Thomas F. Hellmann

University of British Columbia - Vancouver | UBC · Sauder School of Business

Beyond Covid‐19, there is a growing interest in what economic structures will be needed to face ongoing pandemics. In this paper, we focus on the diagnostic problem and examine a new paradigm of voluntary self‐testing by private individuals. We develop a dynamic model where individuals without symptoms face daily choices of either taking the risk o...

This paper re-examines the role of investor power in a model of staged equity financing. It shows how the usual effect where market power reduces valuations can be reversed in later rounds. Once they become insiders, powerful investors may use their market power to increase, not decrease valuations. The critical determinant is whether the insider i...

This article develops a theory of contracting among founders of a new firm. It asks at what stage founders agree to commit to each other, how they structure optimal founder contracts, and how this affects team formation, ownership, incentives, and performance. The article derives a trade-off between upfront contracting, which can result in teams wi...

We develop a theory about the optimal boundaries of entrepreneurial firms. We augment a simple property rights model by introducing uncertainty about whether initial contracting partners are also appropriate long-term partners. Individual asset ownership gives entrepreneurs the freedom to easily leave their partners, whereas joint asset ownership g...

Despite recent innovations in entrepreneurial finance, particularly at the early stage of business creation, many new and young companies continue to face hurdles to acquire capital.The Kauffman Foundation addressed current challenges and opportunities in financing entrepreneurial growth, a key driver of job creation and economic expansion, at its...

We develop a new theory of the firm where asset owners sometimes want to change partners ex-post. The model identifies a fundamental trade-off between (i) a “displacement externality” under non-integration, where a partner leaves a relationship even though the benefit is worth less than the loss to the displaced partner, and (ii), a “retention exte...

A literature has developed to substantiate Rosenstein-Rodan's intuition that coordination of a critical mass of investments may induce industrialization through a 'big push'. This literature has essentially ignored the question of what economic institutions may overcome the coordination failures which give rise to an 'underdevelopment trap'. In thi...

This survey reviews the growing body of academic work on venture capital. It lays out the major data sources used. It examines the work on venture capital investments in companies, looking at issues of selection, contracting, post-investment services and exits. The survey considers recent work on organizational structures of venture capital firms,...

The case study provides an overview of the angel investment practices and describes government policies towards angel and venture capital investing in British Columbia, Canada. It focuses in particular on the Equity Capital Program (BCECP henceforth), which provides tax credits to private equity investors that meet several eligibility criteria. The...

We examine the trade-off between efficiency and equality within the context of entrepreneurial founding teams. Using a formal theory where founders may have preferences over relative outcomes, we derive predictions about the antecedents and consequences of dividing equity equally among all founders. Using proprietary survey data, we empirically tes...

This article examines enterprises funded by government-sponsored venture capitalists (GVCs). We find that enterprises funded by both GVCs and private venture capitalists (PVCs) obtain more investment than enterprises funded purely by PVCs, and much more than those funded purely by GVCs. Also, markets with more GVC funding have more VC funding per e...

We examine the effect of trust in venture capital. Our theory predicts a positive relationship of trust with investment, but a negative relationship with success. Using a hand-collected dataset of European venture capital deals, we find that the Eurobarometer measure of trust among nations positively predicts venture capital firms’ investment decis...

This paper develops a multitask model where employees make choices between their assigned standard tasks, for which the firm has a performance measure and provides incentives, and privately observed innovation opportunities that fall outside of the performance metrics, and require ex post bargaining. If innovations are highly firm specific, firms p...

How does the relationship between an investor and entrepreneur depend on the legal system? In a double moral hazard framework, we show how optimal contracts, corporate governance, and investor actions depend on the legal system. With better legal protection, investors give more non-contractible support, demand more downside protection, and exercise...

This paper examines the determinants and consequences of investor activism in venture capital. Using a hand-collected sample of European venture capital deals, it shows the importance of human capital. Venture capital firms with partners that have prior business experience are more active recruiting managers and directors, helping with fundraising,...

This paper examines bank behavior in venture capital. It considers the relation between a bank's venture capital investments and its subsequent lending, which can be thought of as intertemporal cross-selling. Theory suggests that unlike independent venture capital firms, banks may be strategic investors who seek complementarities between venture ca...

Several studies have already addressed the question whether R&D subsidies lead to additionality effects or crowd out firms’ private investment. This paper provides insights into the impact of R&D grants on private R&D expenditure, distinguishing between research and development activities. We employ parametric treatment effects models and IV regres...

This theory paper examines an ex post rationale for the patenting of scientific discoveries. Scientists do not know which firms can make use of their discoveries, and firms do not know which scientific discoveries might be useful to them. To bridge this gap, either or both sides need to engage in costly search activities. Patents increase (decrease...

"This paper examines the process of how entrepreneurs assemble resources. In the model, the entrepreneur's challenge is to convince two complementary resource providers to commit their resources to a new venture. Before committing their resources, one of them needs to perform a costly evaluation. The entrepreneur has a problem with getting sufficie...

This paper provides a new explanation for the use of convertible securities in venture capital. A key property of convertible preferred equity is that it allocates different cash flow rights, depending on whether exit occurs by acquisition or IPO. The paper builds a model with double moral hazard, where both the entrepreneur and the venture capital...

We describe new ideas as incomplete concepts for which the innovator needs feedback from agents with complementary skills. Once shared, ideas may be stolen. We compare how different contractual environments support invention and implementation. Markets, as open exchange systems, are good for circulation and thus elaboration, but may fail to reward...

The received theory of the firm assumes that a firm is an efficient collection of resources (or "assets"), but remains silent on how these are brought together in the first place. This paper examines difficulties in the entrepreneurial process of assembling such resources. In the model, the entrepreneur's challenge is to convince two complementary...

An important aspect of knowledge-based fi rms is the provision of services that are difficult to specify contractually. We examine the involvement of venture capital firms with the companies they finance in terms of non-contractible advice, support in recruit- ing board members and management, and help with obtaining additional financing. We use a...

Financial intermediaries can choose the extent to which they want to be active investors, providing valuable services like advice, support and corporate governance. We examine the determinants of the decision to become an active financial intermediary using a hand-collected dataset on European venture capital deals. We find organizational specializ...

In recent years, a “third mission” pursued by universities, i.e. knowledge transfer to industry and society, has become more important as a determinant of enhancements in economic growth and social welfare. In the vast world of technology transfer practices implemented by universities, the establishment and management of university venture capital...

While many parts of the financial systems are becoming increasingly commoditized, there is a concurrent trend towards greater specialization of financial intermediaries, especially in information-intensive market segments. This paper examines the impact of this specialization, focusing on venture capital. We use a unique hand-collected dataset on E...

A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Ot...

This paper asks the question under what circumstances banks have incentives to increase the deposit collection, when the deposit market is not fully penetrated, i.e. when there is low financial depths. We compare outcomes under a perfectly competitive deposit market with outcomes under financial restraint, defined as a combination of deposit rate c...

Many new firms are started by entrepreneurs who got the idea while working for their previous employer. Sometimes employers also agree to develop their employees' ideas internally. This paper develops a multi-task incentives model to analyze optimal corporate strategies towards employee innovations. The model explains when employees become entrepre...

Some venture capital investors seek purely financial gains while others, such as corporations, also pursue strategic objectives. The paper examines a model where a strategic investor can achieve synergies, but can also face a conflict of interest with the entrepreneur. If the start-up is a complement to the strategic partner, it is optimal to obtai...

This paper examines the impact venture capital can have on the development of new firms. Using a hand-collected data set on Silicon Valley start-ups, we find that venture capital is related to a variety of professionalization measures, such as human resource policies, the adoption of stock option plans, and the hiring of a marketing VP. Venture-cap...

We provide a new theory of the role of banks as catalysts for industrialization. In their influential analysis of continental European industrialization, Gerschenkron and Schumpeter argued that banks promoted the creation of new industries. We formalize this role of banks by introducing financial intermediaries into a “big push” model. We show that...

The venture capital industry experienced its biggest decline ever in 2001. The National Venture Capital Association reports that, in the fourth quarter of 2001, investments by venture capital firms were at approximately a third of the level the year before and the amount of money raised by these firms had dropped 80 percent. Many people question wh...

The goal of this study was to examine cultural differences in the value of family involvement in German and Chinese small businesses due to their differences in collectivism/individualism. Our analyses, based on a sample of 562 Chinese and German owners, showed that family involvement — measured as the number of family members that work in the busi...

This paper examines empirical evidence on the impact that venture capitalists have on the development path of new firms. We use a hand-collected data set on Silicon Valley start-up companies that allows us to "look inside the black box" and analyze the influence of venture capital on the professionalization of firms' internal organization. The evid...

This paper considers potential disagreements between an entrepreneur and a venture capitalist about the desirability of taking a company public. Convertible securities are shown to be optimal for a novel reason. In particular, it is shown that automatic conversion at the time of the IPO takes away the option value of the convertible security. This...

SUBJECT AREAS: venture capital, corporate venturing, strategic investment, conflict of interest CASE SETTING: Apple Computers, 1984-1989, computer industry. This case looks at how a corporation may engage in venture capital. It discusses the particular approach that Apple Computers took when designing its internal venture capital division. In order...

Most theories of the firm ignore the entrepreneurial process of how the various resources of the firm are combined in the first place. This paper examines the process of how an entrepreneur obtains commitments from multiple resource providers to create a new venture. Resource providers may be reluctant to commit to an unproven concept, and the comm...

We provide a theoretical framework to address the historical debate about the role of banks in industrialisation. We introduce banks into a model of the big push to examine under what circumstances profit-motivated banks would engage in coordination of investments. We show that banks may act as catalysts for industrialisation provided that: (I) the...

Previous theories of financial market rationing focussed on a single market, either the credit or the equity market. An interesting question is whether credit and equity rationing are mutually compatible, and how they interact. We consider a model with two-dimensional asymmetric information, where entrepreneurs have private information about both t...

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise va...

Venture capital financing is widely believed to be influential for new innovative companies. We provide empirical evidence that venture capital financing is related to product market strategies and outcomes of start-ups. Using a unique hand-collected database of Silicon Valley high-tech start-ups we find that innovator firms are more likely to obta...

In theory, ownership structures are optimally chosen ex-ante by a single en- trepreneur. In reality, the ownership question is rarely solved at the time of founding. Instead, the decision to be acquired or to pursue the venture an in- dependent firm is made dynamically over time, by an interplay of entrepreneurs with their investors. By looking at...

Research and development at the nanoscale requires a large degree of integration, from convergence of research disciplines in new fields of enquiry to new linkages between start-ups, regional actors and research facilities. Based on the analysis of two clusters in nanotechnologies (MESA+ (Twente) and other centres in The Netherlands and Minatec in...

The role of government in East Asian economic development has been a contentious issue. Two competing views have shaped enquiries into the source of the rapid growth of the high-performing Asian economies and attempts to derive a general lesson for other developing economies: the market-friendly view, according to which government intervenes little...

SUBJECT AREAS: venture capital, strategic partnerships, global venture capital CASE SETTING: WI Harper International, 1997, Silicon Valley, Taiwan, China REQUESTS FOR COPIES: To receive a copy of this case, please contact Harvard Business School Publishing, 60 Harvard Way, Boston, MA 02163. Phone: (800) 545-7685. E-Mail: MAILTO:custserv@hbsp.harvar...

Key words: acquisition, entrepreneurial finance, strategic investment, organizational integration Setting: Symantec Corporation, 1996 , computer industry Symantec Corporation has a competitive position that allows it to market and distribute a variety of software. It's strategy is not to rely solely on internal development of new products, but also...

Venture capitalists often hold extensive control rights over entrepreneurial companies, including the right to fire entrepreneurs. This article examines why, and under what circumstances, entrepreneurs would voluntarily relinquish control. Control rights protect the venture capitalists from hold-up by the entrepreneurs. This provides the correct in...

Analysts of development have long discussed the proper role of the government in promoting economic growth. Although nuances differ, in general, two distinct approaches have dominated, one emphasizing the role of the market, the other emphasizing the role of the state in promoting development. The Market Friendly View (World Bank, 1993) presumes th...

Capital requirements are traditionally viewed as an effective form of prudential regulation - by increasing capital the bank internalizes more of the risk of its investment decisions. While the traditional view is accurate in the sense that capital requirement can be effective in combating moral hazard, we find, in contrast, that capital requiremen...

Empirically it appears that while investing heavily in internal R&D, established corporations are playing only a relatively minor role in the financing of entrepreneurial companies, even if there seem to be "strategic" reasons that would justify such investments. I examine theoretically how strategic objectives affect an established corporation's a...

Much of the recent growth and development literature is based on the notion that economies may exhibit multiple equilibria. An economy may get stuck in a vicious circle of poverty as a result of a coordination failure. Little attention has been given to which economic institutions may solve such coordination failures. Motivated by some historical e...

This paper surveys the main policy debates on financial sector development. It provides a framework for understanding the main functions of the financial system, emphasizing informational problems and their efficient resolution through accumulation of reputational capital and the development of effective governance structures. It examines the exist...

In their 1981 model, Stiglitz and Weiss demonstrated that there may be credit rationing in markets with adverse selection. Work by Cho and DeMeza and Webb has subsequently shown that rationing would disappear in the 1981 model if entrepreneurs seek funds on an equity market, rather than on a credit market. Using a different set of assumptions, Myer...

The authors discuss the effectiveness of credit policies in the early stages of economic development in Japan and Korea. They examine the importance of institutional arrangements for managing credit policies in the two countries. They emphasize participatory government intervention, wherein credit policies could be viewed as part of an internal all...

are professors in the Strategy and Business Economics Division of the Sauder School of Business. Both have backgrounds in finance and economics, and have previously published on venture capital. Edward Egan is an M.Sc. student, specializing in management information systems. He has an extensive consulting background related to venture capital finan...

This paper examines a set of financial policies, called financial restraint, that address financial market stability and growth in an initial environment of low financial deepening. Unlike with financial repression, where the government extracts rents from the private sector, financial restraint calls for the government to create rent opportunities...