Potential Limitations

Our study is not without limitations and provides room to further extend our line of reasoning and analysis. Despite the increase in equity-based venture capital financing throughout the late 1990s and 2000s, Germany is, by and large, a prime example of a bank-based financial system that inherently differs from the prevalent market-based Anglo-Saxon system. Accordingly, when generalizing our results across borders, one needs to bear in mind (and possibly control for) peculiarities of the German context and especially, fit our findings into a wider socioeconomic perspective. Accordingly, what works in one country might not be generally applicable to other countries (see, for example, Milhaupt [1997], who shows that in Japan VC financing fails to fit the prevalent corporate governance system).

In order to establish a successful VC industry, an active IPO market is necessary but does not present a sufficient condition (Becker & Hellmann, 2005; Black & Gilson, 1997). Becker and Hellmann point out that in a bank-based financial system, VC investments need to be complemented with appropriate corporate governance and, most importantly, with a country’s attitude toward entrepreneurship. Bottazzi, Da Rin, and Hellmann (2009) report that with an increase in a country’s legal protection, VC investors give more noncontractible support. Too little protection for investors and too many limits to add value to entrepreneurs (for example through restriction on majority holdings) might prevent VC financing to live up to its full potential. Hence, when comparing our findings

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Moreover, the quantity and quality of entrepreneurs plays a tremendous role for potentially value-adding advice and qualities sought after from potential syndication partners. Incentives for entrepreneurship need to complement the availability of financing provided (Becker & Hellmann, 2005). In contrast to other innovation-driven economies, Germany lacks a broad supply of latent, potential entrepreneurs (Blanchflower, Oswald, & Stutzer, 2001). Despite producing and publishing high-quality scientific output, German universities failed to transfer knowledge and were lacking serious attempts for academic spin-offs (Clarysse, Wright, Lockett, Mustar, & Knockaert, 2007). In fact, employment stability in the research sector combined with a relatively high social status of academics and professors in particular provided little to no incen- tive to commercialize ideas.

Yet, during the time period of our investigation, one was able to witness dramatic changes. Fiedler and Hellmann (2001), for example, report that younger Germans are prone to a much larger exposure to U.S. influences, imitating ides and processes from Silicon Valley and the foundation of Internet start-ups. Moreover, the German government strongly supported biotechnology in the mid-1990s, which led to the provision of private as well as semiprivate funds into venture capital corporations. Adelberger (2000) argues that the German institutional framework (rigid employment practices for senior scientists, high capital gains taxes, and a social stigma for failed entrepreneurs) support incremental rather than radical innovation (also evidenced by the high number of German patents in mature industries—manufacturing and mechanical engineering, as opposed to a U.S. lead in new technologies—such as information technology). The recent Global Entrepreneur- ship Monitor reports a nascent rate of 2.2%, which is comparable to other established innovation-driven economies such as the United States and the U.K. (Bosma & Levie, 2010).

Evidently, a better quality of entrepreneurs raises the chances to add value for VC firms to further professionalize the gestation process. Consequently, the quality of signals sought after from potential syndication partners need to be put in perspective to the universe of entrepreneurs available. As such, money might not substitute a dearth of ideas in some industries. Accordingly, more complete examinations of signaling in VC financing should embrace the consequences of institutional environments on how VC decision makers navigate within the boundaries that governments, capital market systems, and the prevalence of entrepreneurial activity in general provide.

Potential Limitations