The importance of knowledge and skills transfer in the private equity, venture capital and angel investing process

Abstract

New business development is one of the most important contributors to economic growth, job creation and economic prosperity of any country. The successful creation of new ventures is a difficult process with many risks involved. The reward of a successful venture is such that many investors are prepared to accept a certain level of risk in the hope of achieving high returns on their capital invested. Many different aspects contributing to the success of a new venture and specifically the importance of the transfer of knowledge and skills in the investment process, was researched. Venture capital investment in the broader sense, including angel investing, venture capital and private equity investment, are important contributors to economic growth and prosperity. Venture capital and Angel investing are seen to be risky ways to invest. However, the risk may be reduced through the active involvement investment process thereby transferring knowledge. The investor is not only a provider of funds but also the provider of knowledge and skills to assist the venture to become successful. The literature review included the results from research recently conducted in the United States of America and Europe. This research highlighted factors, other than merely having a good business idea, that influence the success of a new venture. The global research clearly indicates that the active involvement of the angel investors, venture capitalists and private equity investors in new ventures, through the transfer of knowledge and skills, determines the success of the investment in new business development. The survey that was done in the SA venture capital environment support this outcome although the SA venture capital market sector is in the early stages of development and focuses on private equity investment and not so much new business development. The SA venture capital market discounts their risk through tangible securities taken in the investment process. Investments made are large amounts in well-established ventures with complete management teams where the investor’s involvement is restricted to control and ensuring that the venture complies too the expectation of the providers of the funds. The SA market concentrates much more on control and monitoring as their counterpart in the USA. The main objective of the study, to determine the impact of the transfer of knowledge and skills by the investor to the investee, is supported by the research done in the USA. The effect of the transfer of knowledge and skills is further supported by the effect on the long term return. The transfer of knowledge and skills and active participation increases the expected IRR. The findings are also supported by the literature research done indicating important elements needed to enhance the venture’s chances of success.