Venture Capital Stage Research Articles

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.

Product market competition, venture capital, and the success of entrepreneurial firms

We document a positive effect of product market competition (PMC) on venture capital (VC) staging. Employing large tariff rate reductions as an exogenous shock to PMC, we find that large tariff reductions lead to a greater likelihood of staged financing and a larger number of financing rounds. Cross-sectional analyses reveal that the effect is stronger for entrepreneurial firms that are younger, operate in high-tech and manufacturing industries, or receive investments from less reputable and inexperienced VCs. Our findings are consistent with the notion that by mitigating business uncertainty and survival risk, VC staging acts as a complement to PMC for enhancing entrepreneurial firms’ success.

Venture capital staging under economic policy uncertainty

Drawing upon a duration analysis framework, this study investigates how economic policy uncertainty (EPU) affects investment staging decisions and exit outcomes in China's venture capital (VC) market. Analyses from a sample of 61,661 venture capital investment decisions support the prediction of the real options theory that VCs delay to refinance their portfolio companies under high EPU. However, such delay effect is largely weakened in severe-VC-competition and high-technology industries, and in better economic conditions. In addition, governmental VCs with greater exposure to economic policy uncertainty are more sensitive to EPU. We further provide evidence that the investments made in times of high EPU have a lower likelihood of successful exit.

How Does Human Capital Matter? Evidence from Venture Capital

AbstractWe examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.

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.

Overview of Venture Capital Landscape in India

It is difficult to find an overview of the Indian venture capital industry because no systematic attempt has been made. To fill this critical gap, the author wants to offer an overall understanding of the Indian venture capital industry. The definition of venture capital is tricky, and the author proposes to use the term to refer only to start-up, early stage, and growth venture capital–stage funding. The term thus encompasses only traditional venture capital. To create an overall understanding or overview of Indian venture capital, the author will cover the following: • How has the venture capital industry in India developed in recent years and how will it continue to develop in the future? Which factors influence its development? • How does it compare to other private market investment asset classes in India and other developed venture markets such as the United States and Europe? • How are Indian venture funds structured in terms of organization? What are the sources for the funds invested in Indian venture capital? • What are the investment patterns of venture capital investment, in terms of, for example, venture stage, industry sectors, investment size, deal trends, and geography? • What exit mechanisms are used? Which exit mechanism has been more favorable and why? • What levels of return are achieved? TOPICS:Security analysis and valuation, statistical methods, emerging markets, risk management, private equity Key Findings • The Indian Venture Capital ecosystem has matured over the last 15 years, it is still a relatively young VC ecosystem as compared to developed markets like US & Europe, with around 4% share of global venture capital investments. This growth is noticeable and is in stark contrast to 2004, when venture investments were almost negligible in India. • While India received around 2.6% of global private-market investments from 2009–2017 period, private equity comprising of growth, buyout, turnaround & mezzanine funding have attracted majority (48%) of these investments. Share of venture capital was 16% of the overall private-market investments during this period. • Share of Series A Investments in value terms has fallen to 13% in 2016–2019 period from 40% in 2005–2010 period, with Series B & above gaining ground during these years. This reflects that VC ecosystem is maturing and promising start-ups are being funded throughout their growth journey. • Mergers & acquisitions (47%) followed by secondary sales (29%) have been the most preferred exit routes in terms of number of exits as of 2018. The ecosystem needs to create large no. of IPO exits across the value spectrum to build a more sustainable exit scenario. Further, unlike US, India doesn’t have a robust data repository on returns and other benchmarks of venture funds. Industry associations and regulatory bodies need to evolve more scientific ways to track returns data to create an accurate picture of the ecosystem.

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.

How Does Human Capital Matter? Evidence from Venture Capital

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.

How Does Policy Uncertainty Affect Venture Capital?

Using a newly developed policy uncertainty index, we find that policy uncertainty is negatively related to venture capital (VC)’s investment propensity. VCs, however, adjust their investment strategy quickly in response to policy uncertainty changes. Relying on plausibly exogenous variation generated by gubernatorial elections, we show that the relation is likely causal. The negative effect is more pronounced when startups are less mature, have fewer tangible assets, are more dependent on government spending, and are exposed to severer holdup from entrepreneurs. Policy uncertainty also adversely affects VCs’ investment outcomes. In response, VCs stage finance more and cut total investment amount.

Venture Capital Staging: Domestic VC-Led versus Foreign VC-Led Investments

How do domestic VC-led and foreign VC-led investments differ in staged financing? We propose that domestic VCs will be more active than foreign VCs in learning through investing to tackle information asymmetry, agency concerns and project-specific uncertainty. We further expect that domestic VCs will be more responsive than foreign VCs to changes in external environment. The empirical analysis indicates that agency concerns and project-specific uncertainty (as reflected in early-stage ventures) prompt VCs to accelerate staging, whereas market volatility delays each round of financing. We further find some differences between domestic VC-led and foreign VC-led investments: Domestic VCs tend to invest in early-stage ventures with shorter durations between rounds of financing than do foreign VCs, and the delay effect of market volatility is also much more salient for foreign VC-led investments.

Monitoring via staging: Evidence from Private investments in public equity

I study the causes and consequences of staging in the setting of private investments in public equities (PIPEs). I find that, in PIPE investments, as in venture capital staging, the staging strategy is used by investors as a monitoring mechanism to mitigate information asymmetry and agency problems. Moreover, strategic investors and investors investing alone are more likely to utilize staging. I show also that staging reduces the cost of financing and has positive implications for PIPE issuers’ long-run stock performance.

Monitoring Via Staging: Evidence from the Private Investments in Public Equity

I study the causes and consequences of staging in the setting of private investments in public equities (PIPEs). I find that, in PIPE investments, as in venture capital staging, the staging strategy is used by investors as a monitoring mechanism to mitigate information asymmetry and agency problems. Moreover, strategic investors and investors investing alone are more likely to utilize staging. I show also that staging reduces the cost of financing and has positive implications for PIPE issuers’ long-run stock performance.

The causes and consequences of venture capital stage financing

This paper examines the causes and consequences of venture capital (VC) stage financing. Using information about the physical location of an entrepreneurial firm and the geographic distance between the VC investor and the firm, I show that VC investors located farther away from an entrepreneurial firm tend to finance the firm using a larger number of financing rounds, shorter durations between successive rounds, and investing a smaller amount in each round. However, VC investors' propensity to stage is independent of whether the firm is located in a close-knit community. I also find that VC staging positively affects the entrepreneurial firm's propensity to go public, operating performance in the initial public offering (IPO) year, and post-IPO survival rate, but only if the firm is located far away from the VC investor. However, the effect of VC staging on entrepreneurial firm's performance is independent of whether it is located in a close-knit community. The findings are robust to a variety of alternative proximity measures, instrumental variables, and econometric approaches for dealing with endogeneity problems.

Keep a Tight Leash: What Does Venture Capital Stage Financing Tell the Market?

The staging of venture capital (VC) financing allows entrepreneurial firms to mitigate the asymmetric information problem while accessing the capital markets. The VC staging signals to the market higher intrinsic quality of the entrepreneurial firms and reduces explicit and implicit costs of accessing public markets. After controlling for endogeneity of VC staging decision, I find that entrepreneurial firms receiving multiple rounds of VC financing are more likely to access funds through IPO rather than acquisition. Such going public firms experience lower underpricing and are valued significantly higher by the market. The higher intrinsic quality of IPO firms financed through multiple VC rounds is later confirmed by their superior post-IPO stock returns, operating performance, and survival rates.

The Causes and Consequences of Venture Capital Stage Financing

This paper examines the causes and consequences of venture capital (VC) stage financing. Using information about the physical location of an entrepreneurial firm and the geographic distance between the VC investor and the firm, I show that VC investors located farther away from an entrepreneurial firm tend to finance the firm using a larger number of financing rounds, shorter durations between successive rounds, and investing a smaller amount in each round. However, VC investors’ propensity to stage is independent of whether the firm is located in a close-knit community. I also find that VC staging positively affects the entrepreneurial firm’s propensity to go public, operating performance in the initial public offering (IPO) year, and post-IPO survival rate, but only if the firm is located far away from the VC investor. However, the effect of VC staging on entrepreneurial firm’s performance is independent of whether it is located in a close-knit community. The findings are robust to a variety of alternative proximity measures, instrumental variables, and econometric approaches for dealing with endogeneity problems.

Duration analysis of venture capital staging: A real options perspective

This study takes a real options perspective towards venture capital staging and views the staging decision as a choice between holding the current option to invest and investing now to obtain the option to invest subsequently. It proposes that this staging decision depends on the factors that influence the value of these two options, such as competition and various sources of uncertainty. The empirical results suggest that market uncertainty encourages venture capital firms to delay investing at each round of financing, whereas competition, project-specific uncertainty and agency concerns prompt venture capital firms to invest sooner. This study has useful implications for theory and practice.

Nothing Ventured — Nothing Gained? Empirical Evidence on Venture Capital Financing in Switzerland

This paper analyses the Determinants of Venture Capital Staging and Syndication in Switzerland. I find that among the different affiliations of VC investors in Switzerland especially independent investors make more extensive use of staged capital infusions. Moreover, the results suggest that staging is employed as a tool for mitigating risks in VC financing. In addition, I find that Syndication can serve as an entrance strategy for foreign VC providers. Furthermore, I find evidence that firms, which realize the benefit of staging, do also become conscious of the value added in financing Start Ups by involving partners. Consequently, VC firms that make use of staging are also more open to syndication. With respect to the value-added of Co-Investment behavior, I show that syndication positively impacts the success rate of a VC provider, whereas VC firms that are more locally embedded do exhibit lower success rates for their investment portfolio.

Chance Favours the Prepared Mind: The Determinants of Monitoring and Staging in Venture Capital Financing

In this paper I analyze the driving forces of Venture Capital staging. I find that staging is more pronounced for younger firms with higher agency problems. Moreover, the duration of financing rounds is shorter for seed and early stage financing indicating that monitoring is paramount to cope with the higher level of uncertainty at these stages of investment. The data reveals that in the earlier years of collaboration between the Venture Capital provider and the financed firm the need for monitoring and staging is significantly more pronounced. In addition, I find that Syndication of venture capital investments alleviates agency problems between the venture capitalist and the entrepreneur and consequently, VC firms that make use of staging are also more open to syndication. Furthermore there is evidence for Lerner's Selection Hypothesis. The findings suggest that joint decision making can improve deal selection and reduce information asymmetries.