Entrepreneurial perspectives on informal venture capital

VENTURE CAPITAL,

2003, VOL. 5, NO. 1, 71 ± 94

Entrepreneurial perspectives on informal venture capital ALF STEINAR SáTRE (Final version accepted 3 December 2002) Entrepreneurial firms, a major source of new employment in Europe, require risk capital from informal venture capitalists in order to create substantial economic growth. This study surveys the capital-acquisition process from the demand sideÐthat is, from the entrepreneurs' perspective. Twenty semi-structured, qualitative, in-depth interviews, conducted over 2 years and focusing on the entrepreneur-informal investor relationship, yielded four case studies that are analysed here. The analysis reveals two very different approaches to acquiring informal venture capital. One approach views capital as a scarce resource, the other views it as a commodity. Entrepreneurs who view it as a commodity contend that what makes the capital-acquisition process so difficult is not securing the capital itself, but rather finding investors with the requisite expertise and contacts. This paper proposes the term relevant capital to describe the àdded value' capital that these investors provide, and offers qualitative insights into the content of the informal investor/ entrepreneur relationship.

Keywords: informal venture capital; entrepreneur±investor relationship; competent capital; social capital; Norway

Introduction Entrepreneurs do not merely want investors that contribute financial capital. For some entrepreneurs, it is not enough only to have investors who bring business experience to the table along with their capital; they also want investors with competencies and experiences relevant to their specific industry niche. Investors with niche-specific expertise and networks provide a significant added value for the companies in which they have invested. This added value qualifies as a form of capital in and of itself (Fisher 1919). During the past decade, there has been increasing interest in the informal venture capital market, both politically and academically. Mason and Harrison (1999) point out that entrepreneurial firms are a major source of new employment in Europe, and that risk capital from informal venture capitalists must be available to these entrepreneurial ventures in order for substantial growth in employment to take place. Alf Steinar Sñtre, The Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Alfred Getzvei 1, 7491 Trondheim, Norway; e-mail: [email protected] Venture Capital ISSN 1369-1066 print/ISSN 1464-5343 online # 2003 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/1369106032000062731

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With respect to an entrepreneurial venture's growth, it is particularly `the early stages of corporate growth [that] are obstructed by firms' inability to access equity capital' (Blatt and Riding 1996: 75). As confirmed in almost every study of the informal venture capital market since Wetzel's (1981) influential work, private investors, or business angels, are a crucial source of equity capital during this early stage of new venture growth. Through the use of case analysis and subsequent cross-case analysis, this paper provides an account of how the informal venture capital market in Norway is experienced by relatively young and small entrepreneurial firmsÐmore specifically, how these companies acquire informal equity capital for their venture, how they experience this acquisition process and how they relate to their investors. This paper also deals with the nonfinancial capital, expertise and contacts that competent investors contribute to the companies in which they have invested. The data presented in the four cases were collected from four Norwegian companies that had recently secured funding from one or more private investors. Previous research pertaining to capital acquisition has discussed industry selection by investors (Haar et al. 1988, Gorman and Sahlman 1989, Ehrlich et al. 1994, Mason and Harrison 1995). It makes equal sense to explore investor selection by entrepreneurs. Two of the four entrepreneurs, or entrepreneurial teams, exhibited very careful attitudes towards potential investors. They placed more emphasis on the potential investor's background and the relevance of his experience than one might expect.1 In terms of acquiring competent capital, these entrepreneurs focused their efforts on acquiring relevant capital, or expertise, not on acquiring capital per se. In other words, financial capital was implicitly considered a generic asset, and industry-relevant experience was considered a highly specialized asset, and thus more valuable. This industry-relevant experience and the contacts furnished by these investors contribute significantly to the income of the venture, and therefore qualify as capital (Fisher 1919). Sociologists and economists alike have been concerned with the concept of human capital, albeit from different vantage points. Erikson (2002) and Erikson and Nerdrum (2001) discuss entrepreneurial capital as a subset of human capital. Coleman (1988) and Fukyama (1995) write incisively about the importance of social capital in wealth creation. Coleman, in distinguishing social capital from human capital, states that ùnlike other forms of capital, social capital inheres in the structure of relations between actors and among actors' (1988: S98). Recently, management journals have reflected the considerable interest in both human capital and social capital (Nahapiet and Ghoshal 1998, Pennings et al. 1998, Tsai and Ghoshal 1998, Adler and Kwon 2002). One of the central topics of existing research on the relationship between informal investors and the firms in which they have invested is the content of that relationship (Rosenstein et al. 1989, Harrison and Mason 1992, Ehrlich et al. 1994, LandstroÈm and Olofsson 1996, Cressy and Olofsson 1997). This paper follows up this body of research by exploring, from a social capital perspective, the non-financial capital provided by private investors with niche-relevant expertise and networks, and provides examples of how competent investors transfer this knowledge and expertise

INFORMAL VENTURE CAPITAL

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to the companies in which they have invested. The findings of this study lend support to LandstroÈm's (1998) findings indicating that the distinction between an investor and an entrepreneur is not always clear-cut. As is typical of inductive research, each of the four cases was constructed on the same framework in order to facilitate the ensuing cross-case analysis (Miles and Huberman 1984, Eisenhardt, 1989, Yin 1994, Brown and Eisenhardt 1997) that is the basis for this paper. Such an approach facilitates subsequent discovery of similarities as well as differences across cases. Methodology Case selection

A theoretical selection method is appropriate for inductive research, as opposed to the random selection method associated with positivistic deductive research. When conducting inductive research, `random selection is neither necessary, nor even preferable' (Eisenhardt 1989: 537). The organizations that participated in this study were chosen from a population of small- to medium-sized companies who had responded to the survey instrument of an earlier study. One criterion for selecting the firms in this study was that the company had actually managed to bring in new capital from one or more investors over the previous three years. An additional criterion, determined through the survey instrument, was that the company had at least one active investor as well as one or more passive investors.2,3 Companies who did not fulfil the above criteria were disqualified. The remaining companies, it turned out, were located near the largest Norwegian population centres. Since only four companies were needed, the decision was made to study two companies from the city of Bergen and two from the city of Trondheim, thus avoiding regional or geographical peculiarities. However, since their participation would be voluntary, it was thought prudent to initially select three companies near Bergen and three others near Trondheim, and then randomly assign them numbers one through three. Companies 1 and 2 for each city were contacted. When one company in Trondheim declined to participate, the third company replaced it. Both the companies initially contacted in Bergen accepted the invitation to participate in this study. The first round of interviews occurred during the autumn of 1999, while the bulk of the interviews were conducted in 2000 and 2001. The final round of interviews were completed in March of 2002, the span thus amounting to 2 years. In addition to these interviewsÐall of which were tape-recorded and transcribedÐphone calls and e-mails were used to clarify specific details. Data collection

This study employed `loosely structured' interviews, allowing subjects to select their topic preference as the conversation unfolded. `Loosely structured', in this case, means more structured than unstructured, lest a

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completely unstructured interview format `yield only a few banalities' (Miles and Huberman 1994: 17). The majority of interviews were conducted by the author, though two graduate students conducted a number of them in two of the four cases. Because this research involved multiple sites and multiple interviewers, it was especially important to employ a similar format for the interviews, developing a common framework and maintaining cross-case comparability (Miles and Huberman 1994). The structure of the interview guide also permitted the exploitation of opportunities that presented themselves. The interviewer would introduce a topic and provide the transition to the next one when appropriate. Ònce respondents have been brought within the sight of the topic, they must be allowed to ``go'' wherever they wish' (McCracken 1988: 40). This is particularly true when dealing with informants as knowledgeable and articulate as the subjects in this study. By letting informants talk themselves `warm' about a topic that engaged them, many new and valuable insights were gained. Probing and follow-up questions were used extensively, as `the interviewer must be able to take full advantage of the contingency of the interview and pursue any opportunity that may present itself' (McCracken 1988: 25). The yield from the interviews was maximized by taking full advantage of this òpportunistic' approach to interviewing. Paid professionals and graduate students transcribed most of the interviews. Because transcription affords an intimacy with the data that is lost by not doing the transcribing oneself, this author compensated for that loss by listening to each interview while working through its transcript, a method that yielded both significant time-savings and the desired intimacy with the interview data. While listening to the tapes, notes were taken, supplementing the interview transcription with comments and theoretical memos (Glaser 1978). The combination of a fairly structured interview format and fully transcribed interviews increased the reliability of the analysis and the write-up of the four cases. Data analysis and write up

Traditional, quantitative, social-scientific research unfolds in stages: hypothesis formulation, data collection, analysis and hypothesis testing and, finally, the writing of findings. When endeavouring to build theory from case-study data collection, data analysis and writing should overlap (Glaser and Strauss 1967, Eisenhardt 1989, Wolcott 1990): Òverlapping data analysis with data collection not only gives the researcher a head start in analysis but, more importantly, allows researchers to take advantage of flexible data collection' (Eisenhardt 1989: 538). A readily apparent advantage of starting the data analysis early is that it facilitates a focusing in the subsequent interviews and observations. Writing is a form of thinking; therefore, starting the writing early so that it overlaps data collection and analysis, is critical. Wolcott concurs: `Hear this: You cannot begin writing early enough' (1990: 20). Doing so forces a sharpening of the remaining work with the cases, as ambiguities inherent in the data become clearer. In the course of this analysis, excerpts


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of conversationÐor sound bites from the interviews that were particularly illustrativeÐwere selected. The sound bites included in this text have been edited for clarity, and cleaned for hesitations, pauses and redundancies (except where they carried meaning). Mindful that the selection of sound bites shapes the view the reader gets of a particular issue or organization (Punch 1986), excerpts were judiciously selected with the intention of leaving the reader with as authentic an impression as possible. The inclusion of excerpts is important for several reasons. First, we are dealing with rich qualitative data, and the excerpts are a way of transferring or communicating that richness to the reader. Second, much of the data is often mundane in relation to the topic at hand. Since verbal communication is much more varied and unstructured than written communication, every effort has been made with regard to the transcription, selection, and translation of these excerpts to make meaning as clear and uncluttered as possible so as to enrich the reading experience. These excerpts, inserted directly into the case narrative, are indicated by the use of italicized text. Filler, or comments irrelevant to the topic at hand, were removed and denoted with leader dots, but only where one could be confident that the meaning was not altered. A few caveats concerning the methodology employed need to be noted. First, most social-scientific research presents subjects with an opportunity to rationalize their own achievements and failures (Politis and LandstroÈm 2002). Multiple interviews with the key informant(s) in each case, combined with the use of alternative information sources, contribute to the amelioration of this potential bias. The use of multiple interviewers has some advantagesÐe.g. reducing researcher biasÐbut it also has some disadvantages, such as introducing an additional source of variance. To ameliorate this concern, at least two interviewers collected data from each case, and two of the three interviewers collected data from all four cases. On those few occasions where inconsistencies appear to have occurredÐ between either interviewees, interviews or researchersÐthe matter was always quickly resolved by a fact-checking phone call or e-mail to the relevant people in each case. The validity of the four case descriptions that formed the basis for the analysis presented here was checked by sending the full case descriptions to the interviewees for comment. In summary, considerable effort has been made to ensure that the data presented here is as unbiased as possible. However, one should always be careful when generalizing both explicitly and implicitly from this type of research. To preserve anonymity, aliases/pseudonyms have been substituted in this study for all interview subject names, company names and the names of associates and partners. Table 1 provides a brief description of each of these firms and what they do. Table 2 provides an overview of the capital expansions in the four case companies as well as the key players with regard to ownership. Together, these tables give a brief overview of key players in terms of ownership and thereby provide the reader with a better sense of who the interviewees of this study were. As is clear from table 1, the four case companies represent very different industries. Gas Experts was the only company founded on an existing business and was thus able to grow based on cash flow. This helps

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Table 1. A brief description of the participating firms

No. of interviews

Brief description of company

Interviewees

Gas Experts AS sells gas in bulk to industrial buyers, and gas in bottles both to private and commercial customers. The company also runs a store from which they sell gas-related articles such as welding equipment, heaters, ovens and stoves. The company services the central parts of Western Norway, from their headquarters Ê rstad outside of Bergen. Currently Gas in A Experts AS employs 18 people

Kjell OppaÊs (founder, 4 interviews)

4

Deep Sea Fishing uses a unique technology for `fishing up' equipment that has become stuck in offshore oil wells. The technology of DSF combines traditional offshore fishing equipment and explosives. The strength of their technology is that it enables DSF to perform offshore `fishing' operations much more quickly than their competitors. The company is located outside of Bergen

Torstein Velure (co-founder, 4 interviews) Oddvar Suldal (entrepreneur and co-founder) Eivind Elgseter (investor)

6

Custom-made Artificial Limbs AS (CAL) manufactures customized hip prostheses. The customization is based on digital photographs of the limb combined with x-rays and sensors. This input is fed into a mathematical model that produces threedimensional computer models of the individual hipbone of each patient. Prostheses are then produced in special materials such as titanium. CAL is associated and co-located with St.Olav Hospital in Trondheim.

Egil Aksnes (entrepreneur and co-founder, 3 interviews) Terje GranaÊ (private investor) Steinar AlmaÊs (private investor)

5

SeeArt (now DigiView) was founded in January of 1995 as a spin-off of a large research organization (SINTEF). The business of SeeArt is the development and sale of software for the visualization and animation of electronically stored data, along with various services in conjunction with this. The background for the idea behind the company is 3D visualization of calculations done by SINTEF's Cray supercomputer. In July 2000, SeeArt merged with another company called Delta View AS, and the merged company took the name DigiView AS

Kjell Aga (entrepreneur and co-founder, 2 interviews) Tormod Hagen (founder) Geir Vetle (private investor) Harald Olsen (private investor)

5

explain the comparatively smaller amount of equity that it has acquired (table 2). The other three case companies all acquired similar amounts of equity capital (between NOK 13 and 18 million).


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Table 2. A brief overview of capital expansions Company Capital brought in Key players Gas Experts AS

NOK 1 060 000 ± in three separate offerings between May 1990 and 1996. The share price remained constant throughout these offerings

Kjell OppaÊs founded Gas Experts AS with his father and brother in 1990. He has largely retained control of the company, having allowed just a few key employees and industry experts to invest in it. Private investors own a relatively small stake in the company

Deep Sea Fishing

NOK 13 506 000 ± in six separate offerings between March 1998 and December 2000. The share price increased gradually from NOK 1 to NOK 110 in the most recent capital expansion

Torbjùrn and Torstein Velure founded the company with inventor Oddvar Suldal. In the third round of financing, two people that had helped the struggling new venture were allowed to purchase 9% of it. In the fourth round of funding, two co-investors* with industry ties bought 35% of the company, a stake that they later increased somewhat through the next two rounds of capital expansion

SeeArt (DigiView)

NOK 17 250 000 ± in three separate offerings from 1995 to 1998. The share price gradually increased from NOK 0.10 to NOK 24.** In 2000, SeeArt merged with Delta View and became DigiView

The major owners were two entrepreneurs (17% each), SINTEF (51%), and a private investor (15%).*** Capital expansion through a brokerage firm reduced entrepreneurs' stake in the company to 5% each. The company had 140 passive small investors before the merger

CAL

NOK 18 421 024 ± in six offerings between 1991 and 2000. The share price gradually reduced

The entrepreneur Egil Aksnes' initial stake in the venture was 20%, as was that of a private investor. Aksnes's stake gradually dropped to 1.5%, and private investor's stake dropped to 3% through subsequent capital expansions. An institutional investor (regional fund) is the largest stakeholder. The company has over 50 small passive investors.

Notes: *DSF was the only company with co-investors. All of the other three firms had individual investors. **As little as 6 months after the last brokered capital expansion, SeeArt stock was traded in the grey market for NOK 7. In other words, as much as two-thirds of the market capitalization was gone. ***SINTEF is the Foundation for Scientific and Industrial Research at the Norwegian Institute of Technology.

Data analysis Before the data was analysed, individual case studies were built for subsequent cross-case comparison according to the commonly accepted principles of case analysis in inductive research (Miles and Huberman

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1984, Yin 1984, Eisenhardt 1989, Brown and Eisenhardt 1997). Delaying the cross-case analysis also prevented interference with the independence of the replication logic of inductive research (Brown and Eisenhardt 1997). The cross-case analysis uncovered several themes, two of which are presented here: the equity capital acquisition process and the content of the investment relation. The equity capital acquisition process

It quickly became clear from the case analysis that two of the participating companies focused on what their investors could provide their new ventures besides just capital, whereas the other two were almost exclusively focused on the financial capital contribution of investors. The capital as a commodity approach to procuring investors: Gas Experts AS is one of the companies that underwent the fewest rounds in terms of capital expansion and new stock issuance; however, the founder and entrepreneur has been very mindful of what investors can add to the firm beyond the physical capital itself: `You basically want to know from the outset what they can add, and that they are cooperative partners to begin with'. He looked upon his need for additional capital as an opportunity to acquire relevant sets of expertise for his company. He has accomplished this by allowing selected ìnvestors', or experts, to buy a limited amount of stock in the company at face value: [H]e [one of these experts] was a considerable resource to the company because he worked for Gas-R-Us and Nor-Gas at that time, and he was a key person to have on the team . . . There was therefore no discussion about paying a premium for the shares. One might argue that the price premium (a cost over and above the shares' face value) that he charged these investors was their industry expertise and access to their considerable personal and industry networks.

Although different, the investor-acquisition process at Deep Sea shares many similarities to the process at Gas Experts. In the case of Deep Sea Fishing, the entrepreneurs could actually choose who invested in their company. The entrepreneurs of DSF were at one stage engaged in a discussion with three different potential investors. Their final investor choice was not tied specifically to who could offer the most money, but to who could offer the most in addition to the financial capital. The investors providing the most in terms of instant credibility and relevant industry connections won. This is not to say that they did not use the leverage they had to get a `fair' price, but money was not driving the acquisition process; rather, it was the value-added beyond physical capital.4 Even though they looked carefully at how much each of the `suitors' offered in terms of cash in relation to how much stake and control they demanded, they also looked carefully at what these potential investors had to offer in addition to their cash. During one of the first interviews in September 1999, one of the founders of DSF summed it up nicely:


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Rùkle and Frosta are considered heavy hitters in commercial Bergen; they are very professional and we are very pleased. . . . In relation to going to Statoil to introduce ourselves, it gives us credibility to have them onboard. They are involved in offshore already. They are smart people with the right connections.

Mr. Velure made this statement only a few months after the coinvestors, Rùkle and Frosta, made their relatively substantial initial investment of NOK 5.5 million, acquiring 35% of the company. The entrepreneurs were naturally pleased that they had acquired investors that were well reputed and well connected within the industry. The culminating interview with one of the entrepreneurs of DSF, conducted in March 2002, revealed that the board was discussing getting someone with more relevant industry experience onboard. They had just recruited a new CEO with 15 years of industry experience, who had product-launched a competitor's plugs in his previous position, and they now were transitioning from the innovative stage to a day-to-day business stage. They viewed it as increasingly important to bring in people with industry experience: If we were to do things over I think we got in the right investors, but we should have brought in people with industry experience, either on the top of the organization or on the board, much earlier in the process. There we have taken too long and we have lost market share due to that.

Their experience with bringing in a CEO with experience from the `plug' industry was so good that they realized they should have done it earlier. Their investors came with relevant industry contacts and networks in the offshore oil industry and provided DSF with credibility and hence improved access to the large oil companies. Their more recent discovery was that people with experience from the even more specialized industries of òil-well fishing' and òil-well plugging' provide even greater value. It is interesting to note that 2 years of experience brought about a significant narrowing of the entrepreneur's definition of what constitutes DSF's industry, from the òffshore oil industry' in 1999 to the òil-well fishing and plugging industry' in 2002. These cases presented further testimonials as to the desirability of the extra value provided by people with relevant industry experience. In the first interview with Torstein Velure of DSF, he emphasized his general aspiration for someone with industry ties and connections. In the interview with him 2 years later, his view coincided with that of Gas Experts' Kjell OppaÊs, indicating that what is most desirable is industry, or even nichespecific expertise and experience. In summary, the search for investors and capital by both Gas Experts and Deep Sea Fishing was very deliberate. Only those who could contribute significantly beyond capital were permitted in as investors. This was amply illustrated, particularly in the case of DSF's earlier rounds of financing. The entrepreneurs in both organizations negotiated from a position of strength. Kjell OppaÊs of Gas Experts enjoyed such a position of strength because he already operated a profitable business, and his need for capital was therefore less urgent than that of the other companies. The Velure brothers of DSF, meanwhile, had a strong negotiating position due to their faith in their patented technology after successfully testing their

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product at the oil-well testing facility in Stavanger, and because they had relevant financial experience. They were thus able to place a considerable, but apparently correct, market value on their young venture. That this type of investor did, in fact, provide value is summed up nicely in the following statement: `There is no doubt that if it were not for the owners we would never have made it'. The extra value of investors with relevant ties within the specific industry was also validated by an entrepreneurs' anecdotal comment regarding his experience with another firm: I have been through two private placements in another company [as chairman of the board] . . . In one case we wanted a pure financial investor, but the more we worked the problem, the more we saw the advantages of having someone with industry ties. . . . [and] the more we saw the advantage of contributions in other areas where we could utilize the resources, and also the addition which that individual brought to the board itself and the planning phase. Today, it has become apparent that it was a huge advantage.

Even when beginning the process aiming only to acquire financial capital, the added-value of industry expertise and networks becomes manifest. Financial capital is the least important ingredient in fostering innovation (Timmons and Bygrave 1986). The experience of these two sets of entrepreneurs indicates that financial capital might not be the most important form of capital (Fisher 1919) that investors bring to the ventures in which they invest. The capital as a scarce-resource approach to procuring investors: Consider, on the other hand, the experiences of the CAL entrepreneurs and, to a certain degree, the SeeArt entrepreneurs. The driving force in the capitalacquisition process was almost exclusively the need for further physical capital. Egil Aksnes was a mechanical engineering student at NTH (Norwegian Institute of Technology) when, in his thesis of 1990, he demonstrated a computer simulation for making geometrical models of amputated hips. His thesis work led him to win NTF's 1991 research prize, and subsequently found Customized Artificial Prosthesis (hereafter CAL). Steinar AlmaÊs, a well-known investor, was on the jury for the NTF research prize and, immediately recognizing the commercial value of Mr. Aksnes' idea, he invested in the new company. Although Mr. AlmaÊs is both a competent individual and a competent investor, he had little or no relevant experience in this industry. Developing custom-made artificial limbs is very time-consuming due to the strict requirements for product documentation and verification.5 CAL has therefore not yet been able to show a positive cash flow, even after more than 10 years of operation. The company continually needs further capital to finance product refinements and medical documentation, and the entrepreneur has spent an inordinate amount of time pursuing different venues for capital acquisition. The question arises as to whether the entrepreneur's time had not been put to more productive use if it was spent on further product development, rather than on acquiring continued funding.


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During the 10 years that CAL has existed, the entrepreneur has explored every option available searching for financing, including the services of a broker. Entrepreneurial as he is, Mr Aksnes was creative in his approach to acquiring funding: One private placementÐit was in 1994ÐI was so bold that I took the tax issue of the local newspaper and went through it. I mailed a prospect to 20 people I had chosen. Then I started calling around. I got yelled at a lot, because it was phone-sales, but I managed to get some money. I got one and a half million (NOK).

In this case, the entrepreneur has spent a great deal of time and energy funding his venture. Mr Aksnes claims the ideal is to finance several years of product development at a time: `[Y]ou cannot finance from year to year, because you will not get anything else done'. However, he admits, alluding to the 10 years they have taken for product development and documentation, one cannot finance 10 years at a time. The result of a decade of struggling to acquire continued funding is àn incredible watering down [of ownership], and you do not get the correct rate'. Mr Aksnes' stake in CAL at one point dropped below 1%, and his investors commented that this was an undesirable situation for all parties. The fourth case-company, SeeArt, was founded in January 1995 as a spin-off from SINTEF, the Foundation for Scientific and Industrial Research at the Norwegian Institute of Technology. The business of SeeArt is to develop and sell software for the visualization and animation of electronically stored data. The founders of the company were Kjell Aga and Tormod Hagen. Both men hold doctoral degrees in Engineering from NTH (the Norwegian Institute of TechnologyÐnow called Norwegian University of Science and Technology (NTNU)), and both were employees of SINTEF's industrial mathematics department in Trondheim. The concept behind the company comes from the 3D visualization of calculations done by SINTEF's Cray supercomputer. Geir Vetle, a prominent business leader, was engaged by the firm at a very early stage, and is referred to by the two entrepreneurs as the third entrepreneur. In spite of their reference to him as an entrepreneur, he was considered an active investor when they filled out the original survey. According to Kjell Aga, it was Geir Vetle, at that time chairman of the board, who argued at an early stage that the company was already worth about NOK 20 million. Geir Vetle was also the driving force behind using a broker when seeking to bring in new capital in 1998. It was Geir Vetle's personal network that led SeeArt to utilize SR-Funds in Stavanger as their broker. Together with SR-Funds, SeeArt managed to bring in NOK 9.6 million, at a share price of 24, for their second offering, thus valuing the company at NOK 20 million. At that time there was also talk of SND Invest investing in the company; however, they considered the price of 24 too steep for their liking.6 In hindsight it would appear that SND Invest's assessment was correct, since shares of DigiView (then SeeArt) were traded at NOK 7 and 8 as little as six months later. This led to a great deal of discussion among investors, who expected the stock to rise above their entry rate of 24. As can be expected, when the rate drops to one-third of the price they paid only months earlier, they were concerned.

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The grey market is extremely sensitive, even to single news items. Important questions for the new venture in this market then become, `How does one manage the media, and how do you spin these news titbits?' DigiView's entrepreneur described it this way: In those instances when one gets things in, for example, ``Dagens Nñringsliv'', it was sheer madness. Then they wanted shares, and there was no one who wanted to sell. The price doubled in one day based on one article. . . . It is quickly forgotten, but [both interest and price] bubbles right back up if one is able to bring the good news out.7

SeeArt may not have gone through as many capital expansions as some of the other organizations examined in this study, but they employed the services of a broker much earlier than Custom-made Artificial Limbs. The use of a broker's services in conjunction with SeeArt's capital expansion left them with a large number of small owners, between 300 and 400, none of which have taken an active interest in the company beyond that of a pure financial investment. One of SeeArt entrepreneurs contends that Geir Vetle brought added value to the company in terms of his network and business expertise. Though they previously considered their technology to have broad applications in multiple markets, as a small upstart company they did not have the resources to develop these markets. Over the years, they have continually narrowed their market focus, and have found a niche where they are one of three or four key suppliers worldwide. As their market focus became narrower, they started making money. This same entrepreneur also stated that òne might be surprised that Geir Vetle did not see this earlier, but his experience is from `ÌTC'', and that is a large company with a broad effort in multiple markets'.8 This raises the question, `would SeeArt have been better served by investors with business experience from a smaller software company, rather than a large international corporation?' It is also worth noting that Mr Vetle's role in SeeArt/DigiView has recently been significantly reduced. In other words, the entrepreneurs at SeeArt, during the 2 years this study spanned, have arrived at the same conclusions as the DSF entrepreneursÐvery specific industry or niche experience is most useful to them. All the entrepreneurs and entrepreneurial teams of this study invariably spent considerable effort securing financing for their ventures. Academics and practitioners alike should be interested in the approach used in successful instances of investor selection. For two of the entrepreneurial teams in this study, attracting and recruiting the `right' investor have required the lion's share of their effort and energy. The deliberate manner in which they went about these tasks testifies to how important they consider the acquisition of the competencies, experience, and networks of industry contacts that these investors possess. Though investors may or may not choose to remain with the industries with which they have business experience, some entrepreneurs prefer investors with relevant industry experience, at least when it comes to active investors. Hence, investors tend to remain within industries with which they have experience, not necessarily by their own choice but by selection. Several of the entrepreneurs in this study were undaunted in their quest for competent investors and, once they acquired them, they


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exploited their newfound knowledge, skills and industry contacts to the fullest extent. Investor selection thus emerges as an important topic, on par with the recent study of industry selection by investors (Haar et al. 1988, Gorman and Sahlman 1989, Ehrlich et al. 1994, Mason and Harrison 1996). A question of causality arises when it comes to the previous research, which has concluded that investors prefer to invest in industries with which they have experienceÐthis based on the fact that they tend to end up with investments in such industries. The findings of this case-analysis indicate that the causality may be reversed, or at least compounded. The reality may be that many of the investors who repeatedly invest in their native industries, those in which they have previous experience, do so in part because they are actively sought out and recruited by the entrepreneurs in these industries.9 The term `competent capital', as used in academic literature, generally refers to an investor with one or more of the following: (a) entrepreneurial experience (i.e. experience in founding and running his or her own enterprise), (b) leadership and business experience (i.e. experience general management and business experience), (c) higher education, and (d) investor experience (i.e. experience with investing in unlisted companies). Such investors are clearly competent, but they do not necessarily come with the relevant industry contacts and experience that entrepreneurs find so invaluable. To differentiate the merely competent investors from those positioned to let their investment objects exploit their industry-relevant experience and networks, I propose the term `relevant capital'. It is generally agreed that competent capital is far more valuable to entrepreneurial companies than `mere' capital. This holds true also in this study, as competent capital is far more valued by entrepreneurs than capital alone. However, this study also provides strong evidence that relevant capital is more valuable still.10 Financial capital is just that, capital. Investors providing financial capital are usually passive investors. Competent capital investors bring not only capital to the ventures, but to the extent that they are committed to the venture, that is, are active, they also provide competence. That is, active investors often provide three Cs: capital, competence and commitment. Investors with relevant industry or niche experience provide competent capital, but additionally they provide access to their highly pertinent networks. Relevant capital investors then provide four Cs: capital, competence, commitment and contacts. This last C is important because it is what distinguishes relevant capital from competent capital, and moves the capital from being human capital to becoming social capital. Coleman (1988) makes this point well: Social capital, however, comes about through changes in the relations among persons that facilitate action. If physical capital is wholly tangible, being embodied in observable material form, and human capital is less tangible, being embodied in the skills and knowledge acquired by an individual, social capital is less tangible yet, for it exists in the relations among persons. Just as physical capital and human capital facilitate productive activity, social capital does as well (1988: S100±S101).

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The real significance of relevant capital to new ventures is the added value of the various aspects of these social structures, as resources for facilitating action towards achieving the goals of the venture. It is interesting to note that both companies that have managed to acquire competent investors with relevant industry experienceÐthat is, relevant capitalÐearly on in their development have not employed the services of a brokerage firm to secure additional financing. These two companies have thus maintained a limited number of investors, some of whom are highly active in the companies in which they have invested. In contrast, the two companies who employed the services of a broker have large numbers of investors (several hundred) who view their investments purely as financial instruments. The share of the company retained by the entrepreneurial teams is also greater in these two firms than in the two who primarily sought capital. Content of investment relationship

One of the more important topics of existing research on the relationship between venture capitalists, private investors and the firms in which they have invested has been the content of that relationship (Rosenstein et al. 1989, Harrison and Mason 1992, Ehrlich et al. 1994, LandstroÈm and Olofsson 1996, Cressy and Olofsson 1997). Other than the exchange of capital for stakes, what flows through the channels of the relationship? This study provides a closer look at the relationship contents. If we begin by looking at Gas Experts AS, the reader might recall that Kjell OppaÊs was very deliberate in recruiting investors with relevant industry experience. Most of the investors were, or had at one point in time, been active in the company, and demanded regular updates from management. The investors were also vocal when they felt that this information was inadequate. OppaÊs confessed that `sometimes they rebuke me. . . . They are not always equally pleased with the reports, time priorities. But that is the way that it is supposed to be'. There is little doubt in Mr. OppaÊs' mind that each of his ìnvestors' adds considerable value to the company by virtue of his industry networks and expertise: And such a person as he can then follow the situation as it develops, and have fruitful hour-long dialogues regarding what is happening . . . , and he can see it from a broader perspective, from his vantage point. Give us knowledge of strategic developments . . . and put us in a position to select a scenario, . . . so that the solution you have is as music in their [large potential corporate client] ears: you make it easier for yourself to reach the goal than if you have a diverging strategy.

Someone that can provide information that enables a small firm to approach a much larger company with a solution that `sounds like music in their ears' is naturally of considerable value. The competencies and expertise of investors were clearly utilized when formulating corporate strategy and when deciding how to approach a potential large client. The first two investors àllowed' into DSF, over an extended period, had spent their own time providing valuable insights for the entrepreneurs at DSF. Rùkle and Frosta are relatively high-profile captains of industry,


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and their names opened doors for DSF. Both Rùkle and Frostad provided instant credibility in the offshore industry. Their high-level industry contacts, combined with the highly relevant technical expertise and industry contacts of the other two earlier private investors, provided DSF with a comprehensive set of competencies and contacts to jump-start their venture. At Custom-made Artificial Limbs, the active investor, Terje GranaÊs, was able to influence and shift the company's focus from careful, and perhaps overly deliberate, product development and documentation to a more market-oriented approach. As an investor with business experience, he knew that capturing market share was important. His role in the company allowed him to effect a subtle but substantial shift in corporate strategy. To summarize, if one relegates Geir Vetle to the part of an active private investor in SeeArt (his original role) and not as a member of the entrepreneurial team, the investors in all four organizations in this study were able to exert considerable influence on the organization in which they have invested. It is clear that there is much more than just capital that flows from the investor to the organizations in which they invest. Active investors influence operational decisions as well as important strategic choices. Their contributions to their investment objects are often subtle but always substantial. Relevant capital and, to a certain extent, competent capital is invaluable to new ventures. Investors providing access to industry insights greatly augment a small firm's ability to make viable strategic choices, while the access to high-level industry networks facilitates the enactment of these strategies. Certainly, some investors can make time demands on the entrepreneur because of their desire to keep up with the day-to-day running of the business in which they have invested. These demands require extra effort on the part of the entrepreneur to provide the level and type of information that their investors require, and in a timely fashion. However, this `cost' seems insignificant when compared with the considerable benefit realized. Even though this paper aims to illuminate the demand side of the informal capital market, it will be instructive to include a brief discussion of some findings from the investor interviews. The comments made by these investors clearly confirm the contention that investors, in principle, consider two things: agency considerations and market considerations.11 Based on the admittedly limited number of interviews with investors in this study, there is preliminary support for Fiet's (1995) claim that for competent investors, agency considerations are at least as important as market considerations. Private investors with a great deal of business and financial experienceÐor even pertinent industry experience, expertise and contactsÐare better able to assess the market potential and hence the merit and potential profitability of a new venture idea, than other investors. However, it may be more difficult to assess the competency and integrity, and hence the trustworthiness, of the entrepreneur and his or her team. As Shepherd and Zacharakis (2001) assert, trustÐand its antecedentsÐbecomes a crucial issue in the entrepreneur-investor relationship.

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Entrepreneurs and investors: how distinctive are they? Largely, the existent literature on informal investors takes for granted the traditional distinction between entrepreneurs and informal investors. However, LandstroÈm (1998) questions this assumption, viewing informal investors entrepreneurially as co-creators, and co-entrepreneurs, arguing that their attitude is indeed that of an entrepreneur. In support of this perspective is the fact that many of these informal investors themselves view the real entrepreneurs as potential co-entrepreneurs. A similar issue cropped up in two of the four cases: Where does one draw the line between an entrepreneur and a private investor? This issue was manifest in the Deep Sea Fishing case as regards the Velure brothers and their role in DSF, and in the DigiView/SeeArt case with Geir Vetle. In fact, Kjell Aga, who responded to the original survey instrument on behalf of SeeArt, checked the box indicating that SeeArt had an active private investor. This investor is undoubtedly Geir Vetle, as they do not have any other private investors of any size active in the company, yet Kjell Aga, in subsequent conversations, described Geir Vetle as part of the entrepreneurial team. This confusion illustrates the problem at hand. These investors/ entrepreneurs fulfil the definitional requirement of private investors set forth by Mason and Harrison, where they define private investors as `private individuals using their own money directly in unquoted companies, in which they have no family connection' (2000: 221). Clearly, both the Velure brothers and Geir Vetle fulfill this definitional requirement, and are thus, by definition, private investors. Yet, they are considered a part of the entrepreneurial team by the original entrepreneurs and later investors alike. Entrepreneurs deliberately seek investors of this type. Any private investor who (1) invests in the new venture early, (2) subsequently becomes so actively involved in the company that later investors view him or her as an integral part of the organization, and (3) regard the individual as part of the entrepreneurial team is an invaluable asset to any new venture. One might be tempted to quickly categorize such investors as either private investors or entrepreneurs, but this reduces the complexity of the issue, which in turn reduces understanding. As always, categories are simplifications of the complexities of reality. By refining and developing new categories, we increase our understanding of complex phenomena. Let us as researchers, scientists and academics agree that there is no valid reason for us to disagree with the reality as experienced by entrepreneurs and investors alike.12 When practitioners unanimously perceive these individuals to be an integral part of the entrepreneurial team, researchersÐ as observersÐhave little right to impose an academically derived definition on their grasp of reality and deem them incorrect. Instead of finding new data to fit our theories and definitions, adapt our theories and definitions should be adapted to fit the data and its reality. I propose a distinction in terminology to clarify the rather muddled picture entrepreneurial reality presents us with, a nomenclature that allows us to separate traditional entrepreneurs from these investors who are


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perceived as entrepreneurs, and from more traditional private investors, active or passive. The former and the latter are clear-cut. It is those in the middle category, investors perceived as entrepreneurs, who present a problem for academia. For we must now permit them to be considered entrepreneurs, while previously, at least in theory, we should have considered them private investors.13 These entrepreneurial investors are precisely that. They enter the companies in which they invest as investors, but soon become like entrepreneurs. One might better call these investors financial entrepreneurs to separate them from the traditional entrepreneurs, who then could be called technical entrepreneurs. This nomenclature proposal does not signify that the definition of `private investors' needs alteration. The one proposed by Mason and Harrison (2000), quoted earlier, is both elegantly parsimonious yet adequate. Yet we might well consider the term financial entrepreneurs as a supplement or codicil to their definition of private investors. It could be defined thus: ` ``Financial'' entrepreneurs are `private investors' who invest at such an early stage and become so involved in the company that they are subsequently considered a part of the entrepreneurial team by `technical' entrepreneurs and later investors alike'. The main difference between a financial entrepreneur and an active private investor would then be that the former usually becomes involved in the company far earlier than the latter. This research also indicates that financial entrepreneurs are more actively involved than active private investors. Further research is needed into the differences and similarities between these types of investors. Armed with the definitions of entrepreneur, private investor, and now financial entrepreneur, researchers and practitioners alike should be able to more readily distinguish between them. Implications Implications for entrepreneurs

One of the crucial dilemmas facing entrepreneurs who seek informal venture capital is how much of the company to trade for access to it. The answer depends largely on what kind of capital they are acquiring. Some entrepreneurs in this study have placed a significant monetary premium on relevant capital over pure financial capital. In doing so, they have demonstrated the added value of investor expertise. The answer will also depend not only on the financial sum of capital but also on the competency level as well as the competency relevance of that capital. Given that an entrepreneur truly has an idea of considerable value, an interesting paradox ensues. The entrepreneur, being smart, is willing to sell a stake in the company at a lower rate in exchange for relevant capital instead of non-relevant capital, as was clearly articulated by Gas Exports' entrepreneurs. The relevant capital investor, on the other hand, is, through his industry expertise, more likely to recognize the true value of the project, and is thus willing to pay a premium for a stake in it. This was the situation

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in the DSF case. BRG Investing, the more relevant capital, made a much more attractive offer than BIG Investing, who offered less relevant capital by comparison. Of course, the greater and more distinctive the added value is to the project, the greater this difference. Entrepreneurs need to be aware of this paradox and not get confused by it. Entrepreneurs using this paradox to their advantage can secure the best of both worlds. In fact, in such a situation, an entrepreneur does not have to choose between more money or more expertise, but can say, with Winnie the Pooh, `Yes, both please'.14 Entrepreneurs embarking on an informal venture capital quest are well advised to remember that investors who choose to place their money with their venture take a considerable risk. The risks involved when placing money in unquoted stock are far greater than when placing money in the stock market. For an investment in unquoted stock, risk takes two forms: agency risk (Williamson 1975, Eisenhardt 1989, Fiet 1995), where the entrepreneur might not be inclined to act in the investor's best interest, and market risk. Given that relevant capital means that the investors come with pertinent industry experience, these individuals are well equipped to assess market risk. Agency risks then become increasingly important in the investment decision since here is where the greatest uncertainty lies. Entrepreneurs should, therefore, carefully consider how they present themselves in order to maximize their chance of securing this extra valuable capital. They not only need to be technically competent, but they must also convey their trustworthiness. Implications for investors

One of the issues that this study has documented is the value of relevant capitalÐthat is, the competencies, expertise, personal contacts and industry networks provided by investors who choose to become actively involved in their companies. This value is real. To varying degrees, it is also perceived by the entrepreneurs. Investors should also be mindful of this added value, and should strive to communicate it to entrepreneurs. A thorough understanding of the potential value of this competence, combined with the ability to convey its potential significance to the future of the venture, should serve investors well when negotiating the terms of their potential stake in a new venture. Given the significant value of these investor competencies for entrepreneurial ventures, investors not currently involved in the operations of their investments should consider getting involved, or increasing their involvement level. Valuable advice and industry contacts that can support the efforts of the entrepreneur will ultimately increase the value of the company and thus the return on their investment. Furthermore, investors who have not yet invested, or who wish to invest further, should consider focusing on an industry or market segment in which they have relevant expertise and contacts. It is in these new ventures, which operate in familiar segments, that the actively involved informal investor will have the greatest impact and provide the greatest


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value; hence, it is in those familiar segments that these investors can create the greater value for themselves. Finally, after speaking with investors who have experience co-investing with other investors, it became clear that co-investing with more experienced investors might actually be the very best way for novice or `virgin' investors to enter the informal capital market, for they learn valuable skills from more experienced investors. They can glean more than just lessons about how to invest; they can also learn how to be more actively involved in their portfolio companies. The more experience a novice investor gets from being actively involved in a venture, the more relevantÐ and thus more valuable and desirableÐtheir investment capital becomes for future investments within the same industry. Since the earlier survey studies completed during the course of this research programme indicate that Norwegian investors are less active than their counterparts are in other countries (Reitan and Sùrheim 2000), acquiring the skills of active investors is important for new ventures and new investors alike. Implications for future research

An important task for future research is to explore the size and the shape of the value-added factor provided by relevant capital investors, as well to quantify the value-added factor of relevant capital over both competent and pure financial capital. That is, how much greater is the value that relevant capital investors contribute than that of investors with more general business experience (competent capital investors)? Furthermore, do relevant capital investors exert greater influence strategically than competent capital investors? How is investor influence mediated by the entrepreneur's own background and experience? Another matter for further research regards how the ownership structure (relevant capital vs. competent capital financial investors vs. private investors) of small companies influences their development. Similarly, further research is warranted into the added value provided to new ventures by investors who become engaged in a new venture at such an early stage, and so actively, that they are best described by the term `financial entrepreneurs'. It would also be of interest to find out if `private investors' of various kinds spend more time with portfolio companies in industries with which they are familiar than they do with those in less familiar industries. These issues should prove a fruitful venue for further research. Previous research has shown that investors end up investing in industries from which they have experience. The findings of this study indicate that this effect is not only due to the investors' own preference, but also due to the entrepreneurs' preference for relevant capital over competent capital or mere financial capital. Further research is needed to establish the relative strength of these effects. Though some research does exist (LandstroÈm and Winborg 1995), there is ample room for further research into entrepreneurs' attitudes towards, and use of, various equity capital sources. More investigation is also needed into the relative importance of agency and market considerations in the investment

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decision. It would be of interest to know how this relative importance of agency and market considerations is mediated by the investors' familiarity with the industry and niche of the entrepreneurial venture. When relevant capital investors make investment decisions, the investor has several issues to consider. As mentioned previously, these issues can be classified into two basic types: agency and market considerations. The investors interviewed in this study spent a great deal of time talking about both of these considerations. Further research into their relative importance in the investment decision is warranted. Answers to questions such as what issues are considered most important by what kind of investor, under what market conditions, and in what industries, would provide us with a better grasp of these issues, which are central to our understanding the dynamics of the informal venture capital market. The entrepreneurs in this study expressed both gratitude and frustration with those government agencies, such as Norway's SND and NFR, charged with aiding entrepreneurs.15 Further research into the effectiveness of various government agencies' efforts aimed at stimulating new venture growth is warranted. Agencies such as SND, NFR, and the Inventor's Office loom large in the minds of Norwegian entrepreneurs when it comes to grant and equity. This general attitude is also found within large Norwegian corporations (Sñtre 2001). Clearly, further investigation into the effects of these organizations on various types of entrepreneurs, in various stages of new venture development, would enhance our understanding of the informal venture-capital market in Norway, as well as in other countries. Concluding remarks The two principal questions examined here are: `What kind of investors do entrepreneurs and their new firms seek, and how do they go about the search?' As noted earlier, though entrepreneurial firms are a pivotal source of new employment in Europe (Mason and Harrison 1999), the entrepreneur's perspective on capital acquisition is rarely discussed in the literature. One finding of this exploration into the investment relationship is that the distinction between investor and entrepreneur often gets blurred, particularly in those instances where the investor becomes involved in the company fairly early in the process. Consequently, adding the term financial entrepreneur to our understanding of, and vocabulary for, discussing entrepreneurial finance is reasonable. Reitan and Sùrheim (2000: 138) claim that `Norwegian informal investors are less actively involved in the businesses in which they invest than is the case in the UK and Sweden.' But their survey results only indicate that `the proportion of investors' (2000: 137) actively involving themselves in the companies in which they invest is lower in Norway than in the UK and Sweden.16 The Norwegian private investors who do get involved in the companies in which they invest may actually be as involved as their counterparts in Sweden and the UKÐor perhaps even more so. The cases presented here certainly indicate that those Norwegian private


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investors who do get involved in their companies do so without reservations. The findings of this study lend support to previous findings on the propensity of investors to invest in industries with which they have experience. These same findings, however, challenge the implicit causality assumptions and suggest that looking carefully at the entrepreneurs' selection of investors may be as appropriate as discussing the investors' selection propensities. Entrepreneurs and entrepreneurial teams who view capital as a commodity are very particular about whom they let invest in their companies. Not only do they want competent investors, but they want investors with relevant industry experience and networks. Sùrheim and LandstroÈm (2001) conclude that investor competency entails knowledge, skills, will, and situation. In their operationalization of the concept, they include both formal knowledge, in terms of education, and practical knowledge in terms of experience. Their operationalization is fivedimensional and includes professional experience, self-employment, higher education, managerial experience and company ownership. This conceptualization and the operationalization of the concept fit well with the implicit contents of the concept used by many authors who are far less clear about what they mean by investor competence, yet only include general business background, not the industry-specific experience, know-how and contacts that were so valued by some of the entrepreneurs interviewed here. This study proposes the term relevant capital to supplement the implicitly understood, and much used term, competent capital. Relevant capital is thus defined as capital from private investors with strong ties to the specific industry of the new venture. The higher the degree of industryspecific expertise on the part of the investor, the greater the relevance of his or her capital. This study contributes a wealth of examples regarding how industry-related and strategic advice flow from financial entrepreneurs and financial investors alike, both of whom provide valuable insights for the ventures in which they invest, exerting influence in terms of the general market approach and general management. The relevant capital investors, however, appear to have provided even more valuable insights for their portfolio companies. Their advice and insights were not necessarily more brilliant, just more industry-specificÐhence more valuable to the new ventures. Notes 1. In these four cases, all investors were male, as were all entrepreneurs. 2. All four companies participating in this study had private investors that invested individually, with the exception of DSF that had a pair of co-investors. 3. The inclusion of passive investors is not critical to this study, but it was thought that this would generally reduce the level of ùnexplained variance' between the cases, since all of them had two basic types of investors to deal with, active and passive. 4. This awareness on the part of the founders of DSF was fairly consistent over time as they had issued a small amount of shares (about 9%) in an early round of initial financing to two key players with technical and industry expertise, who had consulted for them previously, and it was important to have continued access to their knowledge and networks.

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5. The customization is based on digital photographs of the limb combined with x-rays and sensors. This input is fed into a mathematical model that produces three-dimensional computer models of each patient's hipbone, which are then produced in special materials such as titanium. 6. SND Invest is a subsidiary of the Industry and Regional Development Fund (SND) 7. `Dagens Nñringsliv' is Norway's largest business and financial paper 8. This might be because Geir Vetle had little technical and industry experience, but a great deal of business and financial experience from the Norwegian subsidiary of a large American corporation. 9. The original intentions and preferences of investors might only be to make as good an investment as possible regardless of industry. On the other hand, investors are of course better equipped to make discernments about potential investments located in industries in which they have an intimate knowledge. 10. The high value of relevant capital is not an idiosyncratic or methodological artefact of this study, since it has been established that investors have a propensity for investing in industries in which they have experience (Haar et al. 1988), and since such non-financial contributions hold considerable potential for financial gain (Fisher 1919). 11. Agency considerations deal with incentives, control and monitoring when one economic actor, the principal, employs another economic actor, the agent, to perform certain functions on behalf of the principal. That is, situations where the entrepreneurs' decision-making might diverge from the preferences of the entrepreneur due to neglect, lack of competence, dishonesty, distance and shortterm self-interest-seeking. Market considerations deal with issues like: Is the idea fully developed? What is the market situation? What is the potential profitability? 12. It is also worth noting that private investors seeing themselves as entrepreneurs, or at least a part of the entrepreneurial team, lends support to Aernoudt's (1999) assertion that investors do not view themselves as ex-entrepreneurs but as entrepreneurs. 13. Thorsten Veblen (1921) prophesized that engineers and innovators would come to dominate the economy as technology played an ever-increasing role. In the process, the traditional venturecapitalist investor might find himself replaced by a new form of investor that understands the technology, the product, the process of that particular industry, and wants to be involved as a coengineer/innovator/entrepreneur. 14. One should always be careful when generalizing from studies with a low sample size. However, as Jim March and his associates (1991) have pointed out, there is much to be learned from samples of one or fewer. Here, however, we have what I would call `single case aggregate' in addition to sound theoretical reasons supporting this line of reasoning. 15. SND is the Industry and Development Fund, and NFR is the Norwegian Research Council. 16. Nevertheless, the findings of Reitan and Sùrheim (2000) serve as a reminder that the four cases presented here are not representative for all, or even most, new ventures since they do not have private investors who are actively involved, whereas all four cases presented here do. 17. DSF was the only company with co-investors. All of the other three firms had individual investors. 18. As little as 6 months after the last brokered capital expansion, SeeArt stock was traded in the grey market for NOK 7. In other words, as much as two thirds of the market capitalization was gone. 19. SINTEF is the Foundation for Scientific and Industrial Research at the Norwegian Institute of Technology.

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