Reliance upon informants in the venture capital industry

Bank Entry Into the Venture Capital Industry

- In this paper we study the effect of venture capital (VC) financing on firms' investments in a longitudinal sample of 374 Italian unlisted new-technology-based firms (NTBFs) observed over the 10-year period from 1994 to 2003. In particular, we consider the influence of VC on both firms' investment levels and the sensitivity of investments to firms' cash flows. We also distinguish the effects of VC financing according to the type of investor: financial VC (FVC) investors and corporate VC (CVC) investors. We show that the investment rate of Italian NTBFs is strongly and positively correlated with their current cash flows. We also find that after receiving VC financing, NTBFs increase their investment rate independently of the type of VC investor. Even though, on average, VC financing seems not to affect the sensitivity of investments to cash flows, we have found that there is substantial heterogeneity according to the type of VC investor. In fact, CVC-backed firms still exhibit positive investment-cash flow sensitivity. Conversely, when firms receive VC financing from an FVC investor, the sensitivity of investments to cash flows disappears. Therefore, while this study clearly indicates that VC financing is beneficial to NTBFs, it also suggests that managers of NTBFs looking for external financing should be aware that the nature of these benefits depends crucially on the type of investor. . Keywords: investment, new technology-based firm, pecking order, venture capital, corporate venture capital Parole chiave: investimenti, imprese ad alta tecnologia, pecking order, venture capital, corporate venture capital . Jel Classification: G32 - D92 - G23

Capital problems are the most important to solve for almost all entrepreneurs, especially for those involved in activity of high level of innovation. The main solution which led to getting a mature innovative firm is a venture capital involvement in form of business angels, venture capital funds or seed funds. A cradle of venture capital market activity is the United States of America, but also in better developed countries in Europe such activity is also flourishing, e.g. in the United Kingdom, France, Germany, Scandinavian countries. In other EU countries, especially new members, venture capital market has not as yet been developed, but it is still growing together with the increase of the level of innovation and entrepreneurial activities. Filling up the capital gap in the very start of innovative companies such institutions as incubators, business angels and various kinds of advisors have played a key role. The main, complementary to each other, sources of early stage of venture projects are business angels (informal venture capital): high net worth individuals, senior managers from large companies, or serial entrepreneurs, who invest (on their own or in groups) a small proportion of their own wealth in SMEs, and venture capital firms (formal venture capital): firms which manage fixed life venture capital funds of banks, pension funds and financial institutions, and other investors (wealthy families, corporations). Together with development of business angel market and enforcing their significance as a source of entrepreneurship financing on start-up stage, and overall economy growth, business angel market has gone under some transformations, like a globalization of business angel conception, growing number of successful projects, of mentality in approach to entrepreneurship, and closing relations between venture capital funds and business angels. Informal venture capital market of business angels in Europe is much less developed than institutional one. The biggest number of business angels in Europe acts in three countries: the United Kingdom, France and Germany. Along an increase of a number of business angels and expanding an area of their activity single business angels lave been associated with business angel networks. The number of such networks in Europe systematically rises. In a half of 2005 there were 228 networks with 12 773 business angels in EU. Activity of business angels in Poland has been developed in fact slowly, but lately there is noticed a growth of interest from either entrepreneurs or capital owners. Undoubtedly an increase of business angels and business angel network activities has been caused by Poland access to EU. After 6 months of 2007, according to the data of European Business Angels Network – EBAN, there have acted three business angel networks in Poland, such as:PolBAN. Lewiatan Business Angels, and SilBAN. Together with putting more impact on innovations and possibility of financing such activity from EU funds the networks of business angels have sprouted all over the country.

Business angels (BAs) and venture capitalists (VCs) play major roles in the early funding stages of a venture. Although a significant proportion of venture funding rounds results from multiple investor types, most existing research takes an isolated view of either BAs or VCs. Research on the conditions and reasons for the formation of co-investments by BAs and VCs remains scarce. This study closes this gap by considering the impact of investor characteristics of BAs and VCs on the likelihood of co-investment. We focus on investor reputation, prior investment ties, and geographic proximity between the new venture and the investor. We address the questions of how these investor characteristics predict the probability of a co-investment between BAs and VCs in the first funding round of a new venture. Relying on the resource-based view and agency theory, we examine conditions that are in place when the two types of investors co-invest. Using a large-scale dataset with more than 7300 funding rounds of US-based ventures between the years 2005 and 2017, we find support for our hypotheses that investor reputation, prior investment ties, and geographical proximity impact the likelihood of co-investment and that these associations differ depending on the investor type.

This systematic literature review of 54 articles investigates quantitative and qualitative studies published between 1974 and 2017 in terms of differences in investment criteria between venture capitalists (VCs) and business angels (BAs). Research has shown a persistent interest in examining VCs’ and BAs’ investment criteria; however, inconsistent findings demonstrate the need for a review of the aggregate extant knowledge. We clarify what is known about the controversial debate on VCs’ and BAs’ investment criteria and shed light on key issues that can lead to a better understanding of why VCs and BAs focus on certain investment criteria. To achieve these objectives, we develop a conceptual framework grounded on agency theory for investment criteria that VCs and BAs use for funding decisions. Our review reveals that VCs in the first instance focus on the business and financial traction, whereas BAs initially employ investment criteria related to the management team. These differences between VCs’ and BAs’ investment decision policies support the agency view. In addition, we propose a detailed path for future research and provide entrepreneurs with practical implications.

The article deals with the issues of the rational approach for attracting investments in the process of commercialization of R&D results in the field of biomedical science by Ukrainian scientists. Some differences between business angels, venture capital (VC), and corporate venture capital (CVC) funds have been investigated. It has been found that engagement with CVC can have several important advantages over other types of investors. Maximizing profits is not the most important task for CVC. This leads to the fact that innovators can expect better financial results when evaluating a startup by CVC comparing with a conventional VC. Corporate venture fund experts are well aware of the situation in the profile market and are able to evaluate professionally the proposed technology immediately, despite possible mistakes in the pitch presentation or business plan. An analysis of all three investor groups (business angels, VCs and CVCs) showed that CVC are equally important to Ukrainian innovators, because unlike the first two groups of potential investors, they may consider the proposed technology despite the lack of professional business managers, or successful serial entrepreneurs in a team that often happens in Ukraine. In this context, obtaining professional advice, assistance in the formation of a company team, or potential licensing are extremely important. Also, quite relevant is the increased likelihood of a better financial result when assessing by CVC and the fact that the CVC brand of a large multinational company will increase the bargaining position with other funds in subsequent rounds of investment.

The Crowdfunding Effects on Venture Capital Investments

Abstract: Using a unique sample of 444 entrepreneurial IPOs in the UK and France, this paper analyses the investment patterns and the stock‐market performance effects of two types of early stage investors: venture capitalists (VCs) and business angels (BAs). Extending existing research, we identify important endogeneity and institutional effects. Our findings indicate that UK IPOs have a higher retained ownership and lower participation ratio by BAs, but a lower retained ownership and participation ratio by VCs than in France. BA and VC investments are substitutes, and they are endogenously determined by a number of firm‐ and founder‐related factors, such as founder ownership and external board ‘interlocks’, and underwriter reputation. UK VCs are effective third‐party certifying agents who reduce underpricing in UK IPOs, whereas in French IPOs they increase it by appearing to engage in grandstanding. This certification effect is more significant in UK IPOs involving both high VC and BA ownership. Finally, underpricing increases with VC participation ratio, where the higher exit of VCs seems to increase the risk premium required by outside investors, in particular in the UK.

In this paper, we shed light on interactions among the various investors operating within the entrepreneurial finance ecosystem. Specifically, we aim to investigate what business angel (BA) investment practices are correlated with follow‐on venture capital (VC) financing, and uncover the strategies that determine a complementary‐based or a substitution‐based relationship with VCs. We analysed a sample of 176 companies that received a BA investment during 2008–2016 and collected financial data over a 10‐year period after the BA investment. The data examined indicate that BAs’ selectivity, as measured by their rejection rate, and BAs’ affiliation to an angel network, are positively related with the probability of raising follow‐on VC financing. However, a high level of BAs’ monitoring activity negatively influences the probability of obtaining VC funding. Interestingly, BA networks do affect this relationship. The positive impact of BAs’ rejection rate is informative for VC decisions if the BA does not invest through a network. Conversely, a high level of monitoring may convey a negative signal for VC, particularly if the BA is affiliated to a network. These results extend our knowledge of the investment practices of BAs and their role in allowing angel‐backed companies to raise follow‐on VC financing.

Venture capital is an important resource for new ventures with no access to the capital market. However, venture capital companies' investment decisions could be extremely risky. Assessing and managing risk is therefore a major task of venture capital companies. Despite the topic's high practical relevance, there is very little literature in this field. We aim to extend the academic discussion by investigating the risk types and risk assessment in venture capital investments. We analysed more than 500 deal documents of nine German venture capital companies, resulting in 2,452 qualitative quotes. We categorised these quotes into seven risk types, namely financial, market, strategy, technology, production, human capital, and legal risks, implying their relevance during the VC investment process. Market risk and technology risk are mentioned the most in the due diligence and the decision papers. Financial risk with 710 quotes is the most often documented risk considering all venture capital documents.

Venture capital is an important resource for new ventures with no access to the capital market. However, venture capital companies' investment decisions could be extremely risky. Assessing and managing risk is therefore a major task of venture capital companies. Despite the topic's high practical relevance, there is very little literature in this field. We aim to extend the academic discussion by investigating the risk types and risk assessment in venture capital investments. We analysed more than 500 deal documents of nine German venture capital companies, resulting in 2,452 qualitative quotes. We categorised these quotes into seven risk types, namely financial, market, strategy, technology, production, human capital, and legal risks, implying their relevance during the VC investment process. Market risk and technology risk are mentioned the most in the due diligence and the decision papers. Financial risk with 710 quotes is the most often documented risk considering all venture capital documents.

ABSTRACTThis research compares risk avoidance strategies employed by business angels and venture capital firm investors. It finds that differences in their approaches to evaluating risk lead them to hold predictably different views of the dangers of market and agency risk. the former tend to rely upon the entrepreneur to protect them from losses due to market risk. Consequently, they are more concerned with agency risk than market risk. the latter are more concerned with market risk because they have learned to protect themselves contractually from agency risk using boilerplate contractual terms and conditions. A likely result of their different approaches to avoiding risk is a segmentation of venture capital markets, which has important implications for both entrepreneurs and future research.

This research compares risk avoidance strategies employed by business angels and venture capital firm investors. It finds that differences in their approaches to evaluating risk lead them to hold predictably different views of the dangers of market and agency risk. The former tend to rely upon the entrepreneur to protect them from losses due to market risk. Consequently, they are more concerned with agency risk than market risk. The latter are more concerned with market risk because they have learned to protect themselves contractually from agency risk using boilerplate contractual terms and conditions. A likely result of their different approaches to avoiding risk is a segmentation of venture capital markets, which has important implications for both entrepreneurs and future research.

Business angels are vital sources of funding for new ventures. Yet, acquiring business angel support is difficult. Typically organized in professional networks, business angels collectively evaluate and deliberate about new ventures to determine their worthiness of support. One factor deemed to be critical during this evaluation is market risk. Yet, limited research in Macromarketing examines market risk. To our knowledge, no previous study examines market risk in capital markets, nor do they study angel financing. Neglecting to study angel financing is particularly problematic for macromarketing because this type of finance is much more prominent than venture capital in supporting new ventures. To fill this gap, we begin by exploring the literature by Lusch (and coauthors) linking marketing and capital markets as well as studies of market risk. We then craft fictitious angel investment proposals to measure market risk assessments by business angels and entrepreneurs. We ask which factors impact market risk during the early-phases of the investment screening process (when market risk is weighted more heavily) and identify whether these factors are evaluated differently by entrepreneurs versus business angels. Our findings reveal that commercialization capability, technological compatibility, and intellectual property rights enforceability influence perceived market risk and that entrepreneurs and business angels view these factors significantly differently. We then offer directions for further research related to this study and other work of Lusch. Finally, we suggest practical implications for use by business angels and entrepreneurs.

Skin in the Game: An Analysis of Venture Capital Investment in Dermatology from 2002 to 2021