giudici & roosenboom - the rise and fall of europe's new stock markets (2004)

ADVANCES IN FINANCIAL ECONOMICS VOLUME 10
THE RISE AND FALL OF
EUROPE’S NEW STOCK
MARKETS
EDITED BY
GIANCARLO GIUDICI
Politecnico di Milano, Dipartimento di Ingegneria
Gestionale, Italy
PETER ROOSENBOOM
Rotterdam School of Management, Erasmus University,
the Netherlands
2004
Amsterdam – Boston – Heidelberg – London – New York – Oxford
Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo
THE RISE AND FALL OF EUROPE’S
NEW STOCK MARKETS
ADVANCES IN FINANCIAL
ECONOMICS
Series Editors: Mark Hirschey, Kose John and
Anil K. Makhija
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CONTENTS
LIST OF CONTRIBUTORS vii
PREFACE ix
VENTURE CAPITAL AND NEW STOCK MARKETS
IN EUROPE
Giancarlo Giudici and Peter Roosenboom 1
PRICING INITIAL PUBLIC OFFERINGS ON EUROPE’S NEW
STOCK MARKETS
Giancarlo Giudici and Peter Roosenboom 25
FINANCING GROWTH AND INNOVATION THROUGH NEW
STOCK MARKETS: THE CASE OF EUROPEAN
BIOTECHNOLOGY FIRMS
Fabio Bertoni and Pier Andrea Randone 61
MANAGERIAL INCENTIVES AT THE INITIAL PUBLIC
OFFERING: AN EMPIRICAL ANALYSIS OF THE
ALTERNATIVE INVESTMENT MARKET
Peter Roosenboom 81
THE VALUATION OF FIRMS LISTED ON THE NUOVO
MERCATO: THE PEER COMPARABLES APPROACH
Lucio Cassia, Stefano Paleari and Silvio Vismara 113
VALUING INTERNET STOCKS AT THE INITIAL PUBLIC
OFFERING
Michiel Botman, Peter Roosenboom and
Tjalling van der Goot 131
v
vi
THE ROLE OF ACCOUNTING DATA AND WEB-TRAFFIC IN
THE PRICING OF GERMAN INTERNET STOCKS
Andreas Trautwein and Sven Vorstius 157

THE EXPIRATION OF MANDATORY AND VOLUNTARY IPO
LOCK-UP PROVISIONS – EMPIRICAL EVIDENCE FROM
GERMANY’S NEUER MARKT
Eric Nowak 181
UNDERPRICING OF VENTURE-BACKED AND NON
VENTURE-BACKED IPOS: GERMANY’S NEUER MARKT
Stefanie A. Franzke 201
THE PERFORMANCE OF VENTURE-BACKED IPOS ON
EUROPE’S NEW STOCK MARKETS: EVIDENCE FROM
FRANCE, GERMANY AND THE U.K.
Georg Rindermann 231
THE NEUER MARKT: AN (OVERLY) RISKY ASSET OF
GERMANY’S FINANCIAL SYSTEM
Hans-Peter Burghof and Adrian Hunger 295
THE LONG-TERM PERFORMANCE OF INITIAL PUBLIC
OFFERINGS ON EUROPE’S NEW STOCK MARKETS
Giancarlo Giudici and Peter Roosenboom 329
LIST OF CONTRIBUTORS
Fabio Bertoni Politecnico di Milano, Milan, Italy
Michiel Botman University of Amsterdam, Amsterdam,
The Netherlands
Hans-Peter Burghof University of Hohenheim, Stuttgart, Germany
Lucio Cassia University of Bergamo, Dalmine, Italy
Stefanie A. Franzke Center for Financial Studies and J. W.
Goethe-University, Frankfurt am Main,
Germany
Giancarlo Giudici Politecnico di Milano, Milan, Italy
Adrian Hunger University of Munich and Dresdner Bank AG,
Munich, Germany
Eric Nowak University of Lugano, Lugano, Switzerland

Stefano Paleari University of Bergamo, Dalmine, Italy
Pier Andrea Randone Politecnico di Milano, Milan, Italy
Georg Rindermann Allianz Group, Munich, Germany
Peter Roosenboom Rotterdam School of Management, Erasmus
University, Rotterdam, The Netherlands
Andreas Trautwein WHU Otto Beisheim Graduate School of
Management, Vallendar, Germany
Tjalling van der Goot University of Amsterdam, Amsterdam,
The Netherlands
Silvio Vismara University of Bergamo, Dalmine, Italy
Sven Vorstius WHU Otto Beisheim Graduate School of
Management, Vallendar, Germany
vii

PREFACE
With the opening of the Nouveau March
´
e in France in 1996, followed by the
Neuer Markt in Germany in 1997 and the Nuovo Mercato in Italy in 1999, the
opportunities for small companies to obtain a listing on European exchanges
were growing rapidly. Other European countries with new stock markets included
Belgium, Denmark, Finland, Greece, Ireland, the Netherlands, Poland, Portugal,
Spain, Sweden and Switzerland. These stock markets had one common aim – to
attract early stage, innovative and high-growth firms that would not have been
viable candidates for public equity financing on the main markets of European
stock exchanges. Of these new markets, the Neuer Markt emerged as Europe’s
answer to NASDAQ.
However, Europe’s new markets met with only limited success. Many markets
were unable to attract sufficient numbers of listings to sustain market interest,
while others suffered from inadequate rules or poor liquidity. In addition, Europe’s

new stock markets were hard-hit by the bursting of the Internet bubble. The market
capitalisation of new markets fell to record lows in 2001 and 2002. Insider trading
scandals and accounting frauds tarnished the reputation of new markets. As a
result, investor confidence quickly disappeared. The most painful consequence
has been the closure of EuroNM Belgium in 2001, the German Neuer Markt in
2003 and NASDAQ Europe in 2004.
What went wrong? On the one hand, markets for high-growth companies
were inherently volatile. The overoptimistic valuations of the Internet bubble
had to be corrected. On the other hand, there were more specific reasons for
the failure of Europe’s new stock markets. These lightly regulated markets were
located at the juncture between private venture capital and main stock exchanges.
They could be viewed as “public” venture capital that partially substituted for
deficient private venture capital markets in Europe. However, stock market
financing lacked the typical provisions such as active monitoring and convenants
that are implemented by venture capitalists to protect their investments against
information asymmetries and entrepreneurs’ opportunism.
At the same time, listing requirements imposed by the new stock markets did
not protect investors from scandals and frauds. On paper, the Neuer Markt had the
most stringent listing requirements in Europe. Companies had to report quarterly
earnings under U.S. or international accounting standards within two months of
ix
x PREFACE
them being available and could issue only common, as opposed to preference,
shares. Moreover, insiders had to agree to a six-month lock-up period following
the IPO before they could sell their shares. However, the enforcement of these
rules was mostly lacking. For example, insiders of some companies listed on the
Neuer Markt circumvented the lock-up rules and several companies reported false
annual and quarterly reports. In addition, the Neuer Markt did not have kick-out
clauses comparable to NASDAQ that allowed it to strike penny stocks from listing.
Although many of the Neuer Markt companies became insolvent, it was relatively

difficult for these companies to be expelled from the market until October 2001.
This meant that these companies continued to tarnish the reputation of the
Neuer Markt.
This book discusses the rise and fall of Europe’s new stock markets. The book
consists of 12 chapters. We will briefly discuss each chapter in turn. Chapter
1, co-authored by Giancarlo Giudici and Peter Roosenboom, describes the
development of venture capital and new stock markets in Europe. Markets for
high-growth stocks offer venture capitalists a valuable exit opportunity for their
investments. This allows them to re-invest their money in other start-up companies
and may spur new business creation and technological innovation. They show that
the private equity market in Europe today is as large as it was just before the advent
of new stock markets in 1997–1999. As such, the need for stock markets that
allow private equity investors to divest their equity stakes in growth companies did
not disappear.
In Chapter 2, Giancarlo Giudici and Peter Roosenboom examine the differences
in pricing Initial Public Offerings (IPOs) on Europe’s new stock markets and on
the main stock markets of European exchanges. Analyzing a large sample of 1,120
European IPOs, they find that companies that went public on new markets are
significantly smaller, younger and riskier than companies that listed on the main
markets. They report a 22.3 percentage point difference in the average first-day
return of 578 companies that went public on new markets (34.3%) and the average
first-day return of 542 companies that went public on main markets (12%). They
attempt to explain this difference. Their results show that reduced incentives to
control wealth losses and differences in firm and offer characteristics partially
explain higher first-day returns on new markets. Their results also show that the
opportunity to bundle IPO deals has been important to control underpricing costs
on new stock markets. However, a large part of the difference in average first-day
return cannot be explained by differences in sample characteristics.
Chapter 3, written by Fabio Bertoni and Pierandrea Randone, analyses how
capital is raised and employed by a sample of 28 European biotechnology

companies listed on Europe’s new stock markets from 1996 to 2000. The authors
analyse the financing and the investment policy of these companies, and make a
Preface xi
comparison with a sample of U.S. biotechnology companies listed on NASDAQ.
Their results show different growth patterns among European and U.S. firms.
European companies primarily rely on capital raised at the time of the IPO, while
U.S. companies also raise a significant fraction of capital in seasoned equity issues
after the IPO. Moreover, European companies are more aggressive in investing
shortly after the IPO, especially in marketing and operating expenses, than
U.S. companies.
In Chapter 4, Peter Roosenboom examines the role of managerial incentives
in 188 small and entrepreneurial companies that went public on the Alternative
Investment Market of the London Stock Exchange. Managerial incentives are
measured as the increase in the amount of executive wealth (composed of share-
holdings, option holdings and human capital) per £1,000 increase in shareholder
wealth. He shows that managerial incentives are higher if the manager co-founded
the firm, chairs the board of directors, and has been employed by the firm for
a larger number of years. In addition, he identifies a trade-off relation between
board monitoring and incentives that is specific to CEOs. He finds that managers
with large pre-IPO shareholdings may use the IPO as a wealth diversification
opportunity. These managers receive smaller stock options grants and sell more
shares in the IPO than other managers.
Chapter 5 is written by Lucio Cassia, Stefano Paleari and Silvio Vismara.
They study the peer comparable approach used for the valuation of companies
that went public on the Italian Nuovo Mercato during 1999–2002. In Italy, IPO
prospectuses often report the valuation methods used by investment banks. This
allows them to analyze the accuracy of “real-world” valuation estimates. They
show that underwriters rely on price-to-book and price-earnings multiples. The
valuation estimates generated by these multiples are closest to offer prices.
Conversely, when using enterprise value ratios, comparable firms’ multiples are

typically higher than those of the firms going public. They argue that underwriters
have the possibility to select comparables that make their valuations look
conservative.
Chapter 6 is devoted to an analysis of Internet-stock IPOs written by Michiel
Botman, Peter Roosenboom and Tjalling van der Goot. They investigate the
relevance of accounting and other information to valuing Internet IPOs during the
years 1998–2000 in Europe and the United States. The authors compare European
Internet companies to U.S. Internet firms at the time of the IPO. They find that
European firms tend to report a smaller amount of loss in the year before the IPO,
sell more shares to the public, have more concentrated ownership by the largest
owner and experience lower first-day returns than comparable U.S. Internet firms.
They show that market value is negatively related to net income in the Internet
bubble period before April 1, 2000 in both European and U.S. IPO markets. This
xii PREFACE
is consistent with an Internet firm’s start-up expenditures being considered as
assets, not as costs. Furthermore, for the U.S. IPO market, they find that free float
is value relevant during the Internet bubble. Underwriters and issuers restricted
the supply of shares at the IPO. This drove up market prices as investors were keen
to buy Internet IPO shares.
Chapter 7 is written by Andreas Trautwein and Sven Vorstius. This chapter
looks at the value-relevance of accounting data and measures of web-traffic for
Internet firms listed on the Neuer Markt at the height of the stock market bubble
from October 1999 to May 2000. In doing so, the chapter contributes to the
understanding of the investment behavior of market participants during that time.
They show that earnings and cash flow cannot explain the valuation of Internet
companies, while there is a positive association between total sales and market
capitalization. In addition, sales and marketing expenses as well as research and
development costs are relevant value-drivers. Furthermore, they find a positive
relation between market values and a number of web-metrics such as customer
loyalty, reach, page impressions, and unique visitors. The authors conclude that

during the Internet bubble measures of web-traffic were at least as relevant as
financial data when explaining market values of Internet companies.
In Chapter 8, Eric Nowak explores the stock price impact of expirations
of lock-up provisions that prevent insiders from selling their shares after the
IPO. He examines 172 lock-up expirations of 142 IPOs on Germany’s Neuer
Markt. He reports statistically significant negative abnormal returns and a 25%
increase in trading volume surrounding lock-up expiration. He is the first to
differentiate between the stock price effects of mandatory lock-up provisions and
the U.S type private lock-up agreements between issuers and underwriters. He
refers to the latter as “voluntary” lock-up agreements. He shows that the average
negative price reaction is significantly stronger for the expiration of voluntary
lock-up agreements than for mandatory prohibitions of disposal. He finds that
the negative abnormal returns are larger for firms with high volatility, superior
performance after the IPO, low free float and venture capital financed firms.
Chapter 9 is authored by Stefanie Franzke. This chapter sheds further light
on the role of venture capitalists and underwriters in certifying the quality of
a company. She finds that many financial intermediaries are involved in IPOs
at the Neuer Markt: 104 underwriters and 148 venture capitalists. In addition,
she reports that venture-backed companies are less profitable compared to non
venture-backed companies. The pre-IPO owners of venture-backed firms sell
significantly more existing shares at the time of the IPO compared to the owners
of non venture-backed firms. She finds no evidence for a trade-off between non-
underwriting costs and IPO underpricing. There is no support for the hypothesized
certification role of underwriters and/or venture capitalists. It does not seem to pay
Preface xiii
to hire a prestigious intermediary, at least as far as underpricing is concerned. On
the contrary, the involvement of a prestigious venture capitalist is associated with
higher underpricing.
Chapter 10, written by Georg Rindermann, presents one of the first comparative
empirical assessments of the role of venture capitalists in the going public process

and their impact on the long-term performance of IPOs in France, Germany and the
United Kingdom. His findings suggest that that there are substantial variations in
the experience and sophistication of venture capitalists. In particular, international
venture capitalists are on average older than national ones, back a larger number of
IPOs in the sample, are more often represented on the board, invest with a higher
number of syndication partners, and hold larger equity positions in portfolio
firms. He reports that venture-backed IPOs do not generally outperform non
venture-backed issues. Instead, only a subset of international venture capitalists
appears to have positive effects on both the operating and market performance
of portfolio firms. The result that venture-backed issues do not commonly
outperform non venture-backed ones has an important implication for research
on venture capital finance. It indicates that the findings of previous studies on
the role of venture capitalists in the U.S. and their influence on the operating and
long run market performance of IPO firms can generally not be transferred to
European countries.
In Chapter 11, Hans-Peter Burghof and Adrian Hunger present a clinical
analysis of the German Neuer Markt. The authors document the initial enthusiasm
of investors for the Neuer Markt. The deep crisis of the Neuer Markt is attributed
to investors’ delusion, to the burst of the Internet bubble and to the numerous cases
of frauds and defaults, that sank the image of the growth exchange and caused its
closing. The closing of the Neuer Markt and the rebranding and restructuring of
the entire Frankfurt stock market indicate the seriousness of the crisis of German
public equity markets.
Chapter 12 is written by Giancarlo Giudici and Peter Roosenboom. This chapter
documents the long-run stock price performance of companies listed on Europe’s
new stock markets. They report that the average company that went public on
these markets has been a very poor long-term investment. Investors would be left
with an average of only 68 cents (72 cents) compared to one euro invested in the
local market index (NASDAQ Composite index). The authors test the divergence
of opinion hypothesis of Miller (1977) as one possible explanation for why the

average company performs so poorly. This hypothesis states that overoptimistic
investors initially set market prices above fundamental values (resulting in high
first-day returns) and that prices gradually decline to fundamental values over time
as more pessimistic investors enter the market. Their results provide some support
for the divergence of opinion hypothesis of Miller (1977). In particular, they find
xiv PREFACE
that IPO underpricing is negatively related to long-run stock price performance.
This suggests that investor overoptimism on the first trading day has a transitory
effect on prices.
Giancarlo Giudici and Peter Roosenboom
Editors
VENTURE CAPITAL AND NEW STOCK
MARKETS IN EUROPE
Giancarlo Giudici and Peter Roosenboom
ABSTRACT
In this chapter we describe the development of venture capital and new
stock markets in Europe. We argue that markets for high-growth stocks
offer venture capitalists a valuable exit opportunity for their investments.
This allows them to re-invest their money in other start-up companies and
may spur the rate of new business creation and technological innovation.
The private equity market in Europe today is as large as it was just before
the advent of new stock markets in 1997–1999. As such, the need for stock
markets that allow private equity investors to divest their equity stakes in
growth companies did not disappear.
1. INTRODUCTION
For the first time in recent history, in 2000 more companies listed in continental
Europe than in the United States. In particular, 727 companies listed on the New
York Stock Exchange and on the NASDAQ while about 900 firms went public on
European exchanges.
1

These statistics are surprising, given that the depth of the
U.S. financial markets has been commonly set against the shallow capital markets
in continental Europe, dominated by large mature firms, privatising companies
and business groups with interlocking ownership (
Faccio & Lang, 2002; Franks
& Mayer, 1997
). Ritter (2003) has highlighted the fast and significant evolution of
The Rise and Fall of Europe’s New Stock Markets
Advances in Financial Economics, Volume 10, 1–24
Copyright © 2004 by Elsevier Ltd.
All rights of reproduction in any form reserved
ISSN: 1569-3732/doi:10.1016/S1569-3732(04)10001-7
1
2 GIANCARLO GIUDICI AND PETER ROOSENBOOM
the IPO market in Europe. The reason of the high level of IPO activity in Europe
may be related to three recent developments:
(i) the de-mutualization of European exchanges, that favoured an aggressive
marketing policy towards attracting more firms to the stock market than in
the past;
(ii) the growth of private equity investments, especially in technology start-ups.
These start-up companies went public on stock exchanges, taking advantage
of the euphoria for high tech and dot.com stock;
(iii) the establishment of new stock markets for growth and technology companies
(the Neuer Markt in Germany, the Nouveau March
´
e in France, the Nuovo
Mercato in Italy, EASDAQ/NASDAQ Europe, only to cite the most important
new stock markets).
Among these recent developments, the third represents the most intriguing one in
European financial markets. New stock markets played a crucial role in the rapid

expansion between 1998 and 2000, as well as in the dramatic decline in 2001
and 2002, when the market capitalisation of new markets fell to record lows. The
most painful consequence has been the closure of the German Neuer Markt in
2003 and NASDAQ Europe in 2004.
Why are stock markets for small and high-growth companies important? Several
studies suggest that these stock markets help to foster a vibrant venture capital
industry by providing a means for venture capitalists to exit their investments. For
example,
Black and Gilson (1998) argue that the opportunity to exit investments
through an Initial Public Offering (IPO) explains the greater vitality of venture
capital in the United States.
Jeng and Wells (2000) find that IPO activity is the
strongest driver of venture capital investments.
Increased venture capital investments may lead to a higher pace of technolog-
ical innovation and business creation.
Kortum and Lerner (2000) find that the
amount of venture capital activity in an industry significantly increases its rate
of patenting. They show that venture capital accounts for about 15% of industrial
innovations.
Hellmann and Puri (2000) find that the presence of a venture
capitalist is associated with a significant reduction in the time taken to bring a
product to market, especially for innovators.
Michelacci and Suarez (2004) show
that the earlier young firms go public the quicker venture capital can be redirected
towards new start-ups. Hence a stock market for high-growth firms may encourage
business creation. New business creation is in turn important for employment
growth (
Audretsch, 2002).
Stock markets are also important for economic growth.
Minier (2000) examines

the effect of opening a first national stock exchange on economic growth. She finds
that countries that opened stock markets grew faster than similar countries that did
Venture Capital and New Stock Markets in Europe 3
not open exchanges.
Levine and Zervos (1998) show that for every ten percentage
point increase in the value of share trading, economic growth increases by one
percentage point.
Rajan and Zingales (1998) show that a high level of financial
development increases the rate of new business creation.
Subrahmanyam and
Titman (1999)
argue that when a country’s stock market reaches a critical mass,
the market can “snowball” with new firms deciding to list on the stock market,
making the market more liquid and efficient, which in turn attracts more firms to
go public.
Taken together, these studies suggest that stock market development and
venture capital are important to economic growth, new business creation and
technological innovation. Markets for high-growth stocks offer venture capitalists
a valuable exit opportunity for their investments. This allows them to re-invest
their money in other start-up companies and may increase the rate of new business
creation and the pace of technological innovation. Stock markets can thus serve
as catalysts for economic growth and the creation of jobs. This chapter continues
as follows.
Section 2 discusses the evolution of venture capital, private equity
and stock exchanges in Europe. This section also compares the venture capital
industry in Europe to that in the United States. In
Section 3 we discuss Europe’s
new stock markets.
Section 4 presents some concluding remarks.
2. THE EVOLUTION OF VENTURE

CAPITAL, PRIVATE EQUITY AND STOCK
EXCHANGES IN EUROPE
This section discusses the development of European financial markets in the
1990s. The statistics reported about investments in venture capital and private
equity in Europe will show that there are still strong arguments suggesting that
stock markets or exchange segments specifically designed for growth firms should
exist. In particular in Europe, the flow of investments in private equity is still larger
than in 1996–1998, i.e. the period in which the major new markets started their
operations. Therefore, the availability of an exit for such investments, one being
an IPO, continues to be important. A much different fate has been experienced
by new market indices, in many cases fallen to their record lows, as well as the
number of companies seeking to list their shares on new markets that has come to
a standstill.
European financial markets underwent a major change during the 1990s. The
advent of the common currency and the convergence towards homogeneous in-
stitutional settings of financial markets contributed to overcome national barriers,
in particular in the field of banking and intermediation services. Nonetheless,
4 GIANCARLO GIUDICI AND PETER ROOSENBOOM
no relevant progress towards a single pan-European stock exchange has been
observed (
European Commission, 2001). The steady increase in cross-border
financial investments increased the competition between national exchanges, as
highlighted by alliances and acquisitions, sometimes only announced (such as the
project of the iX exchange between the Frankfurt and the London stock markets,
or the acquisition of the London Stock Exchange by the Stockholm Exchange)
and sometimes implemented (such as the Euronext and Norex alliances).
The advent of new markets around Europe from 1995 to 2000 is probably the
most striking evidence that, in a favourable market momentum, stock exchanges
preferred to grow internally instead of going towards integration. The development
of new markets coincided, not by chance, with an unprecedented growth of private

equity investments and in particular venture capital.
Private equity is defined as the investment by professional investors (such
as investment banks, closed-end funds, and business angels) in equity capital
of private companies that are often owned by a small number of shareholders.
Venture capital is a specific form of private equity investment, targeted at start-up
companies, in particular in technology sectors. Venture capital is by no means
the main source of capital for companies in industrialised countries. For example,
from 1990 to 1999, $137 billion has been invested in venture capital activities
in the United States. During that same period companies listed on the New York
Stock Exchange and NASDAQ raised $500 billion in equity capital (
NASDAQ,
2003
). In Europe, the venture capital industry is even less developed, to a larger
extent if we consider that in the U.S. venture capital statistics exclusively relate to
start-up financing (from the seed phase to late-stage development) while European
statistics refer to a more general definition that includes buy-out and replacement
capital (i.e. purchases of secondary shares). Having said this, in Europe from 1990
to 2000 d85 billion has been invested in venture capital financing, while compa-
nies raised more than d200 billion on stock exchanges (
European Venture Capital
Association, 2003
).
Figure 1 reports the annual flow of venture capital investments, compared to
GDP, in the major European countries, and in the United States, from 2000 to
2002. Interestingly, in 2000 (although it has been a record year for venture capital)
investments represented only a small fraction of the countries’ wealth, and only
in the U.S. and in the U.K., and in some Nordic countries such as Sweden and
Finland, they played a significant role. The fraction has further decreased in 2001
and 2002, reflecting the negative market momentum of financial markets.
Although its limited relevance in quantitative terms, venture financing has sig-

nificantly contributed to the creation of small successful enterprises, in particular
in technology sectors, in which the access to external finance is a necessary con-
dition to promote innovation and R&D activity. The European Venture Capital
Venture Capital and New Stock Markets in Europe 5
Fig. 1. Venture Capital Investments in the United States and Europe. Note: Comparison
between venture capital investments in the largest European countries and in the United
States, as a percentage of Gross Domestic Product (GDP). Source:
European Venture Capital
Association (2003)
and PricewaterhouseCoopers (2003).
Association (2003) underlines that between 1991 and 1995 European venture-
backed companies exhibited exceptional growth rates, if compared to the EU
largest 500 companies. The sales of venture-backed firms grew at a mean an-
nual rate equal to 25%, twice the rate computed for large companies. The number
of employees in venture-backed firms grew annually at a rate of 15%, compared to
2% for large companies. Capital expenditures of venture-backed firms increased
every year at a rate of 25%. In 1995, R&D expenses represented 8.6% of sales
in venture-backed companies, and only 1.3% of sales in large companies. In a
recent survey of 351 companies in their seed, start-up or expansion stage, about
90% have created new jobs (
European Venture Capital Association, 2002). Over-
all, these 351 companies created 16,143 new jobs (an average of 46 per company).
6 GIANCARLO GIUDICI AND PETER ROOSENBOOM
Fig. 2. Annual Venture Capital Investments the United States and Europe. Note:
Annual venture capital and private equity investments in Europe (data in d million)
and in the United States (data in US$ million) from 1995 to 2002. Source:
European
Venture Capital Association (2003), National Venture Capital Association (2003), and
PricewaterhouseCoopers (2003).
Companies that received seed or start-up capital between 1995 and 2001, have an

annual growth rate of 125% over the first four years after venture capital invest-
ment, whereas companies that received expansion financing grew by 33% per year
during the four year period (
European Venture Capital Association, 2002). For all
companies, venture funding was followed by a sharp increase in spending on R&D
(
European Venture Capital Association, 2002).
Figure 2 exhibits the annual flow of venture capital investments from 1995 to
2002, in Western Europe and in the United States. For Europe, the total flow of
all private equity investments is also reported. After a progressive growth during
the 1990s, venture capital fundraising and investments reached record levels in
1999 and 2000 for both the United States and Europe. The
National Venture
Capital Association (2003)
reports that in the United States, $85 billion has been
invested in technology start-ups in 2000, +91% with respect to 1999. The flow
of all venture capital investments totalled $106 billion. The maximum level has
been recorded during the first six months of 2000. In Europe, during the same
year, more than 10,000 new start-up companies have been financed with venture
capital, totalling about d35 billion (
European Venture Capital Association, 2003),
+39% compared to 1999, with d19.7 billion directly attributable to pure venture
capital financing (+84% compared to 1999).
A steady reversal can be observed in 2001. In the United States as well in
Europe, during the first quarter of that year, investments declined by 60% with
respect to 2000. The halt of the venture capital industry has been confirmed
in 2002: in the United States the flow of investments fell below the level of
1998, −49% compared to 2001. In Europe, the trend has been similar for pure
Venture Capital and New Stock Markets in Europe 7
venture capital. However, the total flow in 2002 has been above the level of

1998, and the total private equity investments even increased in 2002, compared
to 2001.
The fall in funds raised by venture capitalists and private equity investors
has been more dramatic. In the United States, in 2000 venture capitalists raised
resources for more than $106 billion, but only about $41 billion has been raised
in 2001 (−61%) and $7.3 billion in 2002 (−93% with respect to 2000, −82%
compared to 2001).
In Europe, the capital raised by venture capitalists and private equity investors
totalled d48 billion in 2000 (more than the total capital effectively invested in
the same year, as shown in
Fig. 2), while it reduced to about d38 billion in 2001
(−20%), and d19 billion in 2002 (−50% compared to 2001, −60% compared to
2000). Like the flow of investments, also the flow of fundraising has experienced
a less pronounced decrease in Europe than in the United States.
Figure 3 reports the evolution between 2000 and 2002 of the investments, by
stage of firms’ life cycle, both in the United States (a) and in Europe (b). In the
United States the distribution of investments remained rather stable, with a slight
reduction in seed and start-up financing, compared to later-stage development. In
Europe statistics about venture capital, as mentioned previously, take into account
buyout investments (i.e. acquisitions of established firms) and replacement capital
(i.e. purchases of secondary shares without subscription of new shares). In 2000,
19% of total investments have financed seed and start-up companies, compared
to 8% in 1999, while 27% has been channelled to later-stage investments and
41% to buyouts. In 2001, and to a lower degree in 2002, investments in mature
enterprises have been preferred to new ventures.
Figure 4 compares the evolution of venture capital investments, by business
sector, from 2000 to 2002, in the U.S. (a) and in Europe (b). The figure shows that
in addition to a decrease in the flow also a re-allocation of capital among several
business sectors has occurred. There is a strong reduction of funds allocated to
the Internet business, while both in Europe and in the United States an increase in

the investments in the biotechnology and life sciences business is observed. This
suggests that after the burst of the dot-com bubble venture capitalists turned their
attention to growth opportunities in the biotechnology sector.
Figure 4 further highlights that the ratio between professional investments
in technology business and traditional sectors in Europe has been different
from the United States. In the United States, on average, from 2000 to 2002,
more than 65% of the investments were channelled to technology companies,
while the opposite is true for Europe, where about 65% of the investments have
financed traditional sectors (buildings, agriculture, services, transports, chemicals,
mechanics, commerce).
8 GIANCARLO GIUDICI AND PETER ROOSENBOOM
Fig. 3. Distribution of Venture Capital Investments in the United States and Europe. Note:
Distribution of venture capital investments in the United States (a) and in Europe (b) from
2000 to 2002, by lifecycle stage of the financed company. Source:
European Venture Capital
Association (2003)
and National Venture Capital Association (2003).
Venture Capital and New Stock Markets in Europe 9
Fig. 4. Industry Composition of Private Equity Investments in the United States (a) and
in Europe (b). Comparison between 2000, 2001 and 2002.
Source:
European Venture Capital Association (2003) and National Venture Capital Asso-
ciation (2003).
In Europe, technology enterprises absorbed financial resources (from venture
capital and other private equity sources) for d11.5 billion in 2000, +68% com-
pared to 1999, but seven times lower than in the U.S. (
PricewaterhouseCoopers,
2003
). Surprisingly, in a general scenario of decreasing investments, in 2001
and 2002 the relative incidence of high-technology investments increased in the

United States, while the opposite happened in Europe.
10 GIANCARLO GIUDICI AND PETER ROOSENBOOM
The general tendency in 2001 and 2002 was to give priority to the consolidation
of investments in progress, and to select opportunities in the most promising busi-
ness, such as biotechnology. The relative incidence of the biotechnology sector on
total investments increased significantly both in the United States and in Europe.
Finally, it is interesting to consider the evolution of the divestments flow. In the
United States the negative market momentum and the burst of the Internet bubble
twice penalized professional investors. On the one hand, divestments through
IPOs on stock exchanges fell dramatically ($4 billion in 2001 and only $2.5 billion
in 2002, compared to $25 billion in 1999 and almost $28 billion in 2000). On the
other hand, the lack of profits in Internet and technology companies, forced profes-
sional investors such as venture capitalists to write-off their portfolio investments
in these companies. This generated sizeable losses for professional investors.
In Europe in 2001 divestments totalled d12.5 billion, compared to d9.1 billion in
2000. The most frequent exit route has been the trade-sale that accounted for d4.2
billion, compared to d3 billion in 2000. Divestments through IPOs on stock ex-
changes accounted for d250 million vs. d570 million in the previous year. In 2002
divestments totalled d8.1 billion, of which 1% came from IPOs, 29.8% from trade-
sales, and 28.5% from write-offs and capital losses (compared to 23.2% in 2001).
In sum, notwithstanding the negative cycle momentum following 2000, the
private equity market in the United States and especially in Europe is as large
as it was just before the advent of new markets (1997–1999). As such, the need
for specialised exchanges that allow private equity investors to divest their equity
stakes in growth companies did not disappear.
3. EUROPE’S NEW STOCK MARKETS
The U.S. economy has shown strong momentum in the 1990s. Interestingly,
much of the positive push derives from the contribution of small firms. Ac-
cording to the USA Small Business Administration,
2

from 1990 to 1999 small
enterprises created 12 million new jobs, versus a reduction of 650,000 jobs in
large enterprises. The growth has been particularly strong in high-technology
sectors (
Audretsch, 2002). During the same period, continental European firms’
growth rates have been significantly lower, and employment did not receive
significant impulses.
Several explanations have been suggested for the lower growth rates of
European companies. The less-developed capital markets in Europe can be
viewed as one of the primary causes. The scope of capital markets in Europe is
thought to be limited because of the poor legal protection of shareholders that
reduces the willingness of investors to hold securities in European companies (
La
Venture Capital and New Stock Markets in Europe 11
Porta et al., 1997). From 1992 to 1995, more than 2,200 companies listed on U.S.
exchanges, while in Europe only 800 firms went public during the same period.
Moreover, firms listed in Europe during that period have been essentially large
and mature companies, with no need to raise capital, scarce growth opportunities,
and seeking to reduce their debt burden (
Pagano et al., 1998).
European technology firms seeking to raise equity capital preferred to list in
the United States.
Pagano et al. (2002) show that from 1986 to 1997 the number
of European companies listed in the U.S. has been growing, while the number of
U.S. firms listing in Europe has been decreasing. In 1998, 135 EU companies had
a listing on the NASDAQ (52 from the U.K., 18 from the Netherlands, 15 from
Sweden, 14 from Ireland, 3 from Germany and 2 from Italy).
The national governments and the European Commission quickly became
aware of the need to reform financial markets, and pointed to the poor development
of venture capital and equity investments as one the fundamental reasons for

Table 1. Europe’s New Markets Compared with NASDAQ (January 1, 2003).
Market Country Total Capitalisation/ Listed
Capitalisation
a
GDP(%) Companies
TechMark/AIM
b
UK 391,395 27.52 914
Neuer Markt Germany 9,928 0.54 240
Nuevo Mercado Spain 9,576 1.64 13
Nouveau March
´
e/Euronext France 6,954 0.53 147
Nuovo Mercato Italy 6,438 0.59 45
Sitech Poland 5,327 3.02 24
NASDAQ Europe (EASDAQ) Belgium 3,043 n.a.
c
40
ITEQ Ireland 834 0.81 8
SWX new market Switzerland 630 0.25 9
KVX growth market Denmark 598 0.37 10
Nya marknaden
d
Sweden 513 0.23 17
NM-list Finland 290 0.24 15
Nieuwe Markt/Euronext The Netherlands 379 0.01 11
New market NEHA Greece 122 0.01 5
Euro-NM Belgium/Euronext Belgium 57 0.02 11
Novo Mercado/Euronext Portugal – – –
NASDAQ United States 1,994,494 19.91 3,649

Source: Federation of European Stock Exchanges (2003), NASDAQ (2003), Internet URLs of
exchanges.
a
Data in d million.
b
Statistics for AIM only are as follows: 704 listed companies, total capitalisation d15,760 million.
c
The ratio is not significant, since the majority of listed companies are foreign firms.
d
Nya Marknaden is not a regulated market of the Stockholm Exchange, although it shares the same
trading platform.