Tools used by the respondents to govern the investment

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Convertible equity

This section is based on data gathered through personal communication (Industrifonden, 2007-12-03; SEB VC, 2007-12-04; STF, 2007-12-05; Sting Capital, 2007-12-06; Scandinavian Financial Mgt, 2007-12-10 & VTT, 2007-12-10).
Four of the respondents, VTT, Industrifonden, STF and Sting Capital said that they made use of convertible equity, to a varying extent. It was converted after company performance or after a pre-specified termination date. One of the four respondents also used ongoing convertible equity which gave them the option to convert the equity at any point in time.
VTT rarely used it but saw its usefulness on the odd occasion as the use of convertible capital can buy the venture capitalist time to decide how to continue the relationship with the portfolio company. This idea was shared by Industrifonden who considered a convertible equity investment to be a way to invest without investing. Industrifonden treated their convertible equity investment as a passive investment, meaning that they do not take a seat in the board of directors or engage themselves more than any other creditor.
By using convertible equity they are not held accountable for the portfolio company’s destiny nor do they have the same obligation to provide the portfolio company with additional capital, as when investing with normal equity. It reduces the risk of getting stuck with a bad investment. According to STF convertible equity made the risk horizon for the investment decrease as they are able to decide if and when to convert their convertibles.
Despite the benefits of convertible equity, Industrifonden and STF said that they make moderate use of it as they are concerned with the negative influence that such “debt” has on the balance sheet of the company. The other negative aspect was the difficulty for a company in an early phase to pay the interest required. This was addressed by Industrifonden who said that they allowed illiquid companies to accumulate the interest until the company was liquid. STF however viewed these interest payments as a way of, although to a low degree, decreasing the risk of not getting anything back from the investment in case of liquidation. Sting Capital was the respondent that made the most use of convertible equity, although being fully aware of the potential danger of the negative impact on the balance sheet. This impact is addressed through a contract saying that if the
debt/equity ratio drops below 0.5 the amount needed to reach the approved ratio is converted according to a pre-determined rate. In addition to the benefits stated by the other two respondents Sting Capital stated that while normal equity is consumed convertible equity is a claim on the company, which reduces the risk of ending up with nothing at a potential liquidation. This is of major importance as according to Sting Capital the most common blame for failure was not that the technology is insufficient. It is therefore often a value in the technology that according to them can be recovered in case of liquidation, investing with convertible capital can mean a preferred place in relation to other investors. Sting Capital also used convertible equity in order to postpone the valuation of the company. This is achieved by setting the conversion rate accordingly to the next investors’ valuation of the company in combination to a predetermined discount.
Through this Sting Capital said that they could avoid the argument with the entrepreneur, on the value of the company at a point when there may be a lack of known facts to base the valuation on.

Syndication

This section is based on data gathered through personal communication (Industrifonden, 2007-12-03; SEB VC, 2007-12-04; STF, 2007-12-05; Sting Capital, 2007-12-06; Scandinavian Financial Mgt, 2007-12-10 & VTT, 2007-12-10).
Syndication between venture capitalists is according to Sting Capital becoming more and more common. Even though all respondents have made the odd investment without a syndication partner they all discussed the importance and benefits of the existence of other investors with whom to syndicate their investment with. The respondents stated that several investors mean more time spent on the company, hence more eyes on the performance and behavior of the company. As Sting Capital along with Industrifonden said; if one investor fails to recognize a risk or a market potential, this might be identified by another of the partners. Other benefit of syndicating investments that all respondents pointed out was the gain of additional or complementary knowledge and networks.
Scandinavian Financial Mgt said that they syndicate their investment with people or companies chosen due to their industry specific knowledge, to invite the right people is experienced as very beneficial in the work of developing the company. VTT shared this tactic and stated that all venture capitalists can contribute with capital but it is the intelligent capital that makes the difference in terms of reducing risk. Through a larger network consisting of customers, employees and suppliers the likelihood of a successful investment as a result of the company development increases.
Additional reasons for syndicating are according to all six respondents said to first be the possibility to lessen the initial investment as the total amount needed in the company is divided among the syndication partners. Second, the portfolio company’s potential need of supplementary capital to reach a goal is divided between the partners. STF linked syndication to the level of security of the investment, where syndication is a tool to reduce the management-, technical-, market-, and financial risk. According to Industrifonden syndication could be seen as of greater importance in their CleanTech investments in order to safeguard their exit, due to the current lack of investors. By attracting more investors to the CleanTech sector in an early phase, helped them reduce the risk of standing without a buyer when whishing to exit.

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Information system

This section is based on data gathered through personal communication (Industrifonden, 2007-12-03; SEB VC, 2007-12-04; STF, 2007-12-05; Sting Capital, 2007-12-06; Scandinavian Financial Mgt, 2007-12-10 & VTT, 2007-12-10). The best way for the respondents to obtain valuable information on how the company is performing is said to be through their work in the board of directors, where their seat is a result of the ownership. However, to gain further insight of the performance of the portfolio company all respondents said that they also have other information requirements that the company has to comply with.

1 Introduction
1.1 Background.
1.2 Problem discussion
1.3 Purpose.
1.4 Delimitations of the study
1.5 Disposition.
2 Method.
2.1 Research Approach
2.2 Data.
2.3 Presentation of the empirical data and analysis
2.5 Literature review
3 Background knowledge and definitions
3.1 CleanTech
3.2 Venture capital investment
4 Theoretical framework.
4.1 Risks within the CleanTech sector
4.1.1 Agency risk
4.1.2 Business risk.
4.1.3 Innovation risk.
4.2 Governing the investment.
4.2.1 How to enter an investment – Convertible equity & Syndication
4.2.2 How to acquire information- Information system, Monitoring & Milestone
4.2.3 How to create incentives – Bonding & Share options
4.2.4 How to structure the funding of the investment
4.2.5 How to protect the innovation
4.3 Summary of the theoretical framewor
5 Empirical findings
5.1 Company information.
5.2 Risks within CleanTech sector.
5.3 Tools used by the respondents to govern the investment
5.3.1 Contractual rights
5.3.2 Convertible equity
5.3.3 Syndication
5.3.1 Information system
5.3.2 Monitoring
5.3.3 Milestones.
5.3.4 Bonding.
5.3.5 Share options and entrepreneurial ownership
5.3.6 Stage financing
5.3.7 Intellectual property rights
6 Analysis
7 Ending remarks by the authors