Entrepreneurial Finance Literature Research Articles

Business angels investing in green ventures: how do they add value to their start-ups?

ABSTRACT This study investigates how business angels (BAs) add sustainability value to green ventures and how these value-adding activities are dependent on the BAs’ sustainability characteristics, i.e., motivation to invest, sustainability competence, and sustainability investor activity. This explorative qualitative study is based on interviews with 14 BAs from Germany and the Nordics. A cross-case analysis of the interview data reveals that different groups of BAs invest in green start-ups: green angels and light green angels. These BAs differ in their motivation for investing in green start-ups, with some wanting to contribute to the sustainability transition and others investing to be a part of the shift of capital and talent toward green ventures. The BAs offer different sustainability-value-adding activities to their start-ups. Green angels provide activities that are aimed at enhancing the sustainability performance of their investees. Light green BAs add value very similar to conventional BAs. This study contributes to the green entrepreneurial finance literature by exploring the specificity of green angels. By shedding light on how BAs add sustainability value as investors for green ventures, the study places green angels more distinctly in the ecosystem of early-stage financing for green start-ups.

The effect of formal financial accessibility on love money investment

PurposeThis paper aims to analyse whether the degree of formal financial access in a country affects love money investment, defined as capital provided to entrepreneurs from family and friends to finance their businesses, in early-stage entrepreneurial activities.Design/methodology/approachThe authors use multilevel mixed-effect regression models and an extensive database of over 700 thousand individuals from 53 countries between 2007 and 2017 taken from the Global Entrepreneurship Monitor adult population survey.FindingsThis paper finds that a country’s level of accessibility to bank debt and venture capital is positively associated with the likelihood of an individual becoming a love money investor. It also finds that the amount of capital invested by love money investors is positively correlated to the level of access to bank debt and venture capital. The results of this paper confirm the hypothesis of complementarity between the financial system and friends and family financing in the capital market for early-stage entrepreneurs.Originality/valueThis paper contributes to the entrepreneurial finance literature, particularly to a better understanding of the love money investors, an important source of funding and segment of the informal investment that is sparsely studied.

Determination of essential features for predicting start-up success: an empirical approach using machine learning

ABSTRACT Various significant features influence the success of a startup in an entrepreneurial ecosystem. However, identification of such features has not been performed coherently. This study aims to bridge the gap by determining the essential features impacting a startup's success. In the first part, a machine learning-based approach is applied empirically to determine critical features from ten datasets. Then the obtained features were validated using popular feature selection techniques based upon Recursive Feature Elimination (RFE), SelectKBest, and XGBoost to assure the final significant features. Furthermore, mutual information is used between the features obtained from the proposed approach and the ground truth to measure the approach's efficacy, which is calculated to be 90%. The significant features acquired through this approach imply how the entrepreneurs prioritise the determining features in startup success and maximise the socio-economic outputs. This study provides an essential contribution to the entrepreneurial finance literature by empirically exploring the features influencing a startup's success based on its financial performance in different stages of its lifecycle. Startups can apply the implications of this study to reduce uncertainty and enhance performance. It also helps founders, investors, and researchers understand a startup's performance and plan future steps accordingly.

Reducing early-stage Cleantech funding gaps: an exploration of the role of Environmental Performance Indicators

PurposeThe purpose of this paper is to explore why, despite the development of a hybrid investing logic, funding problems are so persistent for early-stage Cleantech ventures (“Cleantechs”). An institutional logics lens is adopted to analyze how key actors' perceptions and communications of the Cleantech value proposition shape information asymmetries (IAs).Design/methodology/approachA mixed methods approach draws on 82 Cleantech pitch decks and 31 investment guidance documents, and insights from interviews with 42 key informants and nine Cleantech CEOs and their investors.FindingsIAs persist, first of all, because key investor and entrepreneurial actors combine different goals in the hybrid Cleantech value proposition. Interestingly, the analysis of Environmental Performance Indicators (EPIs) as a critical communication tool reveals a further mismatch in how actors actually combine logics. The authors ultimately identify three emergent actor roles – traditional laggard, developer and boundary spanner – that present a framework of how the three most influential actor groups develop EPIs and via that a hybrid Cleantech financing logic to overcome IAs.Originality/valueThe paper enhances the entrepreneurial finance literature primarily by showing that in contexts of hybrid investing a more nuanced understanding of institutional logics in terms of ends and means is critical to overcome IAs. While prior works highlight goal incompatibilities, the findings here suggest that the (in-)compatibility of goals as well as EPI choices of the same actors is likely to be the key explanandum for the stickiness of IAs and the funding gap. The novel emerging role framework offers additional theoretical, policy and practical advances for hybrid logic development.

The role of finance in the literature of entrepreneurial ecosystems

ABSTRACT Financial access is considered a crucial element of entrepreneurship. Much of the literature focuses on how individual actors demand or supply finance, but rarely within the context of systemic entrepreneurship. The current entrepreneurial finance literature is fragmented and rooted in various traditions. However, the entrepreneur’s perceived role in aggregated wealth creation is currently being strengthened, most recently by the emerging entrepreneurial ecosystem perspective. This calls for exploring the role of finance in systemic entrepreneurship and entrepreneurial ecosystems. By conducting a systematic literature review of financial determinants, sources and effects, the study synthesizes debates across the different research fields, i.e. finance, entrepreneurship and regional development. As the entrepreneurial ecosystem concept is considered a pre-paradigmatic approach, the paper argues that the role of finance depends on how we regard and define ecosystems. The state of knowledge is also underdeveloped due to the obstacles of acquiring longitudinal data. Such issues keep us from achieving a better evolutionary and processual understanding of the financial dynamics in ecosystems and, therefore, presents a promising avenue for future research.

Sources of finance for tech startups over its lifecycle: what determines their approach of sources and its success?

PurposeThe purpose of this paper is to ascertain the factors determining the choice of sources of finance for a tech startup over its lifecycle.Design/methodology/approachThis study adopts simple random sampling technique to choose 93 sample tech startups in Bangalore. Further, this study employs the primary data collection from the sampled startups under study through a semi-structured questionnaire and in-depth interviews with the founders/CEOs of these startups. Furthermore, it carries out binary logistic regression analysis to primarily examine the likelihood of a tech startup to approach and access a particular source of finance over its lifecycle.FindingsOur results indicate that a tech startup's choice for a financial source varies with its lifecycle stage and financial requirements. We find that while in its early stage, a tech startup's choice of a financial source is limited to business angels (BA), in the growth stage, it approaches the institutional sources, viz. Venture Capital (VC), Corporate Venture Capital (CVC), Banks and Private Equity (PE) firms alternatively. Out of the three major categories of financial requirements: Human Capital (HC), Research Capital (RC) and Social Capital (SC), the requirement for HC and SC is predominantly funded by VCs, while the acquisition of RC is facilitated by early stage investors (BAs) as well as growth stage investors (CVC and PEs).Research limitations/implicationsThe research implication of the study lies in bringing out the need to understand both the nature and the quantum of financial requirements of tech startups would influence the sources of finance it would approach and obtain finance for its operations and growth.Practical implicationsThe major policy implication of the study refers to the need to promote the diverse sources of finance to meet the diverse needs of finance in different stages of a tech startup's lifecycle. Particularly in an emerging economy, where we do not see the emergence and growth of highly innovative tech startups, the need to promote adequate availability of RC is especially important.Originality/valueThis study makes a key contribution to the entrepreneurial finance literature by empirically investigating the factors determining a tech startup's propensity to approach and access a particular source of finance over its lifecycle.

The process of female borrower discouragement

Recent entrepreneurial finance literature identifies ‘borrower discouragement’ as an important phenomenon explaining why female entrepreneurs hold less capital to grow their venture. But how do you become a discouraged borrower? We apply grounded theory to interviews with Tanzanian female entrepreneurs and model the process via which these entrepreneurs become discouraged. Our model suggests that entrepreneurs hold negative perceptions regarding loan application, allocation and payback procedures shaped by both internal and external information sources. We demonstrate that negative perceptions cause an unfavorable attitude towards formal loans which together with entrepreneurs' perceptions of societal norms lead to a low intention to apply.

The Legacy of the Dean of Management Buy-out and Entrepreneurial Finance Research

This paper reviews 133 of Mike Wright’s contributions to the management buy-out and entrepreneurial finance literature. The outline is chronological and subject-related, revealing the development of Professor Wright’s scholarly work over time and its variety. We begin with the emergence of buy-outs, a discussion of agency costs and corporate governance issues. We then move to internationalisation, boom and bust, Mike's acknowledgement of the arrival of active investors, emerging markets, deal structuring, syndication, new venture finance, financial and economic performance, and recent developments. We document the legacy of an abundant scholar and provide, thanks to his outstanding academic impact, guidance on the evolution of management buy-out and entrepreneurial finance research since its inception.

Technology spillovers and capital gains in corporate venture capital investments: evidence from the biopharmaceutical industry

ABSTRACT Using a framework combining the real option perspective and appropriation concerns raised in the entrepreneurial finance literature, we find that technology spillovers and capital gains created by corporate venture capital (CVC) investments are positively related with each other in the biopharmaceutical industry. However, this positive relationship is significantly decreased or becomes negative when CVC investments are made with solely financial objectives or in early-stage startups. This study provides evidence that the nature of the relationship between technology spillovers and capital gains that constitute the corporate investors’ total returns created by CVC investments.

Entrepreneurial Finance: Analyzing the Demand for the Personal Guarantee

This study contributes to the current body of entrepreneurial finance literature by analyzing multiple aspects of personal guarantees. We conducted a survey yielding 1,462 responses from owners or managers of incorporated small businesses geographically dispersed throughout the United States. Of these, 383 C or S corporations had loans in place during 2014. The survey focuses on personal guarantees used on five types of loans: lines of credit, mortgages, equipment loans, vehicle loans, and a loan type referred to as "other loans." We found the variation increase in personal guarantees for equipment loans, vehicle loans, and other types of loans during the 27 years (1987 – 2014) to be significant with a 95% confidence level, with a 5% margin of error. We found an underinvestment problem (Ang, Lin & Tyler, 1995) exists as 12.5% of owners of incorporated small businesses have decided not to undertake a positive net present value project because the lender required a personal guarantee to obtain a loan for the project. We found lenders denied 10.9% of these 383 corporations a loan resulting in credit rationing because of these corporations' inability to meet the lender's personal guarantee requirements. We found more than 15% of the 383 corporation owners refused the lender's requirement to provide a personal guarantee. Almost 42% of the 15% still received a loan from the same lender after refusing to provide a personal guarantee. We found that only 22.2% of female small-incorporated business owners received a loan after refusing to provide a personal guarantee from the same lender. Compared to 51.4% of the male small incorporated business owners still received the loan after refusing to provide a personal guarantee. Overall, we found that only 37% of the 1,462 incorporated small business respondents had a loan in place during 2014 compared to 67% of incorporated businesses documented by the Federal Reserve Board's 1987 National Survey of Small Business Finances.

Exploring how social interactions influence regulators and innovators: The case of regulatory sandboxes

Like incubators, regulatory sandboxes constitute a prominent mechanism to enable entrepreneurial activities that guide financial technology (FinTech) firms through regulatory frameworks in the financial industry. Because they are new, there is a lack of research on regulatory sandboxes; most studies have investigated legal aspects while overlooking the management perspective. To address this gap, this paper builds on incubation research studies to explore how social interactions within regulatory sandboxes influence the practices of regulators and regulatees, using social capital theory. An exploratory-abductive approach is adopted, using data collected from 16 semi-structured interviews. The findings indicate that regulator-regulatee social interactions increase the legitimacy, risk management capabilities, and knowledge of regulatory frameworks among regulatees and, as to regulators, increase their understanding of regulatory constraints and potential risks in enabling technologies, better inform them of regulatees’ support needs, and offer them early access to regulatory innovations. The findings also reveal that the practices of regulators and regulatees may be negatively affected due to lowered trust and discrepancies in expectations and underlying goals. This research contributes to the incubation literature by focusing on the micro and meso levels of knowledge exchange and the entrepreneurial finance literature by promoting the role of incubation models.

A Blessing or a Curse? Unicorn Ventures in the IPO Market

This paper investigates the valuation of high-growth entrepreneurial firms labeled as unicorns – private venture firms that are valued more than $1 billion – during Initial Public Offering (IPO). We explore unicorn valuation at IPO compared to non-unicorns by expanding the entrepreneurial finance literature and contextualizing unicorn phenomenon into underpricing literature with two dominant theories that compete in this context; information asymmetry and ex- ante uncertainty. Using a unique dataset of 226 IPOs in the US including unicorn firms and controlling for potential sampling bias with an instrumental variable approach, we find that unicorn firms are more underpriced than non-unicorn firms in the IPO market that aligns with ex-ante uncertainty theory but against information asymmetry theory. We also examine three moderating factors that support our finding. This paper contributes to literature on entrepreneurial finance, celebrity firms, and unicorn phenomenon.

Western Ideological Homogeneity in Entrepreneurial Finance Research: Evidence From Highly Cited Publications

Entrepreneurs play crucial roles in global sustainable development, but limited financial resources constrain their performance and survival rate. Entrepreneurial finance discipline is, therefore, born to explore the connection between finance and entrepreneurship. Despite the global presence of entrepreneurship, the literature of entrepreneurial finance is suspected to be Western ideologically homogeneous. Thus, the objective of this study is to examine the existence of Western ideological homogeneity in entrepreneurial finance literature. Employing the mind-sponge mechanism and biblio-metric analyses (Y-index and social structure), we analyze 412 highly cited publications extracted from Web of Science database and find Western ideological dominance as well as weak tolerance towards heterogeneity in the set of core ideologies of entrepreneurial finance. These results are consistent across author-, institution-, and country-levels, which reveals strong evidence for the existence of Western ideological homogeneity in the field. We recommend editors, reviewers, and authors to have proactive actions to diversify research topics and enhancing knowledge exchange to avoid the shortfalls of ideological homogeneity. Moreover, the synthesis of mind-sponge mechanism and biblio-metric analyses are suggested as a possible way to evaluate the state of ideological diversity in other scientific disciplines.

Artificial Intelligence, Human Capital, and Innovation

The scarcity of the human capital needed for R&D in Artificial Intelligence (AI) created an unprecedented brain drain of AI professors from universities in 2004-2018. We exploit this brain drain as a source of variation in students’ domain-specific knowledge and provide causal evidence that domain-specific knowledge is important for startup formation, seed funding, round A funding, and funding growth rate. The effect is the largest for top universities, PhD students, and startups in the area of deep learn- ing. These results contribute to the entrepreneurial finance literature and challenge the current view that entrepreneurs are jacks-of-all-trades, master of none (Lazear 2004).

The patent paradox in crowdfunding: an empirical analysis of Kickstarter data

Building on signaling theory, this paper analyzes whether projects signaling patented technologies have a higher probability of funding success on a reward-based crowdfunding platform as compared with a control group of similar projects. Our analysis of a set of Kickstarter projects suggests the existence of an apparent paradox concerning the role of patents in this funding context. Despite solid evidence in entrepreneurial finance literature on the positive role of patents for accessing financing from professional investors such as venture capitals and business angels, our results from the reward-based crowdfunding context point out a negative signaling role of patents. We provide explanations to reconcile such evidence with previous relevant literature and highlight promising avenues for future research in this area.

Entrepreneurial orientation and start-ups' external financing

This study extends the Pecking Order Theory by investigating the role of start-ups' strategic posture for financial decision-making. Using a contingency approach, it proposes that a start-up's entrepreneurial orientation differently affects the costs and benefits associated with external debt and equity financing, and thereby its use of the respective financing forms; with the strength of these relationships depending on industry-level risk and venture development stage. The study tests and confirms these hypotheses on a sample of 4456 German start-ups. It advances the entrepreneurial finance literature by taking strategic posture and its contingencies into account, and adds insight in the relationship between entrepreneurial orientation and firm performance. It also provides valuable practical implications for start-up founders and external financiers.

The performance of angel-backed companies

Abstract We provide empirical evidence of the post-investment performance and survivorship profile of angel-backed companies, filling a long-standing gap within the entrepreneurial finance literature. Using a unique database of 111 angel-backed companies that received angel investments between 2008 and 2012 and at least 3 years of post-investment financial data, we develop an innovative performance metric and show that the performance and the probability of survival of investee companies are positively affected by the presence of angel syndicates and the hands-on involvement of business angels, while they are negatively related to the intensity of angel monitoring and the time structure of equity provision. Our results are robust to several endogeneity tests and provide insights on the multifaceted contributions of angel investors to the performance and survival of new ventures.

A personality perspective on business angel syndication✰

The decision to syndicate investments in entrepreneurial finance has been explained through financial, networking, and resource-based perspectives. We posit that a personality perspective exists next to these three perspectives and hypothesize that the personality of business angels influences syndication behavior. Using data from 3,234 syndication decisions of 1,348 business angels, we find evidence for some of our predictions. By measuring personality through a comprehensive language analysis based on digital footprints in Twitter statements of business angels, we show that extraversion makes syndication more likely, whereas conscientiousness reduces the likelihood of syndication. Several sensitivity analyses underline the robustness of our main results. Further exploratory analyses assess the relationship between personality and syndicate composition as well as that between personality and venture success. Our study contributes to the entrepreneurial finance literature by adding and validating a new perspective to explain syndication behavior. In addition, our study contributes to research on the personality of business angels.

Follow-on financing through syndication in the VC industry – a signaling perspective of VC human capital and fund characteristics

ABSTRACTFollow-on equity fundraising for young ventures is a key issue for venture capital (VC) performance and entrepreneurial success. VC managers’ antecedents and fund characteristics might play a role here, through a signaling perspective, in securing additional financing for their portfolio ventures. However, the entrepreneurial finance literature has not yet investigated the importance of the lead VC managers’ profiles for syndication in subsequent VC financing rounds. In this mixed-methods study, we examine these antecedents and determinants of follow-on fundraising through syndication. Using a hand-collected dataset of first-round VC deals and their subsequent financing rounds in France we demonstrate the importance of prior innovation and VC experience for successful follow-on fundraising. We find that general, business and consulting experiences of first investors have a negative signaling effect on outside VC investors for follow-on fundraising. Also, we disprove previous beliefs that banking and finance professionals attract follow-on financing through their rich VC and private equity networks. We show the contrary: that homogenous finance experience sends negative signals to outside investors about portfolio quality and value-adding ability. We triangulate, refine and frame our findings with a qualitative research loop grounded in 12 in-depth interviews with leading French VCs.

Crowdfunding Entrepreneurial or Humanitarian Needs? The Influence of Signals and Biases on Decisions

Crowdfunding platforms have become a valid alternative for raising funds for both entrepreneurial and humanitarian projects. The aim of our study is to investigate the factors influencing the likelihood of funding success across these two project types. Building on the charitable giving and entrepreneurial finance literature streams, we employ the lenses of signaling theory and behavioral decision making to hypothesize how the impact of certain factors varies contingent on the nature of the project, from a humanitarian plea to an entrepreneurial venture. We conduct our investigation on Kiva and find that gender bias and risk signals exhibit a stronger impact on the likelihood of funding success for entrepreneurial projects, whereas humanitarian projects are more affected by home bias. By reconciling prior inconsistencies in crowdfunding research and bringing forward new ideas, we aim to support the vigorous growth of an emergent phenomenon that is of growing social and economic importance.