The Evolution and Regulation of Venture Capital Funds

Lex Research Topics in Corporate Law & Economics No. 2012-1

49 Pages Posted: 18 Oct 2012

See all articles by Erik P. M. Vermeulen

Erik P. M. Vermeulen

Tilburg University - Department of Business Law; Signify (formerly known as Philips Lighting) - Legal Department; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI); Kyushu University - Graduate School of Law

Diogo Pereira Dias Nunes

Tilburg University - Department of Business Law; Philips International B.V.

Date Written: October 17, 2012

Abstract

Fundraising is one of the biggest challenges for venture capitalists in the wake of the financial crisis, causing some to argue that the venture capital model is broken? Maybe it looks that way, but actually the answer is that fundraising works differently. Indeed, this Paper shows that a ‘Darwinian’ evolution has led to profound changes in the venture capital industry – particularly in the area of venture capital fundraising. Venture capitalists should take these new trends and developments into account when deciding on how to structure future venture capital funds. This conclusion is based on empirical data that shows trends and developments in entrepreneurial finance and investments up to the first half of 2012. A few developments spring to mind, such as institutional investors taking a more active approach towards fund managers, the revival of corporate venture capital, the focus on investments in later stage startup companies, the development of micro-venture capital funds and the emergence of ‘joint’ funds. This paper discusses four strategies that may be deployed by venture capitalists. The first strategy relates to the ‘survival of the fittest’ trend. It appears that the best performing venture capitalists are still able to attract sufficient interest from institutional investors. They may only have to slightly tweak the traditional venture capital fund agreement to offer more protection to the institutional investors. A second strategy, involving the introduction of ‘innovative’ contractual provisions, aims to target more active investors. By offering customized separate accounts arrangements and deal-by-deal investment opportunities, fund managers attempt to attract these investors. The third strategy is moved by the idea that strategic – often corporate – investors will be able to improve and accelerate the fundraising process. Finally, venture capitalists can take a real partnership-type approach by setting up a new fund in which investors are selected on the basis of particular abilities and affinities. This paper holds important lessons for venture capitalists and their advisors, but also for policymakers and regulators who are increasingly contemplating the introduction of ‘venture capital regulations’.

Keywords: Alternative Investment Funds Managers Directive, corporate venture capital, Dodd-Frank Wall Street Reform and Consumer Protection Act, European Venture Capital Funds Regulation, fundraising, government venture capital, institutional investors, limited partnership agreement, venture capital

JEL Classification: G20, G23, G24, K20, K22, L22, L26, L51

Suggested Citation

Vermeulen, Erik P.M. and Pereira Dias Nunes, Diogo, The Evolution and Regulation of Venture Capital Funds (October 17, 2012). Lex Research Topics in Corporate Law & Economics No. 2012-1, Available at SSRN: https://ssrn.com/abstract=2163193 or http://dx.doi.org/10.2139/ssrn.2163193

Erik P.M. Vermeulen (Contact Author)

Tilburg University - Department of Business Law ( email )

Signify (formerly known as Philips Lighting) - Legal Department ( email )

Amstelplein 2
Amsterdam
Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kyushu University - Graduate School of Law ( email )

6-19-1, Hakozaki, Higashiku
Fukuoka, 812-8581
Japan

Diogo Pereira Dias Nunes

Tilburg University - Department of Business Law ( email )

Tilburg, Noord-Brabant 5000 LE
Netherlands

HOME PAGE: http://www.tilburguniversity.edu/

Philips International B.V. ( email )

High Tech Campus 5, HTC 5, 3.015
Eindhoven, Noord-Brabant 5656 AE
Netherlands

HOME PAGE: http://www.philips.com/

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