Influences of Foreign and Domestic Venture Capitalists on Internationalisation of Small Firms

Carneiro, Jorge; Moreira, Antonio Amaral; Sheng, Hsia Hua

doi:10.1590/1807-7692bar2022200105

Jorge Carneiro

Fundação Getulio Vargas, São Paulo, SP, Brazil

https://orcid.org/0000-0003-3321-5430

Antonio Amaral Moreira

Pontifícia Universidade Católica do Rio de Janeiro, Rio de Janeiro, RJ, Brazil

https://orcid.org/0000-0001-5000-899X

Hsia Hua Sheng

Fundação Getulio Vargas, São Paulo, SP, Brazil

https://orcid.org/0000-0001-5827-319X

* Corresponding author

Editors-in-Chief:

Carlo Gabriel Porto Bellini (Universidade Federal da Paraíba, Brazil)

Ivan Lapuente Garrido (Universidade do Vale do Rio dos Sinos, Brazil)

Reviewers:

Two anonymous reviewer.

Editorial assistants:

Kler Godoy and Simone Rafael (ANPAD, Maringá, PR, Brazil)

Authors’ contributions

1^st author: conceptualization (equal), methodology (lead), writing - original draft (lead), writing - review & editing (equal)

2^nd author: conceptualization (lead), data curation (lead), formal analysis (lead), investigation (equal), methodology (equal), writing - original draft (supporting), writing - review & editing (supporting)

3^rd author: conceptualization (supporting), writing - original draft (equal), writing - review & editing (equal), data curation (supporting)

Authors

Jorge Carneiro*

Fundação Getulio Vargas, Escola de Administração de Empresas de São Paulo

Av. Nove de Julho, n. 2029, 3º andar, Bela Vista, 01313-001, São Paulo, SP, Brazil

jtcarneiro@gmail.com

https://orcid.org/0000-0003-3321-5430

Antonio Amaral Moreira

Pontifícia Universidade Católica do Rio de Janeiro, IAG Business School

Rua Marquês de São Vicente, n. 225, Gávea, 22451-040, Rio de Janeiro, RJ, Brazil

aamoreira7@gmail.com

https://orcid.org/0000-0001-5000-899X

Hsia Hua Sheng

Fundação Getulio Vargas, Escola de Administração de Empresas de São Paulo

Av. Nove de Julho, n. 2029, 3º andar, Bela Vista, 01313-001, São Paulo, SP, Brazil

Hsia.sheng@fgv.br

https://orcid.org/0000-0001-5827-319X

Firm/VC	Founding	Area of specialization	Type of VC
F_services	2000	firm that organized an award for the best websites in Brazil and later on became a free internet provider	received a minority equity participation from a domestic VC with very little international experience
F_commerce	2010	firm specialized in collective buying	received a minority equity stake from a pool of foreign VCs, all with extensive global presence
F_IT	1998	firm specialized in IT for the telecom industry	received a majority equity participation from a foreign (South African) VC, which is global and targets investments to any potential country (except the USA) but prioritizes emerging markets
F_pay	2005	firm that manages electronic payments	received a minority equity participation from a domestic VC with no international experience
DVC_1		VC specialized in digital media, e-commerce and mobile solutions	domestic (Brazilian) venture capital firm with very little international experience
FVC_1		VC specialized in investments in internet ventures	foreign (US) venture investment fund targeted specifically at Brazilian firms, but with all the support and experience of their parent fund - an FVC with extensive international experience and presence

Year	Domestic (BRL billion)	Foreign (BRL billion)	Domestic (%)	Foreign (%)
2011	29.2	34.3	46%	54%
2012	42.4	40.7	51%	49%
Year	Domestic (BRL billion)	Foreign (BRL billion)	Domestic (%)	Foreign (%)
2013	45.1	55.1	45%	55%
2014	55.8	71.1	44%	56%
2015	65.9	87.3	43%	57%
2016	67.1	75.7	47%	53%
2017	64.8	89.5	42%	58%
2018	57.9	112.4	34%	66%
2019	57.7	140.4	29%	71%

Year	Private equity (BRL billion)	Venture capital (BRL billion)	Private equity (%)	Venture capital (%)
2015	147.8	5.4	96%	4%
2016	136.7	6.1	96%	4%
2017	146.0	8.3	95%	5%
2018	153.7	16.6	90%	10%
2019	166.7	31.4	84%	16%

Year	Number of invested companies	Average deal size (BRL million)
2013	186	95
2014	101	132
2015	159	117
2016	157	72
2017	175	87
2018	202	67
2019	317	81

	Did the VC help obtain financial resources for your company? If so, how?	Was the capital injection made specifically for internationalization?
F_services^a	“Yes, at the moment he is an investor, he helps capture greater value.”	“There was no specific financial contribution to internationalization. Contributions serve to create value in the company. The investor believed that internationalization was one of the growth paths and could also help in this process, [but the VC] had no specific business plan [for internationalization].”
	Did the VC help obtain financial resources for your company? If so, how?	Was the capital injection made specifically for internationalization?
F_commerce	“Yes, [by] appointment and negotiation.”	“Before buying an international competitor, I had a meeting with one of the future investors that wanted to contribute capital, and they [the VC that had invested in F_commerce] gave a ‘push’ to accelerate the acquisition.”
F_IT	“The second group of investors was not brought in by the old investors, although both co-invested at a later time.”	“No, [the investment] was made specifically for expansion in Brazil. It began with Mexico, a business opportunity offered by a Brazilian customer and then [continued with the] acquisition of an international competitor that already had presence in other countries (Argentina, Mexico, Colombia, Venezuela).”
F_Pay^a	“No, there was no new contribution. The company self-financed its growth.”	“No, [the investment was for the] growth of the company. The main motivator [for internationalization] was customer demand.”
DVC_1	“Yes, we [the VC] have a network of 17 co-investors.”	“There is no cake formula. [The investee] was a born global. Seed and series A [funding rounds] generally serve to dominate Brazil.”
FVC_1	“Yes, with the presentation of other investors.”	“Usually it happens more in round C or D. It is also common a financial contribution specific to the internationalization in stage of early growth (B or C). Companies are looking for rounds of around 10 million dollars and are looking for new partners to help. Some private equity funds use this network capillarity factor as differentiation.”

Do you think [VC name] contributed (and in what form) to the internationalization of [company name]?
	F_services^a	F_commerce	F_IT	F_pay^a	DVC_1	FVC_1
a) [VC]’s experience with similar businesses or industries that involved international business management and internationalization processes
	Yes	No	Yes	No	Yes^b	Yes
b) Corporate governance
	Yes	No	No	No	Yes	Yes
Do you think [VC name] contributed (and in what form) to the internationalization of [company name]?
	F_services^a	F_commerce	F_IT	F_pay^a	DVC_1	FVC_1
c) Control and monitoring of the internationalization process
	Yes	No	No^c	No	Yes	Yes
d) Professionalization and restructuring of processes (e.g., stock option plans, internal processes, reconfiguration of management models, etc.)
	Yes	No	Yes	No	Yes	Yes^d
e) Assistance in human resources policies (e.g., indication and evaluation of candidates)
	Yes	Yes, but very little	No	No	Yes	Yes

F_services^a	F_commerce	F_IT	F_pay^a	DVC_1	FVC_1
a) Has the VC helped you attract talented people? If so, in what way?
Yes, by indicating headhunters	Not actively, but having investors provided credibility; always indirect	No	No	Yes, showing the target talented people that the company has funds, that investors are close to the board, that management has quality, and that a strict filter was used to choose this company	Yes, recruiting the country manager; [the VC] already had a relationship and did the matchmaking
b) Has the VC helped attract other co-investors?
Yes	Yes	No	No	Yes	Yes

What was the involvement of VC in the internationalization process?
F_services^a	F_commerce	F_IT	F_pay^a	DVC_1	FVC_1
a) Decision to internationalize
Only secondary role	Only secondary role	Yes, relevant role	No	Only secondary role	Only secondary role
b) Decision about which countries the company should internationalize to
Only secondary role	Only secondary role	Yes, relevant role	No	Yes, relevant role	Only secondary role
c) Involvement in the foreign market entry process
Only secondary role	No	Yes, relevant role	No	Yes, relevant role	Only secondary role
d) Involvement in the post-entry process
No	No	Yes, relevant role	No	Only secondary role	Only secondary role

Literature: expected POSITIVE impacts of VC ownership	Comparison between the literature, the interviewed VCs, and the interviewed portfolio firms	Literature: expected differential effects between FVCs and DVCs^a	Comparing evidence between the literature and our findings
Provision of financial resources	Interviewed VCs stated that their funding was not earmarked for internationalization but for growth in general. Literature suggests that VCs help attract additional investors. VCs agreed. But two of the interviewed firms downplayed the role of VCs in attracting investors for a second round of funding.	(+) FVCs have more experience in syndicated financing, which may provide the necessary funds for foreign expansion. (+) FVCs are more likely to have their portfolio companies listed successfully on a foreign exchange, and to obtain higher IPO proceeds, which may help finance acquisitions abroad.	No difference between FVC vs. DVC since the money was not earmarked for internationalization, in the opinion both of the VCs (whether FVC or DVC) and of the investees (whether FVC or DVC investees). However, one FVC investee stated that they received a round of funding specifically tied to acquisitions of players abroad.
Management support	Interviewed VCs were in agreement with the literature in general that they do provide management support (especially regarding operational efficiency). However, some portfolio firms downplayed the VC’s support. Therefore, the real contribution of the VC may be contingent on the level of experience and the capacity of the investee to organize their processes (prior to receiving external capital).	(+) FVCs provide more support at the strategic level, which may include internationalization decisions; DVCs focus more on execution, and on the technical and operational levels. (+) FVCs tend to have more international experience (which may be particularly important in later-stage ventures, when internationalization becomes more relevant as a growth option). (+) FVCs are better equipped to attract foreign employees and executives.	Virtually no difference was discerned (either by the VCs or by the portfolio firms) regarding the impact of FVC vs. DVC, except that DVC_1 argued to have helped with identifying potential partners abroad. However, out of the four investee firms, the only two that acquired players abroad were FVC investees.

Literature: expected POSITIVE impacts of VC ownership	Comparison between the literature, the interviewed VCs, and the interviewed portfolio firms	Literature: expected differential effects between FVCs and DVCs^a	Comparing evidence between the literature and our findings
Access to networks	Interviewed VCs were in agreement with the literature in general that they do help with attracting talented workforce and co-investors; but not all of the interviewed portfolio firms agreed.	(+) FVCs have more international connections (with suppliers, buyers, other VCs, etc.). (+) FVCs also can use their lobbying and political influence in potential host countries, while DVCs may need a foreign partner to help with international expansion.	No clearly distinct pattern of differences was discerned (either by the VCs or by the portfolio firms) regarding the impact of FVC vs. DVC, except regarding access to workforce in foreign countries (the FVC seemed to help more, in agreement with the literature).
Reputation/ Credibility	Unlike the literature in general, the interviewed VCs and firms contended that the reputation impacts depend more on the firms than on the VCs, particularly in B2C industries.	(+) FVC reputation confers legitimization of new venture in a foreign country (in particular, in the home country of the FVC).	In agreement with the literature, the two FVC investees, unlike the DVC investees, clearly contended that the credibility of their investor helped them overcome the liability of foreignness, especially regarding B2B relationships.
Organizational Culture	Interviewed VCs tend to agree with the literature in general that they push firms to a higher aspiration level. The investee firms do not recognize such ‘push’ and believe that the firms themselves have the ‘genes’ for growth.	(+) FVCs can be more inspirational for venture executives, in particular because they have more international experience and tend to be less risk averse to foreign endeavors, while DVCs may suffer more from liability of foreignness.	No clear difference was discerned regarding the impact of FVC vs. DVC (either by the VCs or by the portfolio firms). However, in line with the literature, both the sampled VCs and firms suggested that an FVC helped more in terms of aptitude to deal with the liability of foreignness.

Literature: expected NEGATIVE impacts of VC ownership	Comparison between the literature, the interviewed VCs, and the interviewed portfolio firms	Literature: expected differential effects between FVCs and DVCs^a	Comparison between the literature and our findings regarding FVC vs. DVC impacts
Agency problem between VC and venture’s managers	Agency problems may refrain VCs from encouraging initiatives that may be more difficult to monitor (e.g., internationalization).	(-) FVCs tend to suffer more from agency problems due to geographic distance, unfamiliarity with the local market and lack of information about the local entrepreneurs, which may lead FVCs to prefer staged financing (more rounds and lower amounts per round, and higher restrictions on future funding), thus slowing down foreign growth. (-) FVCs may fear that early internationalization could jeopardize their control over the investee.	In agreement with the literature, the FVC preferred more rounds of financing.
Priority for foreign expansion		(-) FVCs may tend to focus on the domestic market of their portfolio companies; DVCs may be more interested in international expansion of their portfolio firms in order to set an international footprint themselves.	The sampled FVC and DVC agreed that their firms should consolidate first in the domestic market before venturing abroad. The two DVC investees (but not the FVC investees) were emphatic regarding consolidating their position in the domestic market before venturing abroad. The sampled firms hinted that FVC investees were more involved with internationalization and that the DVC seemed more domestically oriented.

[1] * Corresponding author

Brasil

Brasil

Influences of Foreign and Domestic Venture Capitalists on Internationalisation of Small Firms

ABSTRACT