Financing With Venture Capital: Advances in Knowledge Over the Last Ten Years and Research Avenues

3.4 The impact of the venture capital company on the business that is financed

By its nature as investor and as middle- or long-term partner, the provider of venture capital can influence significantly the development of the business in which it has invested. Beyond financing, SME can thus benefit from the venture capitalist's network of contacts, experience and advice, allowing some of them to increase their degree of professionalism as well as their competitiveness on national and international markets.

Figure 7: Summary of Topic 4 Studies

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3.4.1 The "professionalization" of SME after VC (introduction of business practices and procedures)

SME are known for their lack of various resources (something that hinders their ability to get organized like big businesses) and, hence, for the fact that they often operate more intuitively than professionally. That, in fact, is their main characteristic. The arrival of an outside shareholder can change this because of the latter's more frequent information needs. Some studies have dealt with this research topic, focussing on such subjects as:

• the board of directors: influence of the VCC's reputation, increase in the number of outside administrators, expected role of the board of directors, etc.;
• formalization: decision-making process, development of information systems, 'professionalization' of the executive team, formalization of certain management activities, etc.

Boards of directors are the favourite tools of moneylenders and investors to "monitor" their investments. How do the senior executives react to the insertion of a board of directors? One must note that the board of directors is often larger when the founding director is replaced by a "manager". Is there a loss of efficiency or of vision associated with this departure? Is the "professionalized" board more efficient than the executive team managed by the founder? Very few studies have been done on the "effects" of VCC on the development of SME. And yet, this type of study is important as it would permit a greater understanding of the needs of SME beyond the need for financial resources and show that a "more professional and formalized" management can be associated with a reduction in the vulnerability of the businesses that are financed.

3.4.2 The involvement and support of VCC

A venture capital provider's commitment to a business is rarely only financial. The increased risk of businesses that solicit this financing involves keeping track of the investment, something that cannot be done simply by putting out periodical financial reports. Thus, there are other types of involvement, which have been dealt with as follows:

• The management team and managerial support: replacement of the primary senior executive (frequently the founder), decentralization of management, independence of the board of directors, regional differences (international studies), etc.;
• Strategic involvement: financial and business advice, sharing and transfer of knowledge, the influence of uncertainty on the type and extent of the involvement, etc.

The business often being the extension of the entrepreneur, it would be interesting to analyse the relationship between the rates of replacement of the main executive when a VCC acquires an interest as opposed to a group of similar businesses that are not financed by VC. What are the consequences on the value of the business? Would such control of the financed business be desirable in the long run inasmuch as the VCC is committed for a limited period of time?