment market declined in 2022 and 2023 due to various factors such as the collapse of Silicon Valley Bank, challenging market conditions for exits, a tough fundraising environment, and a decline in late-stage deal sizes.. The global venture capital investment market was valued at US$320.07 billion in 2023, and is expected to be worth US$713.14 billion in 2029. The current state of venture capital investment environment is characterized by a shift towards remote interactions, increased focus on environmental, social, and governance (ESG) factors, and diversity, equity, and inclusion (DEI) initiatives, as well as economic uncertainty. Another emerging trend in the venture capital investment market is the democratization of access to capital through alternative funding models such as crowdfunding, angel investing, and decentralized finance (DeFi). These platforms enable entrepreneurs to raise capital from a broader pool of investors, bypassing traditional intermediaries such as venture capital firms. While venture capital remains a dominant force in startup financing, these alternative funding models are gaining traction and reshaping the landscape of early-stage investing.

Additionally, the convergence of technology and traditional industries is creating new opportunities for venture capital investment. Startups leveraging technologies such as artificial intelligence, blockchain, Internet of Things (IoT), and robotics are disrupting sectors ranging from finance and healthcare to manufacturing and transportation. Venture capitalists are actively seeking out startups at the intersection of technology and industry, recognizing the potential for transformative innovation and market disruption. The global venture capital investment market is expected to grow at a CAGR of 16.07% over the years 2024-2029. Market Segmentation Analysis:

By Funding Type: First time segment dominated the market in 2023 while follow-on segment is foreseen to grow at the fastest CAGR during the forecasted period. First Time investments represent capital injections into early-stage startups or entrepreneurial ventures that are receiving funding for the first time. These investments are crucial for fostering innovation and entrepreneurship by providing financial support to promising startups with high growth potential. Factors driving the growth of first time investments include the rapid pace of technological innovation across industries, the proliferation of startup ecosystems worldwide, improved access to capital for entrepreneurs through platforms like crowdfunding, and the increasing activity within the venture capital industry itself. By End User: As organizations seek to streamline operations, improve efficiency, and enhance customer experiences, they are investing in software technologies that enable automation, data analytics, and collaboration. Additionally, the shift towards remote work and online services accelerated by the COVID-19 pandemic has further fueled demand for software solutions that support remote collaboration, communication, and productivity. Simultaneously, pharmaceutical & biotechnology segment is anticipated to exhibit the fastest CAGR during the forecasted period. By Region: The venture capital investment market in North America is a thriving ecosystem characterized by dynamic trends and significant activity. With a strong focus on high-tech startups spanning industries such as biotechnology, software, fintech, and clean tech, North America stands out as a global leader in venture capital. The region boasts a high number of unicorn companies, reflecting a vibrant startup culture and a robust investment environment. Both international and domestic investors actively participate in the competitive landscape, driving innovation and growth across various sectors. Canada, in particular, has emerged as a key player in the venture capital scene, with notable investments in ICT, life sciences, and cleantech. Meanwhile, the US remains a powerhouse in venture capital, attracting startups and investors with its concentration of leading investment banks and a thriving fintech sector. The venture capital investment market in the Asia Pacific is expected to grow significantly during the forecasted period. The Asia-Pacific region has become a dominant force in global investments, attracting the keen interest of venture capitalists (VCs) worldwide. Driven by a burgeoning middle class, swift technological progress, and favorable regulatory frameworks, the region provides unmatched prospects for expansion and pioneering ventures. Unlike the saturated markets of Silicon Valley or Europe, Asia-Pacific offers a varied and vibrant investment arena. VCs are enticed by the region's immense scale, boasting billions of potential consumers across both emerging and established economies. Despite challenges such as economic uncertainties and geopolitical tensions, the region remains attractive for VC investments. Singapore and Australia are highly sought-after investment destinations due to their status as developed, transparent, and liquid markets. Meanwhile, India stands out as the preferred emerging market in the Asia Pacific region, with Mumbai and Delhi attracting long-term investors looking to expand their real estate portfolios in one of the world's fastest-growing economies. The venture capital investment landscape in China has faced challenges and fluctuations in recent years, with a notable decline in deal volume and value. Despite these challenges, China remains a significant player in the global venture capital market, standing alongside the US as a key hub for investment and innovation.

Key Market Dynamics

Growth Drivers

Increasing VC Deals

Surge In Start-Ups And Small Businesses

Higher Potential Return

Rising Number of Retail Investors

Technological Innovation

Entrepreneurial Ecosystem

Prolonged Duration of Venture Capital Exits

Foreign Exchange Volatility

Market Trends

Increasing VC Investment in Biotech

Growth of Mega-Deals and Unicorn Companies

Increasing Acquisitions of Venture-backed Companies

Incorporation of Machine Learning and Algorithm

Diversification of Venture Capital Beyond Silicon Valley

The Rise of Equity Crowdfunding

Increasing VC Investment in Cryptocurrency Space

Increasing Investments in Generative AI

Competitive Landscape: The venture capital investment market is highly fragmented. The key players, ranging from large multinational corporations to innovative startups and influential financial institutions, are actively pursuing strategic initiatives. Many are directing their focus towards digital transformation, leveraging cutting-edge technologies such as artificial intelligence (AI) and blockchain to streamline operations, enhance customer experiences, and drive efficiency across various sectors.

Sustainability and environmental, social, and governance (ESG) initiatives are emerging as top priorities, with major players committing to reducing their carbon footprint, promoting diversity and inclusion, and aligning investments with responsible and ethical practices. Moreover, leading companies are keen on tapping into emerging markets, establishing strategic partnerships, and adapting to shifting consumer behaviors and preferences. These endeavors underscore the industry's commitment to innovation, sustainability, and global expansion, reflecting a multifaceted approach towards staying competitive in the evolving landscape of venture capital investment. The key players of the global venture capital investment market are:

Sequoia Capital

Greylock Partners

Andreessen Horowitz

Index Ventures

Union Square Ventures

Kleiner Perkins

New Enterprise Associates

Founders Fund

First Round Capital

Khosla Ventures

Lightspeed Venture Partners

Battery Ventures

For more information about this report visit https://www.researchandmarkets.com/r/176fdj

About ResearchAndMarkets.com ResearchAndMarkets.com is the world's leading source for international market research reports and market data. We provide you with the latest data on international and regional markets, key industries, the top companies, new products and the latest trends.

Q1 2024 Venture Financing Report – Invested Capital Increases at All Stages and Median Pre-Money Valuations Increase for Early Rounds, While Percentage of Down Rounds Reaches New High

Cooley handled 202 reported venture capital financings in Q1 2024, representing $6.1 billion of invested capital. While the deal count remained about the same as last quarter, invested capital increased from the $4.3 billion seen in Q4 2023, aligning with invested capital seen earlier in 2023. In Q1 2024, deal volume remained the same or saw a slight increase across all stages of financing – except for Series Seed deals, which had a downtick from 83 reported deals in Q4 2023 to 66 reported deals in Q1 2024. Despite the relatively flat overall number of deals in Q1 2024 versus Q4 2023, the number of transactions per month in Q1 decreased sequentially.  Invested capital increased across all stages of financing in Q1 2024, as compared to Q4 2023, with the biggest growth noted in Series D and later rounds, which increased from $451.7 million in Q4 2023 to $1.2 billion in Q1 2024.

Median pre-money valuations increased for early- and mid-stage financings, with the most significant increase seen in Series B rounds, which rose from a median of $130 million in Q4 2023 to $165 million in Q1 2024. Median pre-money valuations for Series C, Series D and later rounds decreased in Q1 2024, continuing the downward trend that started in 2023 for later-stage rounds. The percentage of deals with pre-money valuations greater than $100 million (at all stages) increased to 35% of deals – the highest percentage noted since Q2 2022.

The percentage of down rounds continued to increase during Q1 2024, reaching 32% of deals, the highest witnessed since the 2014 inception of this report. The percentage of deals representing up rounds decreased slightly to 65% in Q1 2024. Only Q3 2023 saw a lower percentage of up rounds, and the last three quarters are the only quarters in this report’s history when up rounds represented under 70% of transactions.

Perhaps unsurprisingly in light of the high percentage of down rounds, the percentage of deals with a recapitalization remained relatively high at 2.5% of deals for Q1 2024. Before Q2 2023, the percentage of deals involving a recapitalization had not risen above 2.5% of deals since Q4 2014. The percentage of deals with a pay-to-play provision increased to 8% of deals in Q1 2024, after dropping to 4.5% of deals in Q4 2023. This represents only the fourth time in this report’s history that the percentage of deals with a pay-to-play provision has exceeded 7% of deals. The percentage of deals with nonparticipating preferred stock remained very favorable to companies, representing 93% of deals for Q1 2024.

Despite the overall economic terms demonstrating continued strain, approximately 94% of transactions still had 1x nonparticipating preference, indicating other terms remained fairly neutral.

In PitchBook’s annual Global League Tables for 2023 , for the fourth consecutive year, Cooley was named the #1 law firm in the US and globally for representation of companies in venture capital financings. PitchBook also designated Cooley as the most active firm – in the US and globally – for representing companies in all deals, inclusive of venture capital, mergers and acquisitions, and private equity. In addition, Cooley was named the second-most active law firm in the US and globally for representation of investors in venture capital financings and was ranked #1 overall for representation in venture financings in the industry sectors of pharma and biotech and healthcare services and systems.

Spotlight on technology

The deal volume and invested capital for tech company venture financings saw an increase in Q1 2024. The Q1 2024 numbers for tech company financings were in line with the numbers seen in Q1 2023, but still remained below the highs observed in 2021 and early 2022. Similarly, the average reported deal size of venture financings for tech companies rose to $26.1 million for Q1 2024, up from just under $17.7 million in Q4 2023. The Q1 2024 average was comparable with the averages seen in Q3 2022 through Q3 2023, but still lagged behind the high average deal sizes witnessed in 2021 and the first half of 2022.

Spotlight on life sciences

In Q1 2024, the deal count for life sciences company financings remained about the same compared to last quarter, but invested capital increased from the $1.4 billion reported for Q4 2023. Reported deal sizes for venture financings of life sciences companies also increased in Q1 2024 to an average deal size of $45.7 million, compared to only $30 million in Q4 2023. Despite having the same deal count as was reported in Q1 2023, the invested capital and average deal size both increased compared to one year ago, when invested capital was just more than $1 billion and the average deal size was only $20.9 million. The percentage of life sciences company venture financings structured in tranches continued a downward trend in Q1 2024 to 17% of reported financings for life sciences companies – down from the 23% noted in Q4 2023.

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This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices .

Analyzing Trends in Crypto and Blockchain Venture Capital: Galaxy Digital Research

• CryptoGlobe Writer
• In #Blockchain , #cryptocurrency

In a recent research report titled “Crypto & Blockchain Venture Capital – Q1 2024” by Galaxy Digital, it was highlighted that while digital asset markets have shown significant recovery from the lows of 2023, venture capital investment in the sector has not kept pace with previous bull market trends. Galaxy Digital noted that venture capital dollars are trailing, unlike in the 2017 and 2021 bull runs, where there was a high correlation with liquid crypto asset prices. Several factors contribute to this stagnation, including high interest rates, which dampen risk appetite, a lingering reluctance in the crypto market following the 2022 blowups, and a scarcity of later-stage companies capable of absorbing large venture investments. As a result, early-stage companies have attracted the most interest, both in terms of capital and deal count, with a modest quarter-on-quarter increase in total capital invested and a 50% rise in deal count, mainly at the Series A stage or earlier.

Galaxy Digital’s report also points out that the trend towards early-stage investment is a positive indicator for the long-term health of the cryptocurrency ecosystem. These companies are often at the forefront of developing new technologies, including scaling solutions, games, and tools that integrate artificial intelligence with blockchain technology. Despite challenges in raising capital for later-stage ventures, the flourishing of innovative projects suggests a vibrant and evolving landscape.

The introduction of spot-based Bitcoin ETFs in the United States is another focal point of the report. According to Galaxy Digital, these ETFs provide an accessible, low-fee, and highly liquid means for investors to gain exposure to Bitcoin. However, this ease of access could potentially divert interest away from crypto startups, as these ETFs fulfill some investors’ need for exposure to the crypto market, potentially impacting venture investments in crypto-linked equities.

With regards to specific blockchain technologies, Galaxy Digital highlights significant venture capital interest in Bitcoin Layer 2 projects during Q1 2024. The development of new token standards on Bitcoin, such as BRC-20 and Runes, and the application of technologies pioneered in the Ethereum ecosystem, like optimistic and zk rollups, have piqued investor interest. This shift views Bitcoin not just as a monetary system but as a platform network supporting a variety of applications.

The report by Galaxy Digital further explores the distribution of venture capital across different sectors within the blockchain space. While Web3 and Trading categories continue to dominate in terms of deal count and capital raised, the Infrastructure category has seen substantial growth, becoming the leader in capital raised and second in deal count in Q1 2024. This includes investments in tools like staking, re-staking services, and platform tools, with notable rounds such as EigenLayer’s $100 million financing.

Moreover, Galaxy Digital comments on the challenges faced by fund managers in the current economic climate, noting a downturn in the size of funds and the capital allocated to them since the tumult of 2022. However, a slight uptick in the number of new funds indicates emerging opportunities and continued growth in crypto prices and adoption could rejuvenate investor confidence and funding activities.

Finally, the United States remains at the forefront of the crypto startup ecosystem, though regulatory challenges could potentially drive some operations overseas. Galaxy Digital underscores the importance of thoughtful policymaking to maintain the U.S. as a hub for technological innovation and to support the continuing development of the cryptocurrency and blockchain ecosystem.

Featured Image via Pixabay

The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.

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