Role of Venture Capitals in New Business Formation

by

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

The importance of venture capital to the incubation and early-stage growth of new enterprise (new firms) has been well documented. Studies exploring the determinants of new-firm formation have tested for hypothesized linkages involving contextual (socio-economic) factors on a variety of spatial scales. To date, however, little or no published research is focused on the role of venture-capital investment flows on new-firm formation at the regional level. This study seeks to address this gap in our understanding. In order to isolate the effects of venture capital on new-firm formation, while controlling for categories of covariates whose influences may be confounded.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the Study1

Purpose of the Study2

Problem Statement2

Rationale of the Study2

Significance of the Study3

Aims and Objectives4

Theoretical Framework4

Research Questions5

CHAPTER 2: LITERATURE REVIEW6

Venture Capital6

Empirical Studies on Role of Venture Capitals8

Empirical Studies of New-Firm Formation9

Role of Venture-Capital in New Businesses Formation10

Venture Capital Allocation13

Venture Capital and Business Strategies15

Venture Capital: Formula for Economic Growth16

Entrepreneur and Venture-Capital Investment16

New-firm Formation18

Stages of Venture Capital19

Gaps in the Previous Researches23

REFERENCES24

CHAPTER 1: INTRODUCTION

Background of the Study

The first modem venture capital firm was established in 1946 by Karl Compton, the president of the Massachusetts Institute of Technology, Merrill Griswold, the chairman of the Massachusetts Investors Trust, Ralph Flanders, the president of the Federal Reserve Bank of Boston and General Georges F. Doriot, a Harvard Business School professor. American Research and Development (ARD), the entity formed by these trend-setting men, financed commercial applications of technologies that were developed during the world-war period (Gompers, 2001; Lambe, 1992). Their investment was very successful and was referred to as a “home run" (Gompers, 2001).

This success motivated the federal government to become involved in the activities of what became known as the venture capital industry. In 1958, the government established the Small Business Administration, which was given the authority to control new small business investment companies (SBICs) that provided financing and industry expertise (Gompers, 2001). By the 1980s, there was an increasing flow of funds into the venture capital industry from different types of investors, including individuals, pension funds, corporate funds and endowments. The flourishing of the venture capital industry during the 1980s was attributed mainly to the New Prudent Investor Rule that was enacted at the end of 1970s, which allowed institutional investors to invest in venture capital firms.

Purpose of the Study

In this study, the researcher focuses on venture capitals and its role in formulating the new business in United Kingdom. However, the researcher will highlight the significance of ventures in United ...