Market For Entrepreneurial Finance Research Articles

Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

The US entrepreneurial finance market has changed dramatically over the last two decades. Entrepreneurs who raise their first round of venture capital retain 30% more equity in their firm and are more likely to control their board of directors. Late-stage start-ups are raising larger amounts of capital in the private markets from a growing pool of traditional and new investors. These private market changes have coincided with a sharp decline in the number of firms going public—and when firms do go public, they are older and have raised more private capital. To understand these facts, we provide a systematic description of the differences between private and public firms. Next, we review several regulatory, technological, and competitive changes affecting both start-ups and investors that help explain how the trade-offs between going public and staying private have changed. We conclude by listing several open research questions.

Empirical Analysis of the Global Supply and Demand of Entrepreneurial Finance: A Random Utility Theory Perspective

Considering the globalized nature of international financial markets and the important role of innovative entrepreneurial endeavors for employment and economic development, this paper analyzes the global supply and demand of entrepreneurial finance, in the form of individuals’ savings and borrowings for entrepreneurial ventures in the global economy. To this end, a theoretical treatment of the potential global entrepreneurial finance market (GEFM) dynamics, in response to governments and private sector financial transfers, is first provided. This is followed by the econometric modeling of such dynamics based on intertemporal random utility maximization, using pooled data from the 2014 and 2017 global financial inclusion surveys. The findings reveal, contrary to theoretical predictions, that private sector financial injections (i.e., electronic wage payments), exert an adverse effect on the GEFM; meanwhile, in accordance with theoretical predictions, public sector financial injections (i.e., electronic welfare payments), do positively influence the growth of the GEFM. In addition, compared to their male counterparts, females are found to be 7% more likely to own a formal account, and are 23.4% more likely to save for farming or business entrepreneurship, while also being 18.8% more likely to borrow for entrepreneurial ventures, therefore suggesting a relatively greater growth potential from female entrepreneurship in the global economy.

Digitization in the Market for Entrepreneurial Finance: Innovative Business Models and New Financing Channels

Digitization creates new financial channels that complement traditional intermediaries, but may raise concerns over fraud, cybersecurity, or bubbles. Artificial intelligence and machine learning change the way in which traditional investors work. This special issue focuses on economic, cultural, and regulatory determinants of fintech development, and on the new forms of information production and processing engendered by digital entrepreneurial finance. We provide a general overview of digitization in the market for entrepreneurial finance, illustrate how the different articles in the special issue contribute to advance our knowledge, and identify promising avenues for research.

Digitization in the Market for Entrepreneurial Finance: Innovative Business Models and New Financing Channels

Digitization dramatically changes entrepreneurs’ business models and their implications for the type and timing of finance that support them. It creates new financial channels (including crowd-investors and initial coin offerings) that complement, and in part substitute, traditional entrepreneurial finance intermediaries. These new players offer a broader set of opportunities to raise funds for both new and established ventures, but also raise concerns over bubble formation, fraud, cybersecurity, and unintended consequences for investors. Digitization also changes the way in which traditional investors work through artificial intelligence and machine learning. Despite the profound impact of these innovations on the entrepreneurial ecosystem, we still have limited knowledge of their functioning, of the interactions between companies and financial backers, and of the potential conflicts among financial backers with diverging goals and interests. This special issue sheds light on this phenomenon, focusing on the economic, cultural, and regulatory determinants of fintech development, and on the new forms of information production and processing engendered by digital entrepreneurial finance. In this editorial we provide a general overview of digitization in the market for entrepreneurial finance, illustrate how the different articles in the special issue contribute to advance our knowledge on some key issues, and identify promising avenues for future research in this field.

Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

The U.S. entrepreneurial finance market has changed dramatically over the last two decades. Entrepreneurs raising their first round of venture capital retain 30% more equity in their firm and are more likely to control their board of directors. Late-stage startups are raising larger amounts of capital in the private markets from a growing pool of traditional and new investors. These private market changes have coincided with a sharp decline in the number of firms going public—and when firms do go public, they are older and have raised more private capital. To understand these facts, we begin by providing a systematic description of the differences between private and public firms. Next, we review several regulatory, technological, and competitive changes—both at the startup and the investor level—that help explain how the trade-offs between going public and staying private have changed. We conclude by listing several open research questions.

Financing entrepreneurship in times of crisis: Exploring the impact of COVID-19 on the market for entrepreneurial finance in the United Kingdom.

This commentary explores the manner in which the current COVID-19 crisis is affecting key sources of entrepreneurial finance in the United Kingdom. We posit that the unique relational nature of entrepreneurial finance may make it highly susceptible to such a shock owing to the need for face-to-face interaction between investors and entrepreneurs. The article explores this conjecture by scrutinising a real-time data source of equity investments. Our findings suggest that the volume of new equity transactions in the United Kingdom has declined markedly since the outbreak of the COVID-19 pandemic. It appears that seed finance is the main type of entrepreneurial finance most acutely affected by the crisis, which typically goes to the most nascent entrepreneurial start-ups facing the greatest obstacles obtaining finance. Policy makers can utilise these real-time data sources to help inform their strategic policy interventions to assist the firms most affected by crisis events.

The entrepreneurial finance markets of the future: a comparison of crowdfunding and initial coin offerings

Entrepreneurial finance markets are in a dynamic state. New market niches and players have developed and continue to emerge. The rules of the game and the methods for receiving financial backing have changed in many ways. This editorial and the special issue of Small Business Economics focus on crowdfunding (CF) and initial coin offerings (ICOs), which are two distinct but important entrepreneurial finance market segments of the future. Although the two market segments initially appear to be similar, we identify differences between them. Our comparison focuses on the stakeholders, microstructures, regulatory environments, and development of the markets. We conclude with suggestions for future ICO and CF research.

The Gendering of Money: How Gender Influences Matching in the Market for Entrepreneurial Finance

There is a significant gender gap in the allocation of investment capital to entrepreneurs. While numerous studies have investigated how either demand-side, or supply-side explanations contribute t...

Crowdfunding, business angels, and venture capital: an exploratory study of the concept of the funding trajectory

ABSTRACT The market for entrepreneurial finance has witnessed the arrival of new players – specifically, different types of crowdfunding platforms – which have joined the more traditional forms of entrepreneurial finance such as BAs and VCs over the last decade. Taking stock of this increasingly diverse landscape, the present study explores the concept of a complex funding trajectory and its impact on the dynamics of nascent venture governance. Using a processual case-study design, we explore the particular funding trajectory of a young technology venture, successively combining different actors: reward based crowdfunding (RBC) first, then equity based crowdfunding (ECF) combined with business angels (BAs), followed by ECF combined with BAs and VCs. Our contribution to the literature is two-fold. The case makes an empirical contribution by deepening insights from prior quantitative studies on the determinants of follow-on funding after initial crowdfunding campaigns. The present study also makes a theoretical contribution by demonstrating that, beyond particular determinants of fundraising from various sources linked to initial venture characteristics and individual campaign attributes, the specific shape and sequencing of the overall funding trajectory plays a central role for the success of follow-on funding and the nascent governance of the young venture.

Entrepreneurs meet financiers: Evidence from the business angel market

This paper formalizes and estimates the process of search and matching between entrepreneurs and financiers in the business angel (BA) market. Our theoretical model describes the market for entrepreneurial finance as a fair in which the two sides of the market can meet bilaterally and transform a rough entrepreneurial idea into a real start-up firm. We then collect a new dataset from the BA markets of 17 developed countries for the period 1996–2014, and we estimate the aggregate matching function expressing the number of deals as a function of the number of submitted entrepreneurial projects and of business angels. Empirical findings confirm the technological features assumed in the theoretical literature: positive and decreasing marginal returns to both inputs (stepping on toes effect), technological complementarity across the two inputs (thick market effect) and constant returns to scale. We discuss the theoretical and policy implications of these findings.

Financier Search and Boundaries of the Angel and VC Markets

This paper studies how critical entrepreneurial finance outcomes such as the investment return and equity division are shaped by venture characteristics, financier risk preferences, and competitive searching. Our analysis uses a double-hazard agency model in which financiers determine the equity division to maximize the expected utility of their investment return while entrepreneurs search for the best deal. Model results provide new theoretical insights on the venture funding cycle, the coexistence of angels/venture capitalists (VCs) with heterogeneous risk aversion, and risk separation in the entrepreneurial finance market. The model predicts that financiers with higher funding capacity and advisory capabilities (e.g., VC firms) will prefer to fund at later stages as their expected investment return rises with the venture’s initial value and financier productivity. Competitive searching by entrepreneurs enables financiers with a diverse set of risk preferences to coexist profitably by reducing the advantage (disadvantage) of lower (higher) risk aversion financiers and making investment returns more similar. Further, the model shows the emergence of a risk separation cutoff beyond which only angels/VCs with lower levels of risk aversion can profitably fund riskier ventures.

A Start-Up’s R&D Stages and the Evolution of Financing Sources: Evidence from the Biotechnology Industry

Abstract The co-existence of angel, independent venture capital (IVC), and corporate venture capital (CVC) in the entrepreneurial finance market raises a natural question of why a start-up finances its projects from one source over another. This question becomes more complicated to address because a start-up grows or declines dynamically. Using a life cycle theory of entrepreneurial finance, which suggests that a start-up uses several financing sources as it reaches certain thresholds in its life cycle accordingly, I explore this selection issue with my dataset on 113 biopharmaceutical start-ups. I find that these start-ups tend to finance their projects mostly from solely IVCs or CVCs rather than angels and syndicated investors combining IVCs and CVCs when they have more preclinical and phase I products in their R&D pipelines; and from CVCs or syndicated investors rather than angels and IVCs when they do more phase II and phase III products.

Institutional Seed Financing, Angel Financing, and Crowdfunding of Entrepreneurial Ventures: A Literature Review

Institutional financing, angel financing, and crowdfunding have evolved and matured in the entrepreneurial finance market and their field of research has progressed with it. Congruent to this, however, comprehensive literature reviews on these topics remain scarce. Herein, we provide an overview of a vast body of literature, presenting the contemporary state of research and succinctly identifying its subcategories. Additionally, we provide insight into major research trends and research gaps using a theoretical framework. JEL Codes: G20 (General), G23 (Non-bank Financial Institutions, Institutional Investors), G24 (Venture Capital)

Improving Investor-Investee Matches with Regulation: Evidence from the Orphan Drug Act & Global Biotechnology Industry

Venture capitalists (VCs) ideally like to invest in innovations at a nascent stage but this is inherently incorporated with huge risks (Ruhnka and Young 1991, Gompers 1995). Because it is difficult to value novel technologies at an early development stage, VCs may be herding into financing advanced-stage projects for which an archive of scientific knowledge and commercial performance are available that enables a correct valuation (Lerner 2009). A response to this market failure in investor-investee matches might be an institutional change that can steer investors towards supporting new innovations at an early stage, providing more information necessary to value young projects. Using the setting of the Orphan Drug Act (ODA) in the European Union (EU) enacted in 1999, we test these ideas in the fields of biotechnology using a difference in difference methodology and find that VCs are indeed more likely to invest in early-stage technologies in sub-fields disproportionately affected by ODA. In addition, we document that exit performances of VC-backed startups do not get worse as a result of VCs investing into early-stage innovations. Our results suggest that VCs are enabled to make fully-informed decisions as ODA provides some additional information on early-stage technologies. We conclude discussing the role of public policy in correcting market failure between investor-investee matches in the market for entrepreneurial finance.

A Start-Upps Financing Choice, Market Capitalization, and Industrial Network: Evidence from the Biotechnology Industry

The co-existence of independent venture capital (IVC) and corporate venture capital (CVC) in the entrepreneurial finance market raises the question of whether the source of capital matters for a start-up. To address this question, I build on the resource dependence literature suggesting that start-ups and investors may face heterogeneously distributed mutual dependence in the dyadic relations, which determines the exchange of their resources and the consequent performances. Using a longitudinal dataset on the fundraising activities of 582 biotechnology start-ups, and consistent with predictions based on the resource dependence perspective, I find that a start-up tends to increase its market capitalization when it finances from IVC; and it tends to expand its industrial network when it finances from CVC. Furthermore, this value effect from IVC financing is more salient when a start-up has strong technological capabilities; and the network effect from CVC financing is greater when a start-up purses uncertain technology.

Liftoff: when strong growth is predicted by angels and fuelled by professional venture funds

The present research links knowledge about business angels’ individual cognitive and behavioral features and their co-investment practice with professional venture funds in order to explain differential rates of growth. We conducted a survey by questionnaire and were able to gather a unique dataset concerning the characteristics, investment practice and growth performance of a sample of 124 business angels having made a total of 222 investments in the south eastern region of France surrounding Grenoble. Our contribution to the literature is twofold: first, to our knowledge, the present study is the first systematic exploration of the investment practice of business angels in the French market for entrepreneurial finance, and thus helps extend our knowledge of angel investing beyond the limits of North America and the United Kingdom. Second, we make a specific contribution to a better understanding of the determinants of growth in ventures funded by business angels. It appears that especially strong growth rates are significantly supported when business angels and professional venture capitalists co-invest simultaneously due to a degree of cognitive similarity.

A Start-Up's Financing Choice between Corporate Investors and Independent Venture Capitalists and Its Performance Implications

The co-existence of angel, independent venture capital (IVC), and corporate venture capital (CVC) in the entrepreneurial finance market raises the question of why a start-up finances from different entrepreneurial financing sources. To address this question, I provide a theoretical framework that suggests that a start-up selects each financing source depending on its technological status accordingly. I capture this selection issue in my empirical analyses as well. Using a dataset on the fundraising activities of 525 biotechnology start-ups, I find that technological capability, technological uncertainty, and future technological alliance opportunities impact a start-up’s financing decision on these three entrepreneurial financing sources.

Small Firms, Big Patents? Estimating Patent Value Using Data on Israeli Start‐ups’ Financing Rounds

This paper considers the impact of the intellectual property (IP) system on the market for entrepreneurial finance. If the market for entrepreneurial finance were efficient, investors’ valuations of start‐up firms should be independent of whether their patents’ were pending or granted. However, during the pre‐grant period, the need to disclose unprotected knowledge, asymmetric information and adverse selection could result in lower valuations. This study therefore estimates whether patent grant, which reduces uncertainty about the scope of the IP rights conferred, enhances start‐ups’ valuations by venture capitalists. Original panel data pertaining to 317 Israeli technological start‐ups, who received more than 980 financing rounds, enter a fixed‐effects analysis that controls for firms’ unobserved heterogeneity. The results show a positive association between patent applications and firm valuations for firms whose technology is not software based. No association is found between patents and the valuations of software firms. The additional impact of granted patents is positive and significant for non‐software firms who are younger, in their pre‐revenue stages and during early financing rounds but small and insignificant for more mature start‐ups. These findings suggest that, in the case of younger start‐ups, uncertainty about patent scope, coupled with imperfections in the entrepreneurial finance market, adversely affect the relationship between entrepreneurs and investors. A more speedy examination process of younger firms’ patent applications therefore could enhance their ability to attract financing.

Entrepreneurship, Financiership, and Selection*

AbstractWe develop an equilibrium model of the market for entrepreneurial finance, in which all agents have some personal wealth and a project whose quality is their private information. All agents choose whether to invest either as entrepreneurs or financiers, or to invest in storage technology. We find that a binding economy‐level wealth constraint, which renders credit scarce, can create advantageous selection, where productive agents become entrepreneurs and unproductive agents become their financiers. If funding is easier to obtain, entrepreneurship also attracts unproductive agents. In our model, individual wealth and entrepreneurship are positively (negatively) correlated if financial market participation is complete (incomplete).

Liftoff: When Strong Growth is Predicted by Angels and Fuelled by Professional Venture Funds

The present research links business angels’ cognitive and behavioral features and co-investment practice with professional venture funds in explaining differential rates of growth. Using a questionnaire survey we were able to gather a unique dataset concerning the characteristics, investment practice and growth performance of a sample of 124 business angels having made a total of 222 investments in the south eastern region of France surrounding Grenoble. Our contribution to the literature is twofold: first, this study is the first systematic exploration of the practice of business angels in the French market for entrepreneurial finance, and thus extends our knowledge of angel investing beyond the limits of North America and the United Kingdom. Second, we make a contribution to a better understanding of the determinants of growth in ventures funded by business angels. Strong growth rates are significantly supported when business angels and professional venture capitalists co-invest simultaneously due to a certain cognitive closeness.