Early-stage Financing Research Articles

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.

Initial Coin Offerings

This paper examines the market for initial coin offerings (ICOs). ICOs are smart contracts based on blockchain technology that are designed for entrepreneurs to raise external finance by issuing tokens without an intermediary. Unlike existing mechanisms for early-stage finance, tokens potentially provide investors with rapid exit opportunities thanks to liquid trading platforms. The marketability of tokens offers novel insights into entrepreneurial finance, which I explore in this paper. First, I document that investors earn on average 8.2% on the first day of trading. However, about 40% of all ICOs destroy investor value on the first day of trading. Second, I explore the determinants of market outcomes and find that management quality and the ICO profile are positively correlated with the funding amount and returns, whereas highly visionary projects have a negative effect. Among the 21% of all tokens that get delisted from a major exchange platform, highly visionary projects are more likely to fail, which investors anticipate. Third, I explore the sensitivity of the ICO market to adverse industry events such as China's ban of ICOs, the hack of leading ledgers, and the marketing ban on FaceBook. I find that the ICO market is highly susceptible to such environmental shocks, resulting in substantial welfare losses for investors.

Early-Stage Financing for Academic Entrepreneurs

Early-Stage Financing for Academic Entrepreneurs

Dynamic Adverse Selection: Time-Varying Market Conditions and Endogenous Entry

In this paper I analyze the effects of time-varying market conditions and endogenous entry on the equilibrium dynamics of markets plagued by adverse selection. I show that variation in gains from trade, stemming from market conditions, creates an option value and distorts liquidity when gains from trade are low. An improvement in market conditions triggers a wave of high-quality deals due to the preceding illiquidity and lack of incentives to signal quality. When gains from trade are high, the market is fully liquid; high prices and no delay in trade attract low-grade assets, and the average quality deteriorates. My analysis also reveals that illiquidity can act as a remedy as well as a cause of inefficiency: partial illiquidity allows for screening of assets and restores efficient entry incentives. I demonstrate model implications using several applications: early stage financing, initial public offerings, and private equity buyouts.

Exploring the changing institutions of early-stage finance

AbstractSince the end of the shakeout following the bursting of the dot com bubble, we have seen substantial innovation in the institutions and organizational arrangements used to finance early-stage high growth technology companies. This paper will document the emergence of business accelerators, angel groups, micro venture capital funds and online equity crowdfunding platforms, and show the rapid growth in angel investing over this period. It will also document the corresponding movement away from traditional venture capital activity at the early stage of company development. The paper will explain how technological advance, specifically the decline in the cost of bringing a new software product to market, has driven this shift in the institutions of early-stage finance.

Bite me! ABC’s Shark Tank as a path to entrepreneurship

Business pitch competitions provide early-stage finance and mentoring for entrepreneurs. In this paper, we analyze data from the most public, high-stakes pitch competition in the USA: ABC’s Shark Tank. We construct a dataset comprising all entrepreneurs/firms that have aired between August 2009 and May 2016. Our findings: (1) funding on the show seems to relax an internal financial constraint, rather than signal the quality of the venture to potential outside investors; (2) to the extent that the latter is occurring, there is plausible evidence that the signaling effect works in an unexpected direction for women entrepreneurs—it may crowd out attention from potential investors; (3) while it is fairly clear that this pitch competition is associated with longer-run existence of firms, it has no significant impacts on innovation; (4) there are no consistent differential impacts on racial/ethnic minorities. These findings complement the literature on the impact of pitch competitions and (early) access to finance.

Should securities regulation promote equity crowdfunding?

In this paper, we show that too strong investor protection may harm small firms and entrepreneurial initiatives, which contrasts with the traditional “law and finance” view that stronger investor protection is better. This situation is particularly relevant in equity crowdfunding, which refers to a recent financial innovation originating on the Internet that targets small and innovative firms. In many jurisdictions, securities regulation offers exemptions to prospectus and registration requirements. We provide an into-depth discussion of recent regulatory reforms in different countries and discuss how they may impact equity crowdfunding. Building on a theoretical framework, we show that optimal regulation depends on the availability of an alternative early-stage financing such as venture capital and angel finance. Finally, we offer exploratory evidence from Germany on the impact of securities regulation on small business finance.

Wahoowah Ventures: The Encounter

A time-limited encounter with a busy venture capitalist offers the reader, as entrepreneur, the opportunity to “pitch” an idea to a noted dealmaker. Designed for use as a management-communications or personal-selling exercise for students and others who believe they possess an entrepreneurial opportunity requiring early-stage financing, this case may be used to explore investor networks and expectations, business-plan “executive summaries,” and the role of venture associates and other deal “influencers.” It may be used as the basis for an oral examination or a business-plan competition.

Wahoowah Ventures: The Encounter

A time-limited encounter with a busy venture capitalist offers the reader, as entrepreneur, the opportunity to pitch an idea to a noted dealmaker. Designed for use as a management-communications or personal-selling exercise for students and others who believe they possess an entrepreneurial opportunity requiring early-stage financing, this case may be used to explore investor networks and expectations, business-plan executive summaries, and the role of venture associates and other deal influencers. It may be used as the basis for an oral examination or a business-plan competition. Excerpt WAHOOWAH VENTURES: THE ENCOUNTER This is Jerry Deutsch at Wahoowah Ventures—I'm returning your call. . Sorry it's taken so long to connect. . I have your venture summary and resume, and I appreciate your invitation to lunch. . But the truth of the matter is that, given the very early stage of your venture, I'm not sure there would be much merit in discussing venture capital at this point. . But I'm willing to listen. . . . ….. Look, I'm leaving for the West Coast and am about to head out to the airport. . Can we meet there? ? I'm catching Agony Airlines flight 3666 in an hour. . It's always on time, so we'd better meet right near the gate. You possess what you believe to be a real entrepreneurial opportunity and are intent on pursuing it. . You have been trying for some time to make contact with Jerome Deutsch, managing general partner of Wahoowah Ventures, a local venture-capital firm. . Deutsch is the region's most significant player in making successful ventures “happen.” . You have sent him a letter with your resume and a short document outlining your concept. . Thus far, your letter has not been acknowledged. . You have also made several telephone calls to him whichhim that, until now, have not been returned. An entrepreneurship professor at a top business school has intervened with Deutsch on your behalf. . You have researched Wahoowah and know it has invested in several ventures of the type you wish to discuss. . You know, too, that if your initial presentation to him goes well, he might give you much more than valuable feedback. . Finally, you know that if this, his second impression of your venture, isn't favorable, access to him—and to Wahoowah—will be all but impossible in the future. . . .

Policy Lessons from Financing Innovative Firms

There has been increasing global concern from policy makers over the lack of access to finance for young innovative firms. As a result, governments in many OECD countries have sought to address the financing gap and perceived market failures by supporting the seed and early stage market. This paper seeks to summarise the lessons learned in seed and early stage finance based on OECD work focused on policies related to financing high growth firms, including angel investment and venture capital. Growth in seed and early stage finance policies highlights the role that financial development and other policies play in firm dynamics and job creation.

Entrepreneurial implications of crowdfunding as alternative funding source for innovations

Crowdfunding (CF) is a form of early-stage financing for innovative ventures, which has seen tremendous growth in the past few years – partly because it provides a desperately needed alternative to the scarcity of traditional sources of finance during the so called ‘credit crunch’. CF ranges from a simple form of pre-financing to full grown debt or equity investments, but they are typically small pledges that can add up to incredible amounts. Scholarly literature has only started to examine CF and is still in an early stage when it comes to identifying implications for entrepreneurs apart from often over-simplified anecdotal evidence of success. The authors argue that CF can by no means be seen from a financial perspective only, rather it needs to be addressed as a bundle of processes leading to innovative entrepreneurial business-models. This qualitative study explores four extreme cases from the information and communications technology sphere to find out non-financial implications of CF as alternative funding source for innovative entrepreneurs and their business models.

Seeking early-stage financing and knowhow: A formal assessment of contingent contract

This article addresses the challenge of generating cash investment and business knowhow through the design of a contingent contract between an investor and an entrepreneur. We first develop a two-s...

Name Fluency on Venture Investment Decisions

We explore how linguistic fluency (ease of acquaintance of a word in the English language) and phonetic fluency (ease of pronouncing phonological segments and sequences) in venture names affect their financing outcomes. During the ventures’ early financing stages, investors may prefer investing in ventures that evoke low familiarity (low linguistic fluency) but high ease of processing information (high phonetic fluency). As more information becomes available on late stage ventures, however, linguistic fluency may be less influential, whereas phonetic fluency continues to be influential. Using a sample of 6,695 business plan investment decisions to understand early-stage financing and a sample of 1,689 IPOs to understand late-stage financing, we find general support for our hypotheses.

Venture Capital Investments for Life Sciences Start-ups in Switzerland.

Despite its economic and technological importance, the Swiss life sciences sector faces severe challenges in attracting enough venture capital for its own development. Although biotechnology and medical technology have been the most important areas of venture financing from 1999 through 2012 according to our own data, average investment volumes nevertheless remain on a low level of only 0.05 percent of Swiss GDP. After 2008, there was a pronounced shift away from early-stage financing. While business angels still play an important role at the early stage, venture capitalists are the most important investor type by volumes having their main focus on expansion financing. The industry faces predominant challenges in securing capital availability for entrepreneurs, in transforming the highly skewed and back-loaded payoff profile of investments into a more stable return stream, and in defining appropriate business and collaboration models.

Which Securities Regulation Promotes Crowdinvesting?

In this paper, we show that too strong investor protection may harm small firms and entrepreneurial initiatives, which contrasts with the traditional ‘law & finance’ view that stronger investor protection is better. This situation is particularly relevant in crowdinvesting, which refers to a recent financial innovation originating on the Internet and targets small, innovative firms. In many jurisdictions, securities regulation offers exemptions to prospectus and registration requirements. We provide an into-depth discussion of recent regulatory reforms in different countries and discuss how they may impact crowdinvesting. Building on a theoretical framework, we show that optimal regulation depends on the availability of alternative early-stage financing such as venture capital and angel finance. Finally, we offer exploratory portal-level evidence from Germany on the impact of securities regulation on small business finance.

Policies for Seed and Early Stage Finance

This report highlights the growth in support for financial instruments for seed and early stage firms across OECD member countries. These instruments include grants, loans and guarantee schemes, tax incentives and equity funds. This increased support is linked to the recent financial crisis and the growing concern about young firms’ access to finance. The paper notes that framework conditions play an important role in access to finance and must be taken into consideration as a significant part of the policy mix. Demand-side policies to develop entrepreneurial and investment talent and networks are also critical. The role of evaluation and the need to better link policy objectives and outcomes are also discussed.

Family offices bolster early-stage financing

Family offices bolster early-stage financing

Some Simple Economics of Crowdfunding

Executive SummaryIt is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decisions are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding—raising capital from many people through an online platform—which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the United States, we provide a preliminary exploration of its underlying economics. We highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of nonequity crowdfunding and offer a framework for speculating on how eq...

R&D service firms: The hidden engine of the high-tech economy?

R&D service firms are highly innovative knowledge-intensive businesses. They constitute an important component of the knowledge economy, but one that is often in the shadow of the role normally attributed to universities and other public research organisations in the growth of high tech clusters and, more broadly, innovation systems. In this paper we present evidence from an in-depth analysis of the strategy, practice and impact of a sample of R&D service providers long active in the Cambridge area, the leading science and technology cluster in the UK. Based on an extensive programme of interviews with companies’ CEOs and managers, we analyse: the main features of the R&D contract and the way in which this allows firms to de-risk the uncertain process of early technology development and to meet customer's needs; the services’ typical organisational features and development stages; the variety of observed growth paths. We provide evidence of the significant direct and indirect contribution to innovation of these service firms and conclude by discussing the implications of this original model of technology development in relation to the early-stage financing and university-led growth debates.

Hidden Information:The Impact of Received Signals on the Continued Interest of Angel Investors

Angel financing is one of the most important but least well understood sources of early stage financing. Using signaling theory, we examine the entrepreneur – angel investor communication dyad, specifically examining the signals sent by the entrepreneur and those received by the angel investor. Drawing on a unique dataset of 170 presentation summaries and corresponding venture proposals, we find a significant gap between the signals entrepreneurs think they are sending and those that angels are receiving. Additional findings indicate the dynamic nature of signaling and the ways in which angels attempt to overcome hazards of hidden information. Implications are discussed.