D O U G L A S C U M M I N G

I R E N E H E N R I Q U E S

P E R R Y S A D O R S K Y

Y O R K U N I V E R S I T Y

S C H U L I C H S C H O O L O F B U S I N E S S

D R A F T : M A R C H 2 0 1 4

‘CLEANTECH’ VENTURE

CAPITAL INVESTMENT

Motivation

Many in VCThink CleantechIs the next Big thing!

WorldwideDue toLaw, culture,Media, orSomethingElse?

Prior Research

(1) Factors that affect the level of VC in a country VC/GDP VC / Population

Jeng and Wells (2000 JCF), Leleux and Surlemount (2003 JBV), Armour and Cumming (2006 OEP), Cumming (2011a,b VCJ)

Be careful to not do this (more next slide): Early Stage VC / Late Stage VC

Da Rin et al. (2006 JPubE)

(2) SRI in VC Scarletta and Alemany (2010 JBE) Cumming and Johan (2007 JBE) Johan and Najar (2010 JBE) Cumming and Fleming (2010 JBE) Forget (2012 PhD Thesis)

Prior Work part (1) onFactors that affect aggregate

country levels of venture capital

Prior Research: Early Stage / Late Stage VC

Incorrect!

Correct!

Au

str

ia

Be

lgiu

m

De

nm

ark

Fin

land

Fra

nce

Ge

rma

ny

Ire

land

Italy

Ne

the

rlan

ds

Po

rtu

gal

Sp

ain

Sw

ed

en

UK

US

Ca

nad

a

Early Stage

Expansion Stage

Total Private Equity

All Dispositions

Fundraising

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Amounts Averaged

1990 - 2003

Relative to GDP

Expressed in %

Figure 1. Size of Venture Capital and Private Equity Markets Across Countries

-200

0

200

400

600

800

1000

1200

1400

Ind

ex V

alu

e (

Ad

juste

d t

o S

tart

at

0 o

n S

ep

tem

ber

1992)

Date

Figure 9.3. Selected Indices 1992 - 2005

Globe LSVCC Peer Index Globe Canadian Small Cap Peer Index

TSE 300 Composite Index / TSX Total Return Index US Venture Economics Index

30-Day Treasury Bill Index

LSVCCs Phased Out

In Ontario Announced in 2005 Effective in 2011

Federally Announced in 2013

Good decision LSVCCs bid up deal prices, crowd out private investors LSVCCs have very high management expense ratios (>5%) Lack of retail investor governance, attributable to massive tax breaks LSVCCs have too many investees per fund manager

Other mechanisms of direct subsidies to Venture Capital in Canada where the government acts as an institutional investor Success in other jurisdictions with this model in other countries such as Australia

More background on Venture Capital around the World… all you need to know....!

Prior Work Part (2)on SRI in Venture Capital

A sourceon prior workon SRI in Venture Capital

Motivation

Increasing practitioner and academic attention on:

Socially Responsible Investment (SRI)

Corporate Social Responsibility (CSR)

Studies of SRI and CSR have focused on publicly traded companies

Publicly traded companies start as privately held firms!

Institutional

Investor 1

Venture Capital Funds

Entrepreneurial Firms

Fundraising Returns

Supply of

InvestmentsDemand for

Investments

Different Types:-Pension-Insurance-Bank

And DifferentCountries

Pension

Plan

Members

(you and I)

Regulated

(e.g., IFRS)

Scantly

Regulated

(e.g., no

reporting

standards)

(discourages

institutional

investors)

Institutional

Investor 2

13

Venture Capital Intermediation

Questions

1. When do institutional investors make SRI investments into PE/VC funds?

2. Does SRI in VC/PE depend on

a. Internationalization?

b. Legal and reporting standards?

c. Institutional and organizational structures?

3. Does the determinants of SRI for VC/PE differ relative to other institutional investments?

Main Findings in our Prior Work (1 of 2)

• SRI in VC/PE for institutional investors that have:

– International investment focus

– Adhere to the International Financial Reporting Standards (IFRS)

– Individuals that work for the institutional investor do not compete for returns (i.e., the decision to implement SRI is centralized)

– Direct investments (not fund-of-fund investments)

Main Findings in our Prior Work (2 of 2)

When a Chief Investment Officer is in charge, a socially responsible private equity investment program is approximately 40-50% more likely to be adopted

Institutions that have managers competing with each other for portfolio returns are substantially less likely to adopt SRI in their VC investments

This paper:Cleantech Venture Capital Around

the World

This Paper

Clean technology (‘cleantech’) venture capital (‘VC’) investment 31 countries

Do not include the US

Unbalanced panel spanning 1996-2010.

Cleantech VC spurred by Economic wealth (GDP per capita, stock market capitalization) Legal protections (antidirector rights) Hofstede’s cultural variables (uncertainty avoidance) Media Oil prices

What is Cleantech?

Cleantech includes energy efficient technologies that include but are not limited to

recycling,

renewable energy (wind power, solar power, biomass, hydropower, biofuels),

information technology,

green transportation,

electric motors,

green chemistry, and

lighting.

Why Care About Cleantech VC? (1 of 2)

Venture capital investment in Cleantech ($billions)

Why Care About Cleantech VC? (2 of 2)

% of all VC deals worldwide that are Cleantech

List of Countries in our Data (Thompson SDC)

—Argentina —Ghana —Korea —Philippines

—Australia —Greece —Latvia —Poland

—Bolivia —Hong Kong —Lithuania —Qatar

—Brazil —Hungary —Malaysia Russia

—Canada —India —Mexico —Singapore

—China —Indonesia —Namibia Slovakia

—Columbia —Ireland —New Zealand —South Africa

—Costa Rica —Israel —Nigeria —Switzerland

—Cyprus —Italy —Norway —Thailand

—Egypt —Japan —OmanUnited Arab Emirates

—France —Kenya —Pakistan —United Kingdom

Table 1. Variable Definitions

Variable Definition Data source

Deals

Natural logarithm of (Number of venture capital cleantech deals

divided by the population). “Venture capital” includes early and

expansion stage investment, but does not include buyout and

turnaround private equity investment.

VentureXpert database

GDPNatural logarithm of GDP, PPP (constant 2005 international $) per

capitaWorld Development Indicators

TurnoverNatural logarithm of stock market turnover of listed companies (% of

GDP)World Development Indicators

Ad rights Antidirector rights Spamann (2010)

OilNatural logarithm of real 2005 oil prices. Real oil prices are calculated

as Brent spot prices ($US) deflated by US CPIBP 2012 Statistical Review of World Energy

Oil sq Natural logarithm of real oil prices squared BP 2012 Statistical Review of World Energy

Adj sav Adjusted net savings, including particulate emission damage (% of GNI) World Development Indicators

Media

Natural logarithm of the media variable.

Media variable is the number of hits of the key words clean technology

or renewable energy

Factiva

UAI Hofstede Uncertainty avoidancehttp://www.geerthofstede.nl/research--

vsm.aspx

Corrupt Control of corruption Worldwide Governance Indicators

Gov Eff Government effectiveness Worldwide Governance Indicators

Pol Sta Political stability Worldwide Governance Indicators

Reg Qu Regulatory quality Worldwide Governance Indicators

Rul Law Rule of law Worldwide Governance Indicators

Voi Acc Voice and accountability Worldwide Governance Indicators

Table 2. Summary Statistics

Variable mean sd p50 min max N

Deals -14.772 1.903 -14.461 -20.792 -11.458 288

GDP 10.159 0.658 10.318 7.121 10.803 288

Turnover 4.434 0.605 4.455 2.344 6.002 288

Ad rights 3.750 0.859 3.5 2 5 288

Oil 3.636 0.481 3.476 2.724 4.480 288

Adj sav 13.093 6.362 12.176 1.509 40.500 288

Media 9.768 1.498 9.762 6.227 11.933 288

UAI 57.066 23.137 51 8 112 288

Corrupt 1.585 0.736 1.865 -0.497 2.586 210

Gov Eff 1.579 0.548 1.734 -0.139 2.408 210

Pol Sta 0.665 0.744 0.895 -1.696 1.665 210

Reg Qu 1.371 0.506 1.537 -0.441 2.120 210

Rul Law 1.436 0.523 1.612 -0.566 2.002 210

Voi Acc 1.156 0.483 1.331 -0.522 1.826 210

Table 3. Correlations

Deals GDP TurnoverAd

rightsOil Adj sav Media UAI Corrupt Gov Eff Pol Sta Reg Qu Rul Law

Deals 1.000

GDP 0.597 1.000

Turnove

r0.028 0.096 1.000

Ad

rights-0.082 -0.326 -0.122 1.000

Oil 0.077 0.220 0.351 -0.031 1.000

Adj sav 0.031 -0.025 -0.007 0.163 0.048 1.000

Media 0.137 0.217 0.346 -0.013 0.881 0.006 1.000

UAI -0.368 -0.092 0.032 -0.423 -0.033 -0.301 -0.039 1.000

Corrupt 0.591 0.720 -0.053 -0.124 0.055 0.027 0.046 -0.483 1.000

Gov Eff 0.648 0.769 -0.037 -0.173 0.077 0.113 0.069 -0.410 0.941 1.000

Pol Sta 0.261 0.581 0.015 -0.294 -0.035 0.124 -0.070 -0.276 0.714 0.689 1.000

Reg Qu 0.638 0.818 0.027 -0.088 0.165 0.026 0.167 -0.460 0.897 0.888 0.630 1.000

Rul Law 0.593 0.749 0.123 -0.242 0.140 -0.011 0.135 -0.373 0.924 0.913 0.710 0.848 1.000

Voi Acc 0.322 0.443 0.156 -0.451 0.059 -0.439 0.027 0.008 0.594 0.560 0.500 0.481 0.681

Regression Methods

Estimation is of an unbalanced panel data set of 44 countries over the period 1980 to 2010 by random effects negative binomial models.

T-statistics are in parentheses.

The oil price inflection point is calculated in 2005 US dollars.

Random effects GLS

Table 4. Random Effects Generalized Least SquaresThe impact of oil prices, media and culture on cleantech VC deals

(1) (2) (4) (7)

GDP 1.637a 1.438a 1.334a 1.271a

(7.15) (5.63) (3.95) (3.82)

Turnover 0.324c 0.329b 0.382b 0.335b

(1.95) (2.03) (2.24) (2.06)

Oil 3.653c 3.593c 2.655 3.490c

(1.93) (1.88) (1.28) (1.85)

Oil sq -0.609b -0.601b -0.496c -0.612b

(-2.38) (-2.33) (-1.72) (-2.34)

Media 0.300b 0.309b 0.346a 0.342a

(2.34) (2.49) (2.82) (2.91)

UAI -0.0255b

(-2.25)

Gov Eff 0.727b

(2.22)

Rul Law 0.838b

(2.16)

Constant -42.01a -36.87a -38.40a -39.25a

(-10.02) (-7.44) (-6.75) (-7.95)

R2(O) 0.413 0.509 0.435 0.419

Marginal Effects

A 1-standard deviation increase in…Gives rise to increase in Cleantech

VC by (relative to mean)

GDP 7.3%

Turnover 2.3%

Oil Prices 9.9%

Media 3%

Rule of Law 3%

Government Effectiveness 2.9%

Uncertainty Avoidance -4%

Interaction Effects

Uncertainty avoidance moderates the effect of regulatory quality and government effectiveness on cleantech VC deals.

With high uncertainty avoidance (UAI = 92 – such as Japan where people do not like uncertainty), increases in regulatory quality and government effectiveness increase cleantech VC deals.

Compare with UAI = 29 – such as Hong Kong where people accept uncertainty

Canada UAI = 48

The moderating effect of uncertainty avoidance on the relationship between government effectiveness and cleantech VC deals

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-.5 -.25 0 .25 .5 .75 1 1.25 1.5 1.75 2 2.25 2.5Government effectiveness

uai=29 uai=92

The moderating effect of uncertainty avoidance on the relationship between regulatory quality and cleantech VC deals

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-.5 -.25 0 .25 .5 .75 1 1.25 1.5 1.75 2 2.25 2.5Regulatory quality

uai=29 uai=92

Conclusions

Clean technology (‘cleantech’) venture capital (‘VC’) investment 31 countries

Do not include the US

Unbalanced panel spanning 1996-2010.

Cleantech VC spurred by Economic wealth (GDP per capita) Hofstede’s cultural variables Media Oil prices Government effectiveness, depending on country uncertainty avoidance

Cleantech VC not spurred by (contrast to VC in general) Stock market capitalization Legal protections (antidirector rights)

Thank You!

Douglas Cumming

Professor and Ontario Research Chair

York University - Schulich School of Business

4700 Keele Street

Toronto, Ontario M3J 1P3

Canada

http://ssrn.com/author=75390

dcumming@schulich.yorku.ca