The Role of Venture Capital in the Entrepreneurial Finance Ecosystem: Future Threats and Opportunities

Abstract

Despite the enduring relevance of venture capital as a source of funding for new firms, the last decade has seen the emergence of multiple alternative sources of funding, radically reshaping the start-up ecosystem and posing new questions for both academics and practitioners. In this review paper, we provide a comprehensive analysis of the challenges and opportunities opened by these new financing structures, trying to shed light on the features, investment policies and risk-return profiles of institutional and informal investors providing capital to early stage companies. We begin by critically reviewing the strengths and weaknesses of the main alternative capital providers. We then highlight that traditional closed-end venture capital funds, while experiencing competitive pressure, still play a critical role in the financing structure of new firms because of their unique production process and distinctive competencies. With conclude by providing a comprehensive representation of the complex and multidimensional nature of startups that can be useful to identify more effective fundraising strategies and tackle new and yet unexplored research questions.