Determinants and effects of Venture Capital and Private Equity ...

interest. As a matter of fact one can argue that especially for small firms, VCs and PEs bring
along additional consultancy which include marketing services and the upgrading of the
commercial network; both aimed at fostering the increase in sales. This acts as a response to
the enterprises’ need to enhance their results, after a period of an intensive investment
campaign and/or growth. In this case the expected sign will be positive. Intangibles, once
considered as close estimates for the effort put in innovation, should, again, have a positive
sign.
4.2 The effects
In the previous paragraph we showed that theories on asymmetric information have a
relevant impact on the characteristics of SMEs enterprises, which in turn can shape the sign of
the relation between them and the probability to be backed by VCs and PE funds. On the other
side we will find that similar intuitions will drive the expectations on the eligible outcomes once
the investment took place. In the first instance, Ueda (2004) presents a model in which venture
capitalist and the entrepreneur are equally informed about the projects; this fact facilitates
financing to firms with low collateral but exposes the entrepreneur to the risk of project
expropriation by the venture capitalist. For this reason the model also predicts that, after the
deal, profits should increase to compensate the entrepreneur for the risk of being expropriated
by the venture capitalist. Hence, some measure of profitability (such as ROE – return on equity
– or ROA – return on assets) should be comparatively higher than that of other firms.
Nevertheless, these relations can be undone by other factors such as, respectively, a striking
increase in the figures of equity as recorded in the balance sheet and an ongoing campaign of
assets acquisition after the involvement of the external investor.
At this stage it is possible to further develop the issue concerning the presumed impact of
the venture capital industry on degree of innovation. Indeed, gathering evidence on the
consequences of VC should help to shed some light on the direction of causality; if venture
capital first hypothesis dominates in the Italian case, then we should expect an increase in
Capex, Growth, Intangibles. In fact, the injection of capital will stimulate the acquisition of the
essential inputs enabling the production and the marketing of the product. If, on the contrary,
is the innovation first hypothesis that dominates, we do not expect either accumulation of
tangibles assets (measured by Capex) nor Growth to continue after the deal, but rather figures
indicating the consolidation of firm’s results. The organization should have already the assets
required and it’s mainly seeking a push for its sales. As a consequence, VCs and PEs can also be
perceived as consultants, owing to their ability to transfer to firms in which they are involved
new values, as the above mentioned efficiency, and welcome them in a wider network of
relationships, a fundamental source for future outstanding results. In accordance to the latter
Sales of the backed firms should prove better results than non‐backed firms. Moreover, in the
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