Early Stage Equity Research Articles

Gender Gap in Business Angel Financing

Abstract This study explores the impact of gender on entrepreneurial finance, analyzing both the supply and demand sides of early-stage equity financing through Business Angel (BA) investments. The research investigates the probability of men and women-owned businesses securing BA investments and assesses whether the gender of BA investors influences financial transaction magnitudes, potentially disadvantaging women-owned businesses. Additionally, the study explores the intersection between the gender of BA investors and investees to test for the presence of any potential heterogenous behaviors in terms of average invested amounts by men (women) Business Angels towards women-(men-) owned target companies. Results reveal that women entrepreneurs receive less equity financing than men, with a lower probability of securing larger investments from men BAs. Notably, this bias is absent when women BAs invest in men-owned businesses. These patterns persist regardless of information availability and consideration of unobservable factors, suggesting a connection between this disadvantage and taste-based prejudice among men BAs.

Do exploration and exploitation in university research drive early-stage equity financing of university spin-offs?

An emerging theme in the entrepreneurial university (EU) literature is how universities should evolve to best reconcile their different missions, particularly research and commercialization, which often require different sets of resources. This tension is evident in the development of university spin-offs (USOs). In particular, the EU literature has generally overlooked how characteristics of university research affect USO’s early-stage access to external equity. In this study, we embrace the characterization of university research offered by literature in terms of patterns, specifically, exploration and exploitation. Through the lens of the imprinting perspective, we study the effect of exploration and exploitation in university research on the early-stage equity financing of USOs on a unique dataset that covers a sample of 739 USOs from 39 Italian public universities founded from 2011 to 2019. Our results indicate that exploration (exploitation) in research has an overall positive (negative) impact on the likelihood of USOs obtaining early-stage external equity financing. Additionally, this exploratory study offers several conceptual and practical contributions to the EU literature.

Getting off to a good start: emerging academic fields and early-stage equity financing

Prior studies show that access to academic knowledge plays a crucial role in new venture financing. We extend this research by shifting the focus from the access to academic knowledge to the developmental state of the academic field, where the academic knowledge is generated. Using natural language processing (NLP), we clustered peer-reviewed academic knowledge from Scopus into various fields. We then analyzed a sample of 341 new biotech ventures from Crunchbase to determine if increased past activity by (1) academics and (2) early-stage venture investors in a particular academic field is associated with the early-stage equity financing of new ventures associated with that field. We found that new ventures associated with academic fields for which academic activity has grown in the past receive more early-stage equity capital. However, contrary to our expectations, we also revealed that when a particular academic field shows greater early-stage venture investments in the past, the amount of early-stage equity capital received by subsequent ventures associated with the same academic field decreases. This suggests that while emerging academic fields signal the presence of business opportunities with high reward potential, past increase in the number of investments by peer early-stage investors associated with a particular academic field signals the opposite.

Tackling the UK’s regional economic inequality: binding constraints and avenues for policy intervention

ABSTRACT We analyse binding constraints to productivity growth in the UK’s regions outside London and the greater South East. These analyses challenge a number of common arguments about the UK’s regional economic inequality problem. We find little evidence consistent with the hypotheses (i) that low shares of university graduates remain the primary constraint on growth for the UK’s regions; (ii) that there is a generalised issue with access to finance for firms outside the South East; or (iii) that low or falling regional migration rates are to blame for the persistence of the UK’s regional economic inequalities. Instead, we find evidence consistent with (i) a specific relative shortage of STEM degrees; (ii) binding transport infrastructure constraints within major non-London conurbations; (iii) a failure of public innovation policy to support clusters beyond the South East, in particular through the regional distribution of public support for Research and Development (R&D); and (iv) missed opportunities for higher internal mobility due to London’s overheating housing market. We also find some suggestive evidence consistent with constraints on access to early-stage equity financing for high-growth-potential SMEs in certain regions.

The Role of Entrepreneurs’ Perceived Competence and Cooperativeness in Early-Stage Financing

Building on social-psychological insights into social perception and judgment and empirical findings from the entrepreneurship literature, we propose that early-stage equity investors look at two main dimensions to assess entrepreneurs seeking early-stage financing: competence and cooperativeness. In all, 84 angel investors and venture capitalists active in Europe participated in a conjoint experiment. The results show that investors prioritize entrepreneurs’ competence over their cooperativeness. Entrepreneurs’ competence is even more appealing to investors when combined with coachability. We find that entrepreneurs can compensate for a lack of experience by demonstrating solid market knowledge and appearing to be coachable. Furthermore, the results suggest that investors differ in their consideration of entrepreneurs’ cooperativeness, but not competence, when making investment decisions—a finding that is conditional on investors’ usual level of involvement in their portfolio ventures. We discuss these findings from a theoretical and practical perspective.

The jockey on the horse: what makes a winning ride in the eyes of early-stage investors?

To date, much of the research on early-stage equity investing has revolved around the question of whether early-stage equity investors place more importance on the entrepreneur (jockey) or the business opportunity (horse). Yet research has failed to agree on the relative importance of these two aspects of investment opportunity. The purpose of this study is to clarify how early-stage equity investors use available information about the entrepreneur and the business opportunity to make investment decisions. We analysed empirical data from semi-structured interviews with experienced early-stage equity investors active in Europe. In the analysis, we followed the twin slate approach, which accounts for literature review in the analytical process. Our results suggest that investors make sense of the business opportunity as a whole by integrating information about the entrepreneur and the business opportunity. We identified four aspects of early-stage investor decision-making that led us to conclude that investors’ evaluation of investment opportunities is holistic in nature. The study offers a number of practical implications for investors and entrepreneurs and enriches ongoing discussions about early-stage investors’ investment criteria.

Gender stereotypes in the angel investment process

PurposeWomen-led companies receive less than 5 per cent of early-stage equity investment. This paper aims to explore the disparity in equity funding between men- and women-led companies, using a social identity perspective, complemented by insights from signaling theory. We argue that in the angel group context, which is male-dominated, gender stereotypes may bias angels’ interpretation of the signals sent by entrepreneurs, so that entrepreneurial ventures led by men are more favorably evaluated, thus excluding women entrepreneurs from funding. The ideas are tested on a sample of 358 entrepreneurs who applied for funding from a northeast US angel group using perceptual data from both sides of the investment dyad. Findings suggest that angel investors view women-led entrepreneurial ventures as having less legitimacy, even though we see no difference in actual legitimacy across ventures.Design/methodology/approachThe ideas are tested on a sample of 358 entrepreneurs who applied for funding from a northeast angel group using perceptual data from both sides of the investment dyad.FindingsThe findings suggest that, in the context of angel investing, there is a subtle bias that follows from the perceived stereotype between being female and the ability to lead a legitimate new venture. Thus, this study tests the tenets of the social identity theory by finding that mostly male angel investors act in accordance to their gender prescribed roles when they evaluate businesses presented by women entrepreneurs providing some evidence of “in-group” and “out-group” effects and stereotypes.Research limitations/implicationsThe findings continue the conversation about biases toward women in early-stage financing by using a social identity lens to look at the way in which adopted identities lead to particular outcomes and stereotypes. The authors have used the context of angel investing to test these ideas, finding some support for their contention that gender is pivotal when angels are making investment decisions. For researchers, this study suggests that gender should not be used solely as a control variable, but instead should be the focus of the inquiry itself.Practical implicationsFor practitioners, this study reminds women seeking angel investment that they are not playing on a level field and so they should do all that they can to enhance the legitimacy of themselves and their ventures.Originality/valueThe authors contend that within an angel group that is composed of predominantly men, role stereotypes of entrepreneurs as masculine will be expected, therefore creating gender biases against women. The authors expect these biases, whether conscious or unconscious, will lead the angel investors to evaluate men entrepreneurs more favorably than women entrepreneurs as they move through the angel investment process. Therefore, for women entrepreneurs in the early stages of investment funding, the authors posit that the dearth of funding is a function of gender identity stereotypes which may be manifested in hidden and often unconscious biases on the part of the angel investor.

Construed Shared Expectations: Facilitating Access to Early-Stage Equity Financing Across Structural Holes

Construed Shared Expectations: Facilitating Access to Early-Stage Equity Financing Across Structural Holes

Complementarity of Signals in Early-Stage Equity Investment Decisions: Evidence from a Randomized Field Experiment

This study employs a randomized field experiment to causally identify what type of signal is likely to complement another signal in the context of financing technology ventures. The study examines the effect of product certification by expert intermediaries, prominent customers, and social proof (that is, others’ interest in investing in a venture) on interest in investing. These three signals are primarily signals of a venture’s product, market, and investment characteristics, respectively. The study finds that signals of product certification and prominent customers, and product certification and social proof are complements. In particular, investors who were able to view the combined product certification and prominent customer signals have a 72% higher likelihood of indicating an interest in making an equity investment than those who did not receive any of the three signals. Similarly, investors who were able to view the combined product certification and social proof signals have a 65% higher likelihood of indicating an interest in investing. These results suggest that in the context of technology ventures, a signal about product characteristics is the key to unlocking the value of signals of market or investment characteristics. This paper was accepted by Gustavo Manso, finance.

VC Policy: Yozma Program 15-Years Perspective

This paper deals with a policy instrument supporting the emergence of VC industries. It is based on the Israeli experience with the Yozma program, which triggered the creation of the VC industry. This program dealt with specific system failures of the entrepreneurship process the early stage equity gap and the lack of complementary assets and skills in entrepreneurial firms. VC emergence in Israel was a policy-enhanced process in the sense that a targeted government policy directed to this goal (Yozma Program, 1993-1998) triggered it. Accompanying the process of VC emergence was the transformation of Israel's high tech sector toward a startup-intensive ICT cluster. We suggest that the feasibility of building a dynamic and innovative cluster, which exploits the ICT revolution, may be depended on the emergence of a capable domestic VC industry. Therefore, understanding the specific characteristics of Yozma program and the process it triggered could generate significant policy implication related to the process of VC industries and high tech clusters development in other countries. Therefore, the paper present a full case study of Yozma program 15 years after its implementation.

Impact of Early Stage Equity Funds in Latin America

Impact of Early Stage Equity Funds in Latin America

Women Entrepreneurs Access to Early Stage Equity Financing: Challenges and Opportunities

Women entrepreneurs are a powerful force in the US economy. However, despite the fact that women-owned business comprise 33% of the 28 million US firms, women still face challenges in obtaining ear...

Establishing a new UK finance escalator for innovative SMEs: the roles of the Enterprise Capital Funds and Angel Co-Investment Fund

This paper examines UK public policy addressing the seed and early stage equity finance gap since the global financial crisis (GFC). Drawing on lessons learned from recent studies of UK and international government equity schemes, two contemporary models of government-backed equity finance are examined. The focus is on the Enterprise Capital Funds (ECFs) and the Angel Co-Investment Fund (ACF), the UK government's main schemes operating in the sub-£2m equity finance gap to address the capital requirements for developing the UK's young, potential high growth businesses. The paper highlights the shortcomings of traditional interim fund performance analysis and presents current demand and supply side evidence that establishes that these schemes are making attributable impacts on their portfolio businesses and the wider UK economy. It also demonstrates that they are playing important roles in the establishment of a new post-GFC UK finance escalator. However, whilst these schemes were found to be currently complementary and effective, their future roles within the UK's evolving post-GFC seed and early stage equity markets are also considered.

Assessment of establishment and operations under market conditions for a public equity fund

The government of Slovenia established a publicly funded venture capital fund in order to provide start-up finance for small companies. The fund was meant to fill in the market gap in early-stage equity finance supply. The fund is co-financed from EU structural funds and has to comply with strict regulation regarding possibility of market distortion from such measure. The objective of the study is to give a straightforward answer whether the public fund will behave within the equity market conditions or will impose an unloyal competition to the existing privately financed funds. In accordance to this, an evaluation is given advising that the public fund should not be regarded as a state-aid measure.

The Impact and Functional Forms of the Major Determinants of Performance of Informal Venture Capitalistss Investments

This paper aims at providing evidence on the activity of business angels, using a unique dataset gathered during the five-year time period 2007-2011 with the support of IBAN (Italian Business Angels Network). In particular, the paper studies how characteristics of the investor and of the invested firm are correlated with returns, thus extending to the informal venture capital market research areas and methodologies widely applied in theoretical contributions dealing with the formal venture capital market. While, our descriptive analysis confirms the growing relevance of the relatively unknown and minimally regulated segment of the capital markets represented by the informal venture capital, given business angels’ capability to fill the equity funding gap between demand for financial resources by start-up companies and supply of early stage equity capital, the aim of the econometric analysis is to investigate the returns on business angels’ investments and their major determinants, making reference to an original set of independent variables (industry, exit strategy, experience, holding period, rejection rate, year of divestiture). Furthermore, while previous empirical studies hypothesized linear relationships between the explanatory variables and the performance of informal venture capitalists’ investments, this work tests different functional forms, both linear and non-linear.The major results achieved through the empirical analysis are the following: 1) differently from previous literature, the relationship between experience and IRR is non-linear and significant; 2) the widely accepted expectation that investments with a short holding period (below three years) earn a lower IRR is confirmed, for the first time, by quantitative data; 3) a new variable, rejection rate, is put into the model and its logarithmic impact on business angels’ performance is positive and significant. Finally, the outcomes of the empirical analysis performed in this study allow the identification of new and concrete insights into possible policy interventions aimed at stimulating the informal venture capital industry and, therefore, entrepreneurship inside the economic system.

How governments seek to bridge the financing gap for university spin-offs: proof-of-concept, pre-seed, and seed funding

University spin-offs often develop early-stage technologies characterised by long development paths and uncertain commercial potential. Private financiers, such as banks, informal investors, and venture capital firms, are reluctant to invest in these ventures at an early stage. To bridge this financing gap, governments have set up specialised programmes, but few studies have examined the rationale and organisation of different types of programmes. We analyse government schemes in six countries and identify three main categories of funding initiatives. Proof-of-concept (PoC) schemes aim to reduce the technological uncertainty. Pre-seed schemes aim to reduce the organisational uncertainty and make the nascent venture attractive to investors. Seed funding schemes provide early-stage equity financing. The seed funding initiatives seek to improve the supply of funding, while there seems to be an increasing number of pre-seed and PoC schemes seeking to bridge the financing gap from the demand-side by increasing the attractiveness of the spin-offs towards investors.

The U.S. Angel and Venture Capital Market

Since the nadir of the early nineties the angel and venture capital markets began a recovery with a vengeance, and recent market gyrations offer yet more insights into the long and winding road of the private equity industry. From a relatively quiet and little noticed beginning, angel and venture capital investments soared, accompanied by a near astronomical rise in deal valuations. For the first time since the study of angels was initiated, venture capital investments exceed, in total dollars, the amount of angel investments, although the number of deals remained larger in the angel market. A classic angel and venture capital boom was in the making. Since the law of gravity has not been repealed, even in the early stage equity financing of high growth ventures, unsustainable trends inevitably return to normalcy. Unfortunately, after such lofty behavior, the return to normalcy often seems a harsh penalty. In general, the carnage has resulted in the needed culling of the forest. Angels are reasserting their fundamental role as the major source of seed capital for high growth entrepreneurial ventures. Patient investing is back in vogue and unsustainable expectations have been discarded into the trash heap of an overheated market. This article examines the rise and the downturn in the private equity market, and identifies some of the causes for each. Current and future market trends are also identified.

Barriers to investment in the informal venture capital sector

Much of the government intervention into the market ‘gap’ for start-up and early-stage equity finance in the UK is based on the belief that the problem is on the supply side. Based on an analysis of the informal venture capital market this paper argues that there is no shortage of finance available. A survey of business angels reveals that many are willing to allocate a higher proportion of their investment portfolio to investments in unquoted companies, with recent tax incentives having a positive effect on their willingness to invest. Over 90% are currently looking to make more investments. However, there are constraints on their ability to invest: they do not see enough deals that meet their investment criteria, the majority of the investment proposals that they receive are of poor quality, and they are often unable to negotiate acceptable investment terms and conditions with entrepreneurs. The implication is that there is a need for further interventions by policy-makers to remove these barriers so that more small firms can take advantage of the substantial pool of angel finance that is available.

The Characteristics and Value-Added Contributions of Private Investors to Entrepreneurial Software Ventures

The nature and role of early stage equity financing in the development of emerging entrepreneurial ventures in the software industry is examined. To provide an understanding of the relationship between the suppliers of capital and the ventures they bankroll, issues concerning equity positions and holding periods are addressed. Given the unique position of private investors in the early stage equity market, particular attention is given to the characteristics of these investors and the investor characteristics germane to the software industry. Results for the software sector are compared with technology-based companies in an attempt to uncover any discernable differences between the two groups. The research hypothesizes that there are differences in the informal venture capital market among broadly defined sectors in terms of the sectors' technology and competitive conditions and their impact on: first, the need for, and timing of, external equity capital; and secondly, the characteristics and value-added contributions of the private investors attracted to the sector.

The early-stage equity market in the USA

As recently as 20 years ago the USA began a transition from a declining industrial and manufacturing economy to an emerging entrepreneurial/innovation-driven economy. With this transition, the early-stage equity market has also evolved. As the institutional venture capital industry continues to focus on later stage and larger investments, the private investor market now provides the major source of seed and start-up capital. However, imperfections in the seed and start-up market have led to market inefficiencies for the high-growth firm. Two funding gaps appear to exist in the US equity market, both largely as a result of these market inefficiencies. This paper provides a broad overview of the early-stage equity market for high-growth ventures in the USA. In light of the critical role of business angels in the early-stage market, special attention will be given to this population. Also included is a discussion of angel markets and recent trends in the early-stage equity financing of entrepreneurial ventures.