University of Nottingham
Nottingham NG7 2RD England
This study is a first step towards understanding the nature of the monitoring relationship between venture capital firms and their funds' providers and focuses on the nature of the targets set for venture capital firms and their reporting requirements and the nature of monitoring actions.
First face-to-face interviews were conducted with 22 leading UK venture capitalists. Second, a mail questionnaire was administered to the remaining venture capital firms in the industry. Interviews were conducted in June/July 1996 and the mail questionnaire survey was administered in August/September 1996. After one reminder, 77 responses were obtained, a response rate of 71 per cent. Respondents were: 60 percent CEOs, 23 percent directors and 17 per cent assistant directors.
There is a clear expectation of a shift away from passive approaches to the monitoring of venture capital firms and evidence of a shift towards target rates of return set in relation to comparative benchmarks. Reporting requirements are multi-layered but there is an anticipated shift towards the greater use of quarterly reporting and portfolio valuation plus more frequent direct contact between venture capital firms and their funds' providers. Funds' providers typically engage in few monitoring actions. Remuneration structures were expected to become more performance oriented. The study also finds important differences in the monitoring of independent and captive venture capital firms.
The findings emphasise the importance of developing relationships with funds' providers through more frequent personal communications over the life of a fund. For academic researchers the results highlight the considerable scope for researching governance issues as a complement to the extensive research on venture capital firm-investee monitoring.