Start-ups
often lack certain knowledge and skills and are in the need
of external assistance. If this external help is combined
with capital we can talk about relationship financing or smart
capital. In a heterogeneous financial system such as the one
in Germany, which type of financier supplies `true' smart
capital to entrepreneurs, is still an open question. To answer
this question, a survey was conducted among 85 German suppliers
of start-up finance. The results show that all types of financiers
deliver some sort of smart capital. However, the levels of
information flows within a financing relationship vary strongly
between the different investors.
Young and innovative companies are often in need of two main external inputs capital and the additional knowledge or skill. If the financial relationship between an investor and a start-up contains both, it is considered to be the smart capital offered by the so-called relational investors (Schäfer and Schilder, 2007). The term `smart capital' for this kind of financial service derives from the fact that in order to be successful, it is necessary to have considerable expertise with regard to the portfolio firm, the technology employed and the market environment. Several studies find evidence that, especially the Venture Capital (VC) companies do in fact invest, in obtaining proprietary information about their clients' businesses, and spend substantial time and effort in assistance, advising and monitoring their portfolio firms (Sapienza, 1992; Sapienza et al., 1996; and Kaplan and Stro.. mberg, 2004).
The
research focuses on VC companies as relational investors are
justified in the market-based US financial system. However,
the situation may be different in a bank-based system like
the one in Germany. The German financial system is characterized
by two major features: the well-known Hausbank principle
and the importance of public intermediaries in corporate financing.
Hausbanks are involved in the businesses they
finance and they monitor them closely (Elsas and Krahnen,
1998 and 2004). Thus, many German commercial banks can also
be considered as relational investors. Moreover, despite the
fact that public financing is often said to be passive (Hellmann
and Puri, 2002), several references in the literature indicate
that German public equity suppliers, in particular public
VC companies, are different because they try to establish
a close relationship with their target firms (Hood, 2000;
and Schilder, 2006). Therefore, the public equity suppliers
in Germany could also be an important part of the market for
smart capital. |
