Stage Financing Research Articles

Physical attractiveness, same-sex stimuli, and male venture capitalists' financial risk-taking.

Financial risk-taking is central to venture capital decision-making, which is increasingly approached from a heuristics and biases perspective. While previous research has identified entrepreneurs’ physical attractiveness as an important heuristic cue in VCs’ investment decisions, this study addresses the role of VCs’ own physical attractiveness in relation to the financial risks they take. Using a dataset for a representative sample of 341 male entrepreneur and male VC dyads in the context of stage financing, this study finds that VCs of below-average attractiveness are more sensitive to the physical attractiveness of the entrepreneur when compared to VCs of average attractiveness. Also, the nature of this effect changes from the first to the second investment round for VCs of below-average attractiveness. Combined, these findings imply that VCs’ funding decisions may be subject to mechanisms that stem from their own physical attractiveness. Theoretical implications for VC decision-making and same-sex stimuli are discussed.

Financing Preference among Technology Startups (TSs) in Malaysia

As the maverick of the new economy TSs are making economic waves across industries. However at their early stages TSs are fragile and vulnerable. Startups struggle with many issues starting from business planning, capacity building and management, but financing is key to their survival and growth. Governments play pivotal role in financing TSs at their early stages and so do venture capital. This study measures financing and its’ correlation to culture, innovation, government financing and private investments (venture capital and angel investors). It also examines if Islamic Finance play any role in financing TSs. Findings show that innovation and government financing are significant in later stage financing and results indicate that venture capitalists and investors are more likely to finance female technopreneurs than their male counterpart. Despite high awareness levels among technopreneurs findings indicate that Islamic Finance is highly insignificant among TSs. This study is an important contribution in the startup and entrepreneurship space as it identify financing determinants for TSs in the Malaysian startup ecosystem. Further studies are recommended in the area of securitization of assets and intellectual property to enable to TSs to financing their venture via Sukuk or other forms of Islamic securities.

Empirical Evidence on the Relationship between Capital Structure and Organizational Life Cycle

The paper investigates the capital structure of companies listed on the Bucharest Stock Exchange (BSE) from an organizational life cycle perspective, seen as a determinant of the decisions to finance operations and growth. For this purpose, the life cycle is measured according to the cash flows patterns. Motivated by the pecking-order theory (POT) and carried out on a sample of 59 companies in the period 2010-2020, the study uses a Least Squares Dummy Variable (LSDV) panel data model and shows that listed Romanian companies resort more to bank financing in the initial stages of their life cycle. As they reach the maturity and shake-out stages, companies reorient towards internal financial resources and equity issuance, which is in line with the POT. Furthermore, the age of companies has a rather weak effect on the financial leverage, and its effect diminishes as firms age. The results also confirm the importance of having a high level of tangible fixed assets as collateral for bank loans, but also the significant role of the industry and geographical positioning on the degree of external financing.

Attractiveness, ethnicity, and stage financing: exploring heuristics in venture capital staging

ABSTRACT Understanding heuristics in stage financing is imperative, given the consequences of staging for both new venture entrepreneurs and VC investors. This study documents how entrepreneurs’ physical attractiveness affects VCs’ staging intensity during the early stages of the funding process, while taking into account the ethnic constellation of a given VC – entrepreneur dyad. Using a dataset for a representative sample of 231 European IT-ventures, the study finds that physical attractiveness of the lead entrepreneur and the ethnic constellation of a given VC-entrepreneur dyad independently and jointly affect a VC’s staging intensity during the early stages of the financing process. These findings were subjected to a two-stage least squares analysis and Heckman selection models.

The impact of internet penetration on venture capital investments: Evidence from a quasi-natural experiment

This study investigates the relationship between internet penetration and venture capital (VC) investment in China. Exploiting staggered inclusion in demonstration cities under the Broadband China strategy as a positive shock to internet penetration, our difference-in-differences analysis shows that this policy shock results in an increase in VC investments in demonstration cities relative to others. Moreover, the increase in VC investments is concentrated in early stage financing and young start-ups. In terms of VC fund sources, we find a stronger effect on foreign and independent VCs. Our mechanism analysis suggests that the effect of the broadband rollout is mainly driven by cities with higher ex-ante costs of information acquisition and that such costs are reduced by the improvement of internet-based network infrastructure. Finally, we provide additional evidence on the benefits to established companies by showing that broadband rollout improves the information environment of listed firms. Our study sheds new light on the economic consequences of infrastructure development that reduces information acquisition costs in China.

Gender Diversity, Role Congruity and the Success of VC Investments

Building upon the gender role congruity theory, in this paper, we propose that the association between gender diversity and venture performance changes when roles played by individuals are not coherent with the gender-derived expectations of their ascribed social group. We test our theory in the context of early stage financing, investigating how gender diversity between entrepreneurs and VC managers influences the investment performance of VC-backed firms. Our sample consists of 5800 VC managers, who invested in 5075 different ventures in the period 2000–2019 and of 16,713 venture founders. We find that gender diversity is associated with better performance only when a female entrepreneur is matched to a male VC manager. Our analysis sheds light on the presence of several factors that moderate the observed association, related to the VC’s ability to provide value-added services to the invested ventures.

“Pennies from heaven”? Market failure, circuits of capital and policy support for business angels: The case of cross-border angel investment

Angel investment is widely associated with economic development through entrepreneurial activities, and has attracted the attention of policy makers internationally, nationally and regionally, resulting in a range of measures to support the development of the market. In this paper we challenge this policy orientation and identify three key flawed assumptions on which it rests: the presence of market failure in the early stage risk capital market, the complementarity of angel and other sources of early stage finance, and the integration between the angel and venture capital circuits of capital. We develop a framework for the identification of market failure as both a supply-side and a demand-side phenomenon, demonstrate that venture capital and angel finance are substitutes not complementary funding sources and draw out the association between angel investment and venture underperformance, and build on the ‘circuits of capital’ literature to identify the increasing structural independence of the VC and angel investment markets which has implications for the link between angel financing and local and regional economic development. These issues are discussed in the context that stimulation of cross-border (international) investments by angel investors has emerged as an important topic of academic analysis and policy debate in Europe, not least on the basis that such investment will support the otherwise constrained growth and scale-up of entrepreneurial ventures. The paper concludes by outlining, in the policy mix concept, a basis for the systemic analysis of the development, implementation and impact of entrepreneurial finance policy.

Do Venture Capital Investors Learn from Public Markets?

We examine whether venture capital (VC) investors learn information contained in public market stock prices. VCs are less likely to stage finance startups and syndicate with other VCs when stock prices are more informative. An instrumental variable approach suggests that the relation is likely causal. The startup’s initial public offering (IPO) prospect is the plausible information contained in stock prices learned by VCs. The effect of VC learning on staging and syndication is more pronounced when collecting information is more costly and the information learned is more reliable. Evidence from a survey of VC investors confirms that they actively learn information from the public market. VCs’ learning from the public market significantly affects their investments across startup firms. Our paper sheds new light on the real effects of financial markets and suggests that the informational role of security prices is much broader than what we have thought. This paper was accepted by Gustavo Manso, finance.

Promoting cross-border investing by business angels in the European Union

ABSTRACT The supply of entrepreneurial finance in Europe is constrained by the geographical fragmentation of its capital market. The need to facilitate more cross-border investing by business angels – the main source of early stage finance – is recognized. A study of business angels on the island of Ireland identifies three constraints on cross-border investing: (1) lack of information on cross-border investment opportunities; (2) the preference of angels to invest locally; and (3) tax incentives that are only available for investments in the angel’s own country. Increasing cross-border investment requires mechanisms that build relationships between business angels in different countries.

ANALYSIS OF THE CAPITAL STRUCTURE FORMATION: THE CASE OF GEORGIAN IT COMPANIES

Any country’s economy benefits significantly from the sector of information technologies. As the data demonstrate, the global information technology market has not only remained stable, but is expected to expand in 2021 due to changes in social life, employment, and education caused by the global COVID-19 virus pandemic. While information technology is vital to any country’s advancement, its growth in developing countries is being hindered by lack of skilled labour force, underdeveloped market infrastructure, insufficient financial mechanisms to stimulate innovative projects, and weak legislative framework. IT companies are characterized by a high degree of risk and uncertainty, a reliance on external sources of financing in the early stages, and an unattractiveness to conservative investors. In this regard, the issue of capital formation for innovative companies in the IT sector to ensure their effective functioning becomes especially important. The purpose of this study is to analyze the formation of financial sources and capital structure of Georgian IT companies based on the analysis of 50 IT companies in Georgia. The analysis is based on the usage of the main financial ratios of companies’ performance, taking into account the specifics of the IT sector companies. The study revealed that the capital structure of Georgian information technology firms is more consistent with the Pecking order theory, with almost no long-term loans and a small share of short-term loans. Equity and retained earnings are the primary sources of funding for IT businesses. This was supported by the legal exemption of corporations from income tax payments in the case of net profit non-distribution.

Life cycle of startup financing

I characterize an optimal, incentive compatible, and renegotiation proof contract of venture capital (VC ) financing of a startup (that may be successful or not) whose rate of arrival of success is a function of the accumulated investment stock. The contract depends on the startup valuation, prior probability of success, and initial capital. Sufficient conditions for existence of such a contract are specified. The paper explains why the startup has to rely on different ways of financing in different stages of its life, and why VC financing is not feasible in early stages of development of the startup.

Ready or Not? The Sequence of Nascent Entrepreneurs' Actions and External Financing

The set of actions undertaken by nascent entrepreneurs during an organization’s emergence is the basis for studying a wide variety of entrepreneurial phenomena, including outcomes such as organizational growth and survival. The act of acquiring external financing is a critical step toward achieving these outcomes, hence this then begs the question, “What actions do nascent entrepreneurs take in order to attain external funding?” In this study we apply an event history model and a framework integrating four major perspectives of entrepreneurship to examine when nascent entrepreneurs acquire external funding during the startup process. We apply this model to nationally representative panel data of nascent entrepreneurs to determine which discrete startup activities are likely to precede external financing. Nascent entrepreneurs tend to take actions that are “resource-light” early in the startup process to build their organizations to a fundable stage before completing more “resource-heavy” activities. However, we provide compelling evidence that some complete resource-heavy actions early and in anticipation of external financing rather than relying on actual use of such funds. Our findings highlight the possibilities of clarifying some of the heterogeneity of entrepreneurial actions to provide a more systematic understanding of organizational emergence and early stage financing.

Friends Don’t Lie: Monitoring and Communication With Risky Investments

Venture capital (VC) investors have been criticized for lax monitoring and for be- ing too “founder-friendly.” We identify an overlooked benefit of such behavior: entrepreneurs lie less to friendly VCs. The entrepreneur is privately informed about project success, enjoys private benefits of control, and recommends a project to the VC. The VC chooses the project and can intervene in the interim. The equilibrium features a “monitoring trap”: possible intervention leads the entrepreneur to lie, which prompts further intervention. However, both are better off if the VC commits to intervene less. We characterize implications for information acquisition, control rights, outside directors, and stage financing.

The Impact of Social Media on Venture Capital Financing: Evidence from Twitter Interactions

We examine how information acquisition through social media affects venture capital (VC) investments into VC-backed startups. We collect a unique data set from Twitter API to measure the impact of portfolio companies owned social media (OSM) and earned social media (ESM) on the structure of VC investments. We find evidence consistent with the hypothesis that startup firms’ social media engagement affects the staging of VC financing, the VC syndicate structure, and the probability of a successful exit. If a portfolio company’s social media accounts are more active and the company has a higher engagement volume with its followers, VC firms reduce the extent of stage financing and are less likely to syndicate with each other in financing such a portfolio company. In particular, our results demonstrate that entrepreneurial firms with higher OSM and ESM engagement volume have fewer VC financing rounds, a smaller number of VCs in their VC syndicates, a lower probability of VC syndication, a higher probability of an IPO exit and a higher amount total funding across all rounds. Our findings are robust to a variety of alternative model specifications, subsamples, controlling for endogeneity in VC staging and syndication, selection biases and machine learning approaches.

The Role of Social Networking in Capital Sourcing

The aim of this research is to apply the tool of social network analysis to situations in capital sourcing, including early stage financing. The study is conducted within the social network of Medical Alley Association of Minnesota (MAA). We investigate the correlation between the main centrality measures: closeness, degree and betweenness, and the amount of funding received by the 163 MAA members during 2009–2012. Companies benefit from their social network to get access to better financing. The empirical results also provide a road map to encourage the sponsored or spontaneous growth of other social networks in related fields. Despite the financial crisis, the empirical results show how competition works when firms have established relations with others. Where an intersection occurs is merely an empirical curiosity and the causation resides in the intersection of relations. The relation that intersects on an organization determines the player’s competitive advantage.

Stage financing and syndication in the IPO underpricing of venture-backed firms: Venture capital and IPO underpricing

The article investigates the impact of stage financing and syndication practices on the underpricing level of venture-backed firms (VBFs) undertaking their initial public offerings (IPOs). This empirical study uses a unique hand-collected data set concerning more than 260 VBFs that went public on Euronext Paris and Alternext between 1997 and 2013. Our findings suggest a lower level of underpricing for firms backed by syndicated venture capital investment. Additionally, we find that the syndicate size is negatively associated with the level of underpricing. However, there is no evidence that stage financing has a significant impact. Syndication thus appears to be the only relevant mechanism to improve IPO performance (measured by the underpricing level), as it reduces agency costs and information asymmetry between the different stakeholders in an IPO process.

Juridical Review of Notary Role in Fiduciary Insurance in PT. Andalan Finance Indonesia (Nasmoco Credit) Semarang

The purpose of this study was to analyze: 1) Implementation of the agreement with the Fiduciary PT. Andalan Finance Indonesia (Nasmoco Credit) Semarang. 2) The role of the Notary in the Deed of Fiduciary Manufacture PT. Andalan Finance Indonesia (Nasmoco Credit). 3) Obstacles and solutions in the manufacture of the Deed of Fiduciary PT. Andalan Finance Indonesia (Nasmoco Credit) Semarang.This research is research with empirical juridical approach. Specification of the research is descriptive. In this study, researchers obtained the primary data sources through interviews and field research object of research Nasmoco Credit and Notary in Semarang. The secondary data obtained through literature.The research results are: 1) Implementation of the agreement with the Fiduciary PT. Andalan Finance Indonesia (Nasmoco Credit) Semarang starting from the stage financing request of consumers, the application review consumer financing, the stages of recommendation, preparation of contract documents, disbursement of consumer financing, the stages of the agreement, the stages of the determination of insurance, the imposition of fiduciary, a deed to the notary and registration of fiduciary to fiduciary office. 2) The role of the Notary in the Deed of Fiduciary Manufacture PT. Andalan Finance Indonesia (Nasmoco Credit) Semarang is a Notary role in making authentic deed in the form of fiduciary deed in accordance with the provisions of the legislation as well as the notary office. 3) Barriers perceived by the notary that there are no obstacles for the data and procedures required by the notary had been prepared in full by both parties to undertake the financing agreement. This makes the notary does not have a bottleneck in the fiduciary deed. But for the problems in case of default Credit Nasmoco the path of deliberation, billing, administration subpoena or warning and the last way is a claim to court if there is no response from the Debtor.Keywords: Fiduciary; Agreements; Credit

The evolution of equity crowdfunding: Insights from co-investments of angels and the crowd

Equity crowdfunding platforms are at the center of the digital transformation of early-stage venture funding. These digital platforms were originally heralded as a democratizing force in early stage finance, due to their role in facilitating the exchange between entrepreneurs and a multitude of non-professional small investors (“the crowd”). Equity crowdfunding platforms have experienced considerable growth and now attract professional investors including business angels. The presence of angels alongside the crowd on equity crowdfunding platforms has raised questions whether these digital platforms can continue to play their role in democratizing access to capital. Using data from a leading equity crowdfunding platform, we examine the interplay between the investment decisions of angels and the crowd. We find evidence of information flows in crowdfunding platforms between angels, and from angels to the crowd. We find angels play an important role in funding of large ventures, whereas the crowd not only fill the funding gaps for such large ventures but also play a pivotal role in the funding of small ones. The complementarity between angels and crowd investors seems to increase the overall efficiency in an otherwise highly asymmetric and uncertain market, confirming that digitization can indeed bring important benefits to venture investment.

Early Stage Investing in Green SMEs: The Case of the UK

How might a Green New Deal be applied to the early stage financing of Cleantechs? Amidst rising interest and adoption of Green New Deals in the US, the paper explores the need for more focused policy to address early stage long horizon financing of Cleantechs. We argue that insufficient focus has been applied to early stage investing into these types of innovative SMEs that could lower CO2 emissions across a range of sectors (including renewable energy, recycling, advanced manufacturing, transport and bio-science). Adopting a resource complementarity lens and borrowing from transaction cost theory, we illustrate and build theory through longitudinal UK case studies. These demonstrate how government policy can scale-up through international collaboration public-private, principally venture capital, co-finance to facilitate cleantech innovation with potentially game changing impacts on reducing CO2 emissions in order to meet the Paris 2015 Climate Change targets.

Ethnic Ties in US Venture Capital Stage Financing

AbstractThis paper examines the effect of ethnic ties on venture capital (VC) stage financing in the US market. After dealing with the endogeneity problem, the paper shows that VC investors who share ethnicity with an entrepreneur tend to finance the company using a smaller number of rounds, longer durations between successive rounds, and a larger amount in each round. The effect is more pronounced when the startup company and the VC firm are not located in the same city or the VCs lack industry‐specific expertise. My findings also suggest that such trust due to co‐ethnicity leads to bad investment performance.