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The geography of venture capital and entrepreneurial ventures’ demand for external equity
Abstract
In this paper, we study how the geography of venture capital (VC) and the location of entrepreneurial ventures affect the propensity of the latter to seek external equity financing. We analyse a sample of 533 European high-tech entrepreneurial ventures and examine their external equity-seeking behaviour in the 1984–2009 period. We find that ventures are more likely to seek external equity when the local availability of VC is higher, whereas the level of competition of the local VC market plays a negligible role. The stimulating effect of the availability of VC on the demand for external equity rapidly decreases with distance and vanishes at approximately 250 km. It also vanishes when national borders are crossed, except for countries at close cultural and institutional distance. Moreover, the distance decay of the stimulating effect of the availability of VC varies with the characteristics of prospective VC investors, namely, their private or public ownership and governance, and their reputation. These results have important implications for the policy that European countries and the European Commission should implement to foster the demand for VC by entrepreneurial ventures, thereby improving the functioning of the VC market in Europe.
... As financial support is not sufficient in emerging economies (Pan and Yang, 2019), foreign VC plays an important role in emerging economies (Dai et al., 2012). However, entrepreneurs and prospective VC investors located in different countries are set apart by linguistic and cultural distances, which implies differences in values, beliefs and practices (Colombo et al., 2019;Tian et al., 2020;Yong et al., 2014). Therefore, while entrepreneurs in emerging economies must also be selected and funded by VC, the selection criteria may differ from the West, i.e. advanced economies. ...
... Table 2 lists the induced questions, some of which were derived from firstorder concepts not shown in Figure 1. Relevant literature on entrepreneur characteristics and VC funding includes studies by Burton et al. (2002), Hsu (2007), while peripheral studies on pre-IPO financing (Baum and Silverman, 2004), performance (Baum and Silverman, 2004;Klingler-Vidra et al., 2021;Lee et al., 2001), geography distance (Colombo et al., 2019), social network (Wang, 2016) and patents (Conti et al., 2013) informed additional variables. ...
... Baum and Silverman (2004) used the size (number of individuals) of the top management team as human capital, and Hsu (2007) used the number of founding team members as a control variable; hence, we added a question to check the number of founders (s). In prior literature in the context of advanced economies, a higher degree is considered a positive factor (Hsu, 2007;Colombo et al., 2019;Burton et al., 2002); however, based on our qualitative data analysis, the academic background is just said to be a bonus point; instead, VC prioritizes first-hand working experience in a specific domain. Hence, we incorporated a question regarding the degree of founders (s). ...
Purpose
This study aims to explore the elements and attributes of accredited entrepreneurs/start-ups by venture capital (VC) in Vietnam, with its emerging start-up environment in the non-Western context.
Design/methodology/approach
The data and methods follow an exploratory study using a mixed method with an exploratory sequential design. The qualitative data analysis involved eight initial interviews with various entrepreneur supporters. Following this, a self-designed survey instrument incorporating the interview results was developed. The entrepreneurial founders of 86 early-stage start-ups participated in the survey to confirm several new or adapted quantitative components.
Findings
Several variables based on the conceptual model (Aggregate dimensions: Distinctive criteria from local contexts and Alignment with overseas standards) affect the likelihood of success in a professional VC round: a higher-degree founder has a negative effect; the size of the Total Addressable Market in the pitch to VC, the intention to expand overseas and the founder studied at a foreign university in an English-speaking country have positive effects.
Originality/value
The conceptual model in this study can extend the research stream on entrepreneurship and VC in emerging economies based on the institutional theory with regulatory, normative and cognitive pillars. Moreover, this study is the first broad research on the relationship between VC funding and entrepreneurs’ characteristics in emerging economies, using hand-collected actual funded start-up data.
... Studies of entrepreneurship in the field of hospitality and tourism have focused on why and how an entrepreneur starts a new business (Fu et al., 2019;Hallak, Assaker, & Lee, 2015;Lee, Hallak, & Sardeshmukh, 2016;Zhou, Chan, & Song, 2017) and performs entrepreneurial activities (Lee et al., 2016;Ngoasong & Kimbu, 2016;Swanson & DeVereaux, 2017). Limited research has paid attention to the determinants of venture capitalists' investment decisions in hospitality and tourism entrepreneurship programs, which are extremely decisive to the success of entrepreneurship (Chen, Yao, & Kotha, 2009;Colombo, D'Adda, & Quas, 2019;Zhang, 2019). VCs are the key external stakeholders in hospitality and tourism entrepreneurship (Carlisle, Kunc, Jones, & Tiffin, 2013;Leonidou, Christofi, Vrontis, & Thrassou, 2020). ...
... Hence, VCs try to obtain all the available information to assess new ventures. In addition to the entrepreneurs' objective background information, i.e., temporal-spatial distance to VCs (Colombo et al., 2019;Tian et al., 2020;Zhang et al., 2020), cultural distance (Khurshed, Mohamed, Schwienbacher, & Wang, 2020;Liu & Maula, 2016), and industry correlation (Hull, 2021), signaling information at the early startup stage is rare (Islam et al., 2018), and the information carried by entrepreneurs matters for VCs (Zhang, 2019). Undoubtedly, entrepreneur roadshows for business plans are an effective way for VCs to get to know new ventures and entrepreneurs more comprehensively. ...
... Second, this study extends the research of entrepreneurial passion to external stakeholders' behavior in the hospitality and tourism entrepreneurship context by comparing the effect of cognitive passion and affective passion on VCs' funding decisions, partly uncovering VCs' decision-making mechanism for screening and evaluating a project. The extant VC literature reveals a positive relationship between financial support and innovation promotion (Carlisle et al., 2013;Tian et al., 2020;Zhang et al., 2020), and VCs' funding decisions are mainly based on entrepreneurs' objective background information, i.e., temporalspatial distance to VCs (Colombo et al., 2019;Tian et al., 2020;Zhang et al., 2020), cultural distance (Khurshed et al., 2020;Liu & Maula, 2016), and industry correlation (Hull, 2021). Moreover, there is information asymmetry between entrepreneurs and VCs (Glücksman, 2020). ...
This study investigates the effects of entrepreneurs' passion on persuasion by focusing on venture capitalist funding decisions toward hospitality and tourism business plan presentation. To this end, we conducted two studies. In study 1, we collected evidence from 13 hospitality and tourism start-up financing projects broadcasted on China Central Television Channel 2 by utilizing a Linguistic csQCA. In study 2, we conducted an experimental analysis of entrepreneur passion and venture capitalists'(VCs') funding decisions via the causality test of 277 participants. Our findings indicate that both cognitive and affective passion have significantly positive effects on VCs' funding decisions and that VCs' involvement moderates the effects of cognitive passion and affective passion on VCs' funding decisions. The established integrative model has important implications for research on entrepreneur passion and investment decisions in entrepreneurial pitches from an involvement perspective, and the impact of entrepreneur passion on persuasion in hospitality and tourism entrepreneurship.
... Using a worldwide sample of cross-border VC investments, they find evidence that firms backed by syndicates with international and local VC are more likely to exit successfully 3 and have better post-IPO operating performance than do those backed by syndicates composed entirely of local or international VC. More recently, Colombo et al. (2019) find that ventures are more likely to seek external equity when some VC investors are nearby, and Tian et al. (2020) reveal a nonlinear effect of a VC firm's geographic distance on the technological performance of VCbacked companies in China. ...
... Compared to other studies, our positive and significant first-order impact of geographic proximity on the odds of obtaining later-stage financing is consistent with the findings of Lutz et al. 2013 but contradicts those of Colombo et al. (2019). The effect we obtain here is smaller (a 0.27% increase in probability for one-unit change). ...
The characteristics of the financial arrangements established to finance startups affect the fate of startups. Among these features, we particularly focus on the proximities and differences between venture capital (VC) investors in syndicated investments. We consider the proximities between investors in a startup and between investors and the startup. Against the background of the theoretical literature dealing with proximity relations, we distinguish five types of proximities between VC investors and between VC investors and the startups they finance: geographic, institutional, organizational, social, and cognitive. We then test six hypotheses regarding the impacts of these proximities on the likelihood of three events occurring in VC-backed startups: obtaining a later-stage round of funding, going public, and being merged or acquired. We implement these tests on a 33-year-long, 68-country sample using survival models adapted to account for tied failures and competing events. We find that the five forms of proximity relations are influential but have distinct roles. We also find that the impacts of these proximities are nonlinear in the sense that too much proximity/distance always ends up reverting the effects of proximity/distance. Finally, we observe that as the theoretical literature predicts, cognitive proximity is positively correlated with the probability of a merger and acquisition (M&A) but negatively correlated with the likelihood of an initial public offering (IPO).
... However, the attractiveness of entrepreneurial options for acquired founder CEOs depends on the local availability of necessary resources, particularly venture capital (Stam et al., 2010;Sanguineti et al., 2022). Previous studies have highlighted the strong local bias of venture capital investments (Chen et al., 2010;Colombo et al., 2019). Therefore, the extent of the venture capital activity in the areas where acquired firms are located positively influences the decision of acquired founder CEOs to pursue an entrepreneurial career, establishing a new venture instead of accepting employment offers. ...
... We took the following steps to construct the venture capital investment activities in the acquired firm's area (Regional VC). First, following recent works (e.g., Colombo et al., 2019;Tavassoli et al., 2021), we defined the regions for European acquired firms based on the second-level Nomenclature of Territorial Units for Statistics (NUTS) developed by Euromonitor, and for US-acquired firms based on Metropolitan Statistical Areas (MSAs). In the second step, we counted the number of venture capital investments in the region of the acquired firms divided by the total number of venture capital investments at the country level for European firms and the state level for the United States in the year preceding the acquisition announcement year. ...
The cultural distance between the acquiring and acquired firms is a double-edged sword in cross-border high-tech acquisitions. It magnifies the 'combination potential' of the acquisition but also poses severe integration challenges. Scholars have highlighted that the retention of acquired CEOs in combined entities is an effective integration action to address these challenges but have generally considered it from the acquiring firms' perspective only. In this study, we also take into account the acquired CEOs' perspective and find that the permanence of acquired CEOs in the post-acquisition organization depends on the balance between the acquiring firms' incentives to retain the acquired CEOs and the acquired CEOs' opportunity costs to remain in the company. Specifically, we argue that both sides increase with the cultural distance between the acquiring and acquired firms and that the acquired CEOs' personal characteristics and context-specific conditions also influence this balance. We test our hypotheses using a sample of 447 cross-border acquisitions of small high-tech firms by large listed firms between 2001 and 2014. Our findings confirm our expectations and highlight the role of micro-foundational characteristics in shaping the effect of key macro-level factors on the integration of high-tech acquisitions in international contexts.
... Bertoni et al. (2015a) find that investment patterns in high-tech ventures differ significantly between Europe and U.S, as American VCs prefer younger and riskier investments. Also, European tech companies seek more external funding when the local availability of venture capital is high (Colombo et al., 2019). At the same time, VCs are usually clustered into cities known as 'VC hubs' and they display a strong inclination to keep their investments close to their headquarters (Cumming and Dai, 2010). ...
... The result presented in Table 4 represents a plausible picture of the eSports funding geographical distribution with APAC being the market leader, as described in several industry reports (NewZoo, 2020;Deloitte, 2019;Goldman Sachs, 2018). The results are in line with academic research on regional variations of VC funding (Colombo et al., 2019;Hege et al., 2009), suggesting that the sample is not biased or overrepresenting American companies. ...
We examine the drivers of venture capital financing raised by eSports companies, using the Crunchbase database containing information on private and public companies receiving any type of venture capital funding worldwide. We find that companies located in Asia-Pacific and Americas attract more funding than in Europe. Venture capital funds are more likely to fund late stage and older companies, than innovative early stage and younger firms. We also observe that the founders’ previous experience plays a significant role in explaining the level of funding. Companies with at least one founder with previous eSport, managerial or start-up experience are more likely to get more funding by venture capital funds. Our research provides new evidence on how venture capital funding is allocated between late stage and early stage firms as well as between older and younger companies in the eSport-industry and in different markets.
... Ada beberapa faktor yang menyebabkan rendahnya investment readiness antara lain penolakan pengusaha untuk mengalihkan kepemilikan dan kontrol perusahaan kepada pemodal, kurangnya pengetahuan pengusaha tentang instrumen keuangan yang tersedia, sedikit pemahaman tentang apa yang dicari atau kebutuhan pemodal ketika mempertimbangkan investasi, penilaian perusahaan yang berbeda antara pengusaha dan pemodal, rendahnya daya tarik proposal bisnis dari perspektif investasi, dan kurangnya rencana atau penawaran bisnis (M. G. Colombo et al., 2019;C. Mason & Kwok, 2010). ...
Purpose: This research aims to develop instruments to measure start-up funding assessments. The dimensions of measuring funding and Investment readiness consist of eight dimensions adopted from the investment guide. Methodology/approach: This research is based on solving specific problems by improving the instructional design process and developing new models, tools and procedures regarding Investment readiness instruments as guidelines for assessing start-up funding readiness in the digital economy era. An investment readiness instrument is advanced by holding a Focus Group Discussion (FGD) with experts in start-up investment. Findings: The results of this study contribute to developing an investment readiness instrument as a guideline for assessing start-up funding readiness for the start-up. Practical implications: The practical implication of this research is that investment readiness instruments can assist start-ups in assessing financial and non-financial performance, which is helpful for funding applications and start-up financing. Originality/value: This research has social implications for investors and creditors in order to make relevant decisions regarding investment and funding for start-ups.
... Reciprocal trust enhances the willingness of both parties to share risks, alleviates agency problems and conflicts of interest in investments, achieves overall efficiency optimization, and avoids efficiency losses resulting from the prisoner's dilemma caused by mutual suspicion between venture capitalists and entrepreneurs (Kaiser and Berger 2021). Furthermore, scholars have found that factors such as information exchange (Kwok et al. 2019), fairness in the transaction process (Fu et al. 2019), relationship characteristics (Vedula and Fitza 2019), and geographical proximity (Colombo et al. 2019) all have significant influences on trust and cooperative relationship between venture capitalists and entrepreneurs. ...
The role of venture capital in promoting entrepreneurship and funding innovation cannot be underestimated. However, it is important to acknowledge noteworthy concerns associated with collusive behavior in the venture capital process. “Guanxi” is a relatively intimate and closed social relationship, which can impact venture capital through trust and social obligations. Drawing on the theories of unethical pro-relational behavior and social networks, using data from GEM-listed companies supported by venture capital from 2009 to 2021, this research investigates the phenomenon of collusion behavior between venture capitalists and entrepreneurs, with a particular focus on the influence of “guanxi”. The research finds that the presence of “guanxi” between venture capitalists and entrepreneurs tends to facilitate collusive behavior. Specifically, “guanxi” tends to increase entrepreneurial self-interest behavior, and venture capitalists’ returns, infringe upon minority shareholders’ interests, and increase corporate operational risk. Moreover, the study further explores the moderator effect of equity incentives on such collusion behavior. This research not only enriches the theoretical framework of the relationship between “guanxi” and venture capital activities but also provides insight into the ethical implications associated with “guanxi”, contributing to the broader literature on social relationships and unethical behavior.
... Using a sample of Italian companies, Bertoni et al. (2019b) confirmed the local bias of high-tech entrepreneurs and documented that relocation from the home country is very rare. As to this latter aspect, Colombo et al. (2019) (admittedly high) concerns about knowledge misappropriation risks are reduced by country-oforigin stereotypical trust. Nevertheless, it may be the case that the likelihood of initial CVC tie formation also depends on CVC investors' country-of-origin stereotypical trust. ...
... Using a sample of Italian companies, Bertoni et al. (2019b) confirmed the local bias of high-tech entrepreneurs and documented that relocation from the home country is very rare. As to this latter aspect, Colombo et al. (2019) (admittedly high) concerns about knowledge misappropriation risks are reduced by country-oforigin stereotypical trust. Nevertheless, it may be the case that the likelihood of initial CVC tie formation also depends on CVC investors' country-of-origin stereotypical trust. ...
This study proposes a hybrid model of initial trust formation that highlights the role of social categorization and its interplay with both institutional trust and the individuating information about the party. Using data on 1,474 corporate venture capital (CVC) investments in European ventures and a case-control research design, we find that ventures more likely form initial CVC ties with investors whose parent companies are located in countries considered more trustworthy. This effect is weaker but does not disappear when social defenses safeguard ventures from misplacing trust and when there are social ties between CVC investors and ventures’ independent VC investors.
... In accordance with technology finance theory, companies require significant financing to carry out continuously smooth innovation activities (Colombo et al., 2019), and financial support is required by carbon market policies and digital transformation to boost corporate green innovation. The FC index is adopted to measure companies' financing constraint level, and it ranges from 0 to 1; the larger the FC, the more severe the financing constraints of companies will be. ...
Carbon markets and the digital economy are gaining popularity continuously. Under this context, corporate green innovation should be urgently guided, which is an important subject to be studied and solved with great urgency to achieve harmonious ecological and economic growth. In this study, the data of 836 Chinese A-share listed companies from 2007 to 2020 are selected, carbon market and digital transformation are integrated into a unified analysis framework, and the green innovation effect and mechanism of the two and their interaction terms are investigated, not showing consistency with the previous studies about the effect of carbon market or digital transformation on green innovation. The present study suggests that (i) both carbon market policy and digitalization level serve as vital factors in boosting green innovation among high-carbon companies, whereas the synthetic effect of carbon market policy and digital transformation inhibits corporate green innovation behavior. (ii) The influences exerted by carbon market policy, digital transformation, and the synthetic effect on green innovation are dependent on property rights, size, and industry of high-carbon companies. (iii) As revealed by the analysis of mediating effects, financing constraints are the main mechanism of action that leads to a negative correlation between the synthetic effect of the carbon market and digital transformation and green innovation. Besides, R&D investment and environmental information disclosure only affect the action mechanism about digital transformation and carbon market policy, whereas they do not affect the synthetic effect of carbon market and digital transformation. Therefore, to promote green innovation and green transformation of high carbon companies, the government needs to flexibly use market-based environmental regulation tools (e.g., carbon market), strengthen the influence exerted by digital technology in improving innovation quality, and flexibly formulate relevant policies in accordance with the heterogeneity of different objects.
... But also the competition among VCs seems to have an effect on the valuation of entrepreneurial enterprises. Colombo et al. (2019) state that in regions with higher competition among venture capitalists and a lower number of attractive firms, VCs tend to offer entrepreneurs a higher valuation, referring to Gompers and Lerner (2000). ...
Purpose
The purpose of this study is to showcase that the valuation of startups is still considered to be more “art than science”. Moreover, such non-rigorous approaches often lead to valuations, which turn out to be too high, which in turn has become a well-known phenomenon to a broader audience due to shining examples such as We Work. This is reason enough to revisit the important topic of where we stand today with startup valuation procedures and methodologies.
Design/methodology/approach
Literature synthesis and exploratory analysis.
Findings
While some studies describe sound results about how to assess startups, what the authors found was that many questions remain open or have not been covered at all. This is the reason why the authors needed to apply a substantial amount of reasoning in the analysis of studies, which do not exactly deal with startup companies. The authors provided some interesting impulses for future research.
Originality/value
Based on an original overview of the current state of research about the valuation of startup companies, this paper makes the following principal contribution to both the literature and practice: on the one hand, the authors assess four impact factors on startup values critically; on the other, the authors provide an outlook on promising future research avenues.
... For the main analysis, the study includes only entrepreneurial firms (new ventures) aged 15 years or less. Prior studies (for example, Colombo et al., 2019;Lundqvist, 2014) have utilized 15 years as a cutoff point for defining entrepreneurial firms (new ventures). Thus, after merging the datasets and including firms that are 15 years old or younger, the final number of firms in the main analysis is 49,520 from 116 countries. ...
Purpose
This study examines the impact of initial informality years on subsequent firm performance and the moderating effect of institutional quality on this relationship.
Design/methodology/approach
The study draws on the World Bank Enterprises Survey (WBES) data covering 116 developing economies over the 2006–2018 period. The study also utilizes data from the Heritage Foundation, the World Bank World Development Indicators (WDI) and the Fraser Institute Economic Freedom Database.
Findings
The study demonstrates that firms that start operation without formal registration perform better than firms that start operation formally. However, contrary to prior studies that show a linear relationship between time spent unregistered and subsequent firm performance, this study finds a non-monotonic relationship between the two – taking an inverted–U shape form. The study further shows that institutional quality at country level moderates this relationship such that firms operating in countries marked by poorly functioning formal institutions benefit from remaining unregistered longer.
Originality/value
This study is the first to show a non-monotonic relationship between the time firms spend without registration and their subsequent performance. By doing so, it reconciles the contradicting findings in the extant literature regarding the relationship between the two variables. It also identifies one important boundary condition – institutional quality – that moderates this relationship.
... • The fifth largest research frontier concentrates on entrepreneurial finance. The topics explored as part of this frontier include the role of geographical distance between venture capital and entrepreneurs seeking external financing (Colombo et al., 2019), the valuation of venture capital investments in entrepreneurial ventures (Gornall & Strebulaev, 2020), the outcomes of investments for entrepreneurs and venture capital under the crowdfunding model (Babich et al., 2020), the role of venture capital in financing entrepreneurial innovations (Lerner & Nanda, 2020), and venture capital certification (Wu & Xu, 2020). Noteworthily, this research frontier highlights the importance of acknowledging and understanding new methods of entrepreneurial finance . ...
The fields of venture capital and private equity are rooted in financing research on capital budgeting and initial public offering (IPO). Both fields have grown considerably in recent times with a heterogenous set of themes being explored. This review presents an analysis of research in both fields. Using a large corpus from the Web of Science, this study used bibliometric analysis to present a comprehensive encapsulation of the fields’ geographical focus, methodological choices, prominent themes, and future research directions. Noteworthily, the foundational themes in venture capital research are venture capital adoption and financing processes, venture capital roles in business, venture capital governance, venture capital syndication, and venture capital and creation of public organizations. In private equity research, style drift into venture capital emerges as a key theme alongside buyouts and privatization, and valuation and performance of private equity investment.
... Venture capital, as one of the elements of innovation flow, is widely regarded as the main driving force of entrepreneurship and economic development, acting as an important part of local innovation infrastructure by directly providing capital for creativity, technologies, and new business ideas (Florida, 1993;Zook, 2002;Wray, 2012). Research on venture capital in economic geography mainly focuses on the following four aspects (Wray, 2012): (1) depicting the spatial layout (organizations and flow) and network structure of venture capital (Adler et al., 2019), (2) institutional mechanism of geographical differentiation of venture capital (Alperovych et al., 2020;Bustamante et al., 2021), (3) geographical exclusion characteristic of capital (Kuebart, 2019;Lee et al., 2019), and (4) "spatial proximity" in venture capital behavior (Colombo et al., 2019). A preliminary study on venture capital and its network structure has been conducted (Pan et al., 2016). ...
As an important innovation flow, venture capital has been examined in urban network research. However, the segmentation of capital categories and the cross-scale connection of capital remain scarcely analyzed. This study focuses on the structure and industry differentiation of venture capital flows in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) and its cross-scale network characteristics. Based on a venture capital database covering capital amount, investment subject address information, and industry information (2000-2018), this article examines the spatial distribution and network structure of venture capital in the GBA by means of a distance-based test of spatial concentration approach and social network analysis. Key findings show that: (1) Venture capital institutions and startups in the GBA present a high-concentration distribution pattern. In the past 20 years, venture capital activities in the GBA have substantially increased, forming a complex urban network structure with Guangzhou, Shenzhen, and Hong Kong as the core of this network. (2) Different types of venture capital show significantly different urban network structures, with manufacturing, the Internet industry, the financial sector, the cultural media industry, and the medical and health industry as the five industry types with the largest capital flow in the GBA. (3) Cross-scale research on the venture capital network reveals the position of the GBA as a capital hub in China, which forms a dense venture capital connection network with major cities on a national scale. (4) The network structure of venture capital in the GBA is influenced by multi-dimensional proximity, institutional factors, urban economy, and path dependence. Along with these three key mechanisms, the GBA has grown into a national-scale and even global-scale venture capital center.
... Even high-quality start-ups may be rejected by investors if they are considered not 'ready' for funding, in terms of presentation, availability of key financial information on the business, and familiarity with VC contractual details and terminology. (Colombo, D'Adda and Quas, 2019). The geographical distance between investor and investee is detrimental for selection and monitoring, at least at early stages (Cumming and Dai, 2010), but it can be overcome with better infrastructures (Bernstein, Giroud and Townsend, 2016). ...
This paper assesses the financing gap faced by innovative start-ups in the European Union (EU) when they reach the scaling-up stage of their development. It draws on data collected through a seminar involving 117 experts representing start-ups and scale-ups, financial actors, academia, and EU policymakers and aimed at investigating the causes, consequences, and policy solutions of the scale-up gap in the EU. Besides highlighting supply-side deficiencies, the seminar also emphasised weaknesses in both the demand side of the scale-up gap and the EU ecosystem for high-growth entrepreneurship. The paper offers policy recommendations, highlighting the need for policy solutions involving private actors and specifically targeting scale-ups. The paper also calls for more robust research on measuring the scale-up financing gap and its economic impact to improve the policy response.
... Entrepreneurial firms positioned further from potential VC funds attribute higher costs to obtaining external equity. Colombo et al. (2019) found that both VC funds and entrepreneurial firms possess local bias in Europe. Furthermore, their demand for equity increases with the proximity of potential VC funds. ...
... While the theme of the present frontier is related to the theme of the previous frontier, it should be noted that innovation takes center stage here as The fifth largest research frontier concentrates on entrepreneurial finance. The topics explored as part of this frontier include the role of geographical distance between venture capital and entrepreneurs seeking external financing (Colombo et al., 2019), the valuation of venture capital investments in entrepreneurial ventures (Gornall and Strebulaev, 2020), the outcomes of investments for entrepreneurs and venture capital under the crowdfunding model (Babich et al., 2020), the role of venture capital in financing entrepreneurial innovations (Lerner and Nanda, 2020), and venture capital certification (Wu and Xu, 2020). Noteworthily, this research frontier highlights the importance of acknowledging and understanding new methods of entrepreneurial finance. ...
Venture capital and private equity research has grown considerably in recent times with a heterogenous set of themes being explored. Using a large corpus from the Web of Science, this study used bibliometric analysis to present a comprehensive encapsulation of the fields’ geographical focus, methodological choices, prominent themes, and future research directions. Noteworthily, the foundational themes in venture capital research are adoption and financing processes, venture capital roles in business, governance, syndication, and the creation of public organizations. In private equity research, style drift into venture capital emerges as a key theme alongside buyouts and privatization, and valuation and performance.
... • The fifth largest research frontier concentrates on entrepreneurial finance. The topics explored as part of this frontier include the role of geographical distance between venture capital and entrepreneurs seeking external financing (Colombo et al., 2019), the valuation of venture capital investments in entrepreneurial ventures (Gornall & Strebulaev, 2020), the outcomes of investments for entrepreneurs and venture capital under the crowdfunding model (Babich et al., 2020), the role of venture capital in financing entrepreneurial innovations (Lerner & Nanda, 2020), and venture capital certification (Wu & Xu, 2020). Noteworthily, this research frontier highlights the importance of acknowledging and understanding new methods of entrepreneurial finance . ...
... Entrepreneurial companies are likely to seek investments from venture capitalists and to seek investors on a stock exchange. [25][26] Normally, entrepreneurial companies do not have an existing portfolio of approved products that generates cash inflows to cover the expenses of developing new drugs. For entrepreneurial companies, patent protection is essential, because it allows them to signal the quality of their innovation efforts to investors who might otherwise not be willing to invest. ...
Proposals to waive intellectual property rights (IPRs) on coronavirus 2019 (COVID-19)-related developments have gained considerable support among politicians, including from US President Biden, academics, nongovernmental organizations (NGOs), the media, and the general public. However, there are surprisingly few reflections about the short- and long-term consequences for medical innovation, particularly the development of new drugs and vaccines. In this feature, I reflect on the consequences for innovative entrepreneurial companies, the incentives to innovate, and consequences for international knowledge flows to low- and middle-income countries. I conclude that waiving IPRs reduces opportunities for entrepreneurial companies to attract sufficient funding for developing medical innovations. Low- and middle-income countries might suffer reduced knowledge inflows in the absence of IPRs that undermine their ability to develop medical innovations.
This report compares and contrasts the characteristics of unicorns to those of start-up companies in general in Europe, with a particular focus on the influence on the trajectory of these companies of location, industry, and the reputation of venture capitalists investing in them. The analysis is based on a sample of 16,004 start-up companies headquartered in Europe. Our results shows that unicorns mostly emerge in a limited number of countries and metropolitan areas. They primarily operate in high-technology sectors and tend to attract venture capitalists with established and reputable backgrounds. In contrast, the geographical incidence of lower valued startup companies is less concentrated though still predominantly located in major entrepreneurial hubs. These start-ups are often funded by local VC funds and many of them receive government support.
This study examines the rapid growth of venture capital (VC) investment in emerging markets and its determinants. During the 2010 to 2020 period, we find that the level of VC in emerging markets grew at a compound annual growth rate of 35.2%, and the global share of VC generated in emerging markets rose from 11.8% in 2010 to 31.5% by 2020. Using a sample of 135 emerging market economies, we find that market size and human capital development are the most significant factors related to growth in VC investment in these markets. The ease of doing business and the depth of financial markets also influence VC activity, but to a lesser extent. Overall, our results indicate that the presence of large markets and capable entrepreneurs can help offset institutional challenges inherent in these markets.
JEL Codes: F63, G15, G24, O43
Recent studies on organizational status and international business (IB) have found evidence for the transferability of status to new markets by showing that, at least under certain circumstances, network status in the home market affects a firm's entry into and performance in new foreign markets; however, the status transfer mechanisms in these studies have thus far been inferred and not directly tested. We focus on this black box of how status transfers, or more plainly, how high network status in one market leads to high network status in another market. We posit that an important underlying mechanism is the mediating role of the status of common partners in partner selection. Firms with high home‐country status are more likely to have high‐status common partners facilitating tie formation with prospective high‐status local partners in the new market. We argue that through this mechanism, foreign firms with a higher status in their home country are more likely to partner with firms of higher local status in the entered market, thereby transferring their status to the new market. The hypotheses receive support from mediation effect analyses of global venture capital (VC) investments, contributing to an improved understanding of the stratus transfer mechanisms in international settings.
This paper investigates the contribution provided by business angels' (BAs) post‐investment intervention to the interaction between young entrepreneurial firms and bank lending decisions within the entrepreneurial finance ecosystem. The analysis relies on a data set comprising 114 Italian BA‐backed firms over the 2010–2018 period, alongside 498 matched firms. We find evidence that BAs' support makes it easier for entrepreneurial firms to raise follow‐on bank financing. Additionally, we document the positive effects of both BAs' entrepreneurial experience and soft monitoring. These effects can be attributed to BAs' value‐added contributions and their role in mitigating information asymmetries perceived by debt providers.
This study examines the impact of natural disasters on venture capital (VC) investment decisions. Using 47 catastrophic natural disasters occurred in the United States from 1990 to 2019, our empirical analysis reveals a significant reduction in VC investments in disaster zones. Additionally, natural disasters negatively influence VC exit strategies, reducing the likelihood and extending the time to successful exits via IPOs. However, we find that green VCs are more likely to invest in disaster‐affected areas, indicating potential resilience through green technological innovation. Our findings emphasize sustainability and disaster mitigation, and offer valuable insights for policymakers and investors amidst rising climate uncertainties.
Venture capital (VC) significantly contributes to the development of regional economies and fosters innovation. Analyzing the factors that influence VC investments holds key importance. This study employs two methods to ascertain the relative significance of different factors at the city level: the Lindeman, Merenda, and Gold (LMG) approach in multiple linear regression (MLR) and variable importance in random forest (RF) machine learning. The findings reveal that several factors, including economy, finance, innovation, location, and policy, significantly influence VC investments. Both the MLR and RF models highlight the preeminence of economic and financial variables, followed closely by the city’s potential for innovation. Moreover, spatial heterogeneity exists in the importance of these variables. In the economically developed and densely populated eastern regions of China, the financial environment of cities emerges as the most crucial, whereas in the central and western regions, the economy and innovation, respectively, take precedence. This research contributes to a deeper understanding of the distribution of VC investments and offers valuable insights for the development of regional policies.
This study advances the understanding of cleantech commercialisation by adopting a market validation approach to analyse equity capital’s role in navigating the ‘Valley of Death’. Focusing on the three core financial milestones – revenue generation, profitability and retained earnings – we investigate 354 UK cleantech firms over 10 years and employ Cox proportional hazard models to explore whether equity capital speeds or slows the achievement of these three financial milestones. We conclude that equity capital-backed firms are slower across the Valley of Death. We discuss the implications of our findings for cleantech firms and those seeking to support the financing of cleantechs.
This paper examines the impact of digital economy on urban venture capital (VC) networks constructed from 44,122 inter-city VC events involving 285 cities in China from 2011 to 2019. Specifically, digital infrastructure, digital industry development, digital innovation capacity and digital inclusive finance are identified as four critical dimensions of digital economy. Further, panel regressions reveal that digital economy plays a pivotal role in facilitating the flow of VC resources, and thus positively influencing the agglomeration, radiation, and intermediation of cities embedded in the inter-city VC networks. Further, the results show heterogeneity in the focal impact of digital economy. First, it is stronger in central cities. Second, it follows an inverted-U shape, with the maximum effect observed at approximately 550 km distance between start-ups and investment centers. Third, digital economy has a stronger impact at the seed and start-up stages than at the expansion and maturity stages. These findings have implications for policy-making concerning the development of digital economy and the strategic planning of urban VC networks.
More and more large corporations have realized that innovation has become the new currency of competition. Relying just on corporate Research & Development is not sufficient to compete effectively in today’s global markets. A robust innovation strategy includes both internal initiatives and mechanisms to access external innovation. In a perspective of Open Innovation, large incumbent firms have been increasingly active in funding ventures through their Corporate Venture Capital programs.
Corporate Venture Capital units, defined as an equity investment by an established corporation in a private entrepreneurial venture, can vary considerably in terms of both organizational variables (e.g., types of managers in the investment team, discretionary power granted to the Corporate Venture Capital unit) and investment strategy ones (e.g., diversification of the investment portfolio, earliness of the investment).
This Master’s Thesis aims at providing a novel contribution to a hitherto unexplored research topic. The goal of this work is to analyze the interaction between the investment strategy and the internal organizational structure of Corporate Venture Capital units and associate it to the financial and strategic performances observed.
The study adopts a configurational approach that groups Corporate Venture Capital units exhibiting a similar behavior. Key findings will be drawn inductively from the results of several quantitative analyses conducted.
Cross-border venture capital (CBVC) research is becoming increasingly important due to globalisation and its role as a key economic driver of development. As a result, the interest in the domain has been steadily growing in recent years and attracted much attention from top scholars worldwide. Our research provides a comprehensive overview of the growing body of academic research regarding cross-border venture capital. Based on a thorough screening and selection process of literature and an in-depth analysis, we review, summarise, compare, and evaluate the literature on a wide array of topics related to CBVC and identify existing general and theoretical trends over the past three decades. At last, we discuss research gaps and propose avenues for future research.
The main feature of the current business reality is the speed of the changes in the environment and the uncertainty they generate. Among these changes, those which stand out for their importance are the ones related to the current digital revolution, which is changing, in a very short period of time, the companies’ business models. From this perspective, and based on panel data for the 2009–2020 period, the study seeks to examine in depth the technological and innovative factors which are related to the entrepreneurial density in euro area countries, with special emphasis on self-employed entrepreneurs. The results obtained show that greater robotization of industrial activities generates entrepreneurial opportunities, while investment in R&D by companies is negatively related to entrepreneurial activity. It is also noteworthy that public investment in R&D and the greater volume of employment in scientific-technological sectors has not been significant in the generation of entrepreneurial opportunities. These conclusions make it possible to identify economic policies to promote entrepreneurial activity, such as training and the generation of a favorable environment for digital innovation and artificial intelligence, but also the incentive for intrapreneurial activity in companies that invest in R&D.
Patents are an important signal of the unobserved quality of young, innovative firms. We study patents that protect radical inventions associated with high earnings potential but also a high risk of failure. These previously disregarded signals convey positive and negative information simultaneously, i.e., strong signals that have a dark side. We argue that whether firms that send such signals are attractive investment targets for venture capital (VC) investors depends on the characteristics of the investors. Reputable VC investors are attracted to the strong quality signals of patents protecting radical inventions and are better able than other VC investors to deal with the dark side of these signals through syndication. These effects are stronger in the first financing round than in follow-on rounds, as the (positive and negative) informational value of patents protecting radical inventions diminishes over time as information asymmetries between young firms and prospective VC investors are reduced. We test these predictions using a sample of 759 young life science firms and 555 VC investors. Econometric estimates from a matching model support our predictions.
Crowdlending has emerged in recent years as an innovative way to fund financially-constrained new ventures and small companies. However, digitalized funding is a new technology itself and as such it is prone to mispricing and inefficiencies. We investigate whether peer-to-peer crowdlending to businesses provides investors with promised returns consistent with the level of risk borne. By studying over 6000 loans mediated on 73 European platforms from 2012 to 2018 we show that the ex-ante returns are inversely related to loans’ riskiness and tenure, suggesting that, on average, crowdfunded loans are mispriced. Our results have important implications for the debate about the role of regulation in FinTech and the access to debt funding for entrepreneurial ventures.
How does expansion in the high-tech sector influence the broader economy of a region? We demonstrate that an infusion of venture capital in a region leads to: (i) declines in the number of establishments and in employment in non–high-tech industries in the tradable sector; (ii) increases in entry and in employment in the non-tradable sector; and (iii) a rise in income inequality in the non-tradable sector. Expansion in the high-tech sector therefore leads to a less diverse tradable sector and to increasing inequality in the region.
This study considers the impact of venture capitalists’ industry specialization on cross-border investment decisions. The article argues that specialized venture capitalists’ liability of foreignness is lower in specific international markets as assessments of the market and the behaviour of market participants are facilitated through industry-specific learning effects. Specialization leads to lower risk in cross-border investments from a venture capitalist’s point of view. With increasing deal-specificity, the support and value enhancement of a foreign portfolio company are ensured in international markets due to the investor’s specialization. A multilevel investigation of 46,525 worldwide venture capital deals from 2001 to 2019 in 69 countries shows a positive relationship between venture capitalists’ industry specialization and internationality. The results show that the likelihood of a cross-border deal increases with higher levels of industry specialization. Furthermore, this effect is moderated by determinants at the institutional and portfolio company levels, reflecting the degree of information asymmetry between the venture capital firm and the portfolio company.
Purpose
The purpose of this paper is to explore the antecedents of media attention in the context of early-stage startups. While many studies have examined the implications of media attention on firm outcomes, few have investigated the antecedents especially in the context of early-stage startups who significantly lack organizational legitimacy. This study attempts to answer an important and yet unanswered question: What type of startups are more likely to be covered by the media?
Design/methodology/approach
Using Poisson regression, the authors analyze all media articles written about 315 early-stage ventures in the USA.
Findings
The authors found that startups with a prestigious investor or a patent have more media attention and startups with a female founder or prior entrepreneurial experience have less. The results suggest that entrepreneurial signals do play a role in media attention, but that the signal–signaler relationship may be more complicated than that in the investment literature.
Practical implications
Entrepreneurs may benefit from signaling less noisy and unambiguous signals that the media pays more attention to, such as getting an endorsement from reputable third parties early on, which might activate noisy signals.
Originality/value
The contribution of this paper is to extend the current literature on media attention and entrepreneurship by shedding light on attributes of startups that may help or hurt the volume of media attention in an uncertain and noisy environment.
We leverage the discontinuity in the assignment mechanism of the Small and Medium Enterprise Instrument - the first European R&D subsidy targeting small firms - to provide the broadest quasi-experimental evidence on R&D grants over both geographical and sectoral scopes. Grants trigger sizable impacts on a wide range of firm-level outcomes. Heterogeneous effects are consistent with grants reducing financial frictions. This reduction is due to funding rather than certification. We also provide direct causal evidence on pure certification - signaling not attached to funding - and show that firms that only receive ‘quality stamps’ do not improve their performance. Finally, our estimates suggest that the scheme produces private returns that are positive and comparable to those of the US Small Business Innovation Research program, while also generating geographical and sectoral spillovers in the form of increased rates of entrepreneurial entry.
The development of venture-capital markets represents an important economic-policy objective and has been pushed in particular by instruments of EU-wide policies, such as the “Juncker Plan” and investment of the European Investment Fund
In the first part of the paper, effects of venture capital and private equity on various economic outcomes, such as employment, investment and economic growth, are examined. Here, the focus is on the added value for the economy generated by venture capital in the form of higher employment, value creation or innovation activity. Venture capital is both micro- and macroeconomically an important development factor for an economy, which is associated with higher innovation, productivity and further positive outcomes
In the second part, we analyze which location factors are decisive for the establishment of venture capital and private-equity funds, as well as which factors increase demand for VC/PE and, in equilibrium, lead to the development of VC and PE markets. It turns out that the availability of venture capital and private equity depends on a number of location factors. Both the supply and demand sides are relevant. Fiscal policies (such as corporate taxation and taxes on carried interest), and legal and cultural elements are essential. The work contributes to a better understanding of success factors of an economy and allows to derive comprehensive economic-policy recommendations to make locations more attractive for venture capital and private equity.
This Corona Virus has spread throughout the World. Besides having a very negative effect on the world of health, this virus is starting to exert its influence on the economic consequences caused by this pandemic. This has resulted in companies struggling to cope with the impact of this pandemic. Due to this pandemic, there are that ultimately threaten or disrupt the business processes of companies in the world, especially in the supply chain process. The impact of this pandemic in the long term can disrupt the process of Supply, Demand and infrastructure. this research would like to see In Food and Beverage Industry have been affected by the conditions of this Covid-19 pandemic. The researcher use miscellaneous tools to check if there has been a change or a hit to the industry due to this pandemic, the researcher use ROA, DER and Total Asset to assess the performance of the sample companies in the industry.
This essay examines the implications of the evolving environment for the formation and financing of new firms in the United States. After the dot.com crash of 2000, there was a regime change in new firm formation and the number of firms that exited through an initial public stock offering. This change was made possible by the decreased cost, increased speed, and ease of market entry due to availability of open source software, digital platforms, and cloud computing. This facilitated a proliferation of startups seeking to disrupt incumbent firms in a wide variety of business sectors. The contemporaneous growth in the number and size of private funding sources has resulted in a situation within which new firms can afford to run massive losses for long periods in an effort to dislodge incumbents or attempt to triumph over other lavishly funded startups. This has triggered remarkable turmoil in many formerly stable industrial sectors, as the new entrants fueled by capital investments undercut incumbents on price and service. The ultimate result is that new entrants with access to massive amounts of capital can survive losses for a sufficiently long period to displace existing firms and, thereby, transform earlier industrial ecosystems.
We propose a formal model that analyzes which entrepreneurial ventures actively seek and subsequently obtain venture capital (VC) financing in thin VC markets. The model shows that in thin VC markets, (1) VC investors will invest in companies in need (frog-kissing) rather than in best performers (cherry-picking), and (2) the best performing ventures will self-select out of the market for VC. These conclusions are in line with the results from the literature, which note that in Europe many entrepreneurial firms do not actively seek VC investment and that VC investors do not appear to possess the same cherry-picking ability that they have in the US.
We explore the relationship between status and reputation, examining how its dynamics change over time as these two intangible assets coevolve and how reputation and status are influenced by participation in highly visible events. Using a sample of more than 400 newly founded venture capital (VC) firms, we find that reputation and status positively influence each other but that reputation has a greater effect on status, particularly when firms are older. We also find that the effect of past status on current status weakens as VC firms age, but the relationship between past and current reputation remains consistent with age. Furthermore, our findings show that participating in big hits—blockbuster initial public offerings—has a positive relationship with status when firms are young and a positive relationship with reputation when firms are older, and it helps low-status and low-reputation firms more than it helps high-status and high-reputation firms. This study helps differentiate status and reputation, shows how they coevolve, and provides insight into how new firms build these important intangible assets.
Access to finance has figured prominently in the debate on barriers to firm growth, even though existing empirical research
has not found conclusive evidence of a “finance gap.” Moreover, it is not clear to what extent innovation aggravates financial
constraints and what role innovation inputs, processes and outputs play in the market for external capital. In this article,
we analyze how firm-level innovation affects (i) the likelihood of seeking external finance and (ii) the likelihood of obtaining
it. We analyze an original data set of 3095 UK and US firms (small and medium size enterprises and middle-market) containing
information on firms’ innovation behaviors, performance, and finances for the period 2002–2004. Controlling for firm-specific
characteristics, we provide novel and extensive evidence on the links between innovation, in its input, process and output
dimensions, and the demand for external capital and its supply.
This paper investigates how far in space university knowledge goes to breed the creation of knowledge-intensive firms (KIFs), depending on the nature (either codified or tacit) and quality of this knowledge. We consider the impact of knowledge codified in academic patents and scientific publications and tacit knowledge embodied in university graduates on KIF creation in Italian provinces in 2010, while distinguishing between local university knowledge created by universities located in the same province and external university knowledge created by universities located outside the province. Our econometric estimates indicate that the positive effects of scientific publications and university graduates are confined within the boundaries of the province in which universities are located. Conversely, the creation of new KIFs in a focal province is positively affected by both local and external university knowledge codified in academic patents, even though the positive effect of this external knowledge rapidly diminishes with geographic distance. Furthermore, the above effects are confined to high-quality universities; low-quality universities have little effect on KIF creation.
We study the investment strategies of different types of Venture Capital investors (VCs) using a unique dataset that includes 1,663 VC first investments made by 846 investors in 737 young high-tech entrepreneurial ventures located in seven European countries between 1994 and 2004. Using a transformed Balassa index, we analyze the relative investment specialization of independent VCs, corporate VCs, bank-affiliated VCs and governmental VCs along several dimensions that characterize investments (e.g., syndication, duration and exit mode) and investee companies (e.g., industry of operation, age, size, development stage, location and distance from investor’s premises at the time of the investment). Our findings indicate that VC types in Europe differ markedly in their patterns of investment specialization, especially governmental VC on the one side and private VC on the other. We compare our findings with evidence from the USA and find some interesting differences, notably regarding independent and governmental VCs.
The VICO project collected a database on young high-tech entrepreneurial companies operating in seven European countries (Belgium, Finland, France, Germany, Italy, Spain, and the United Kingdom). The objective of the data collection process was to build a data infrastructure to conduct an extensive study about the venture capital (VC) activity in high-tech sectors in Europe. The dataset includes two strata of companies: the first is a sample of VC-backed companies and the second a control group of non-VC backed (but potentially investable) companies. Data were collected by local teams from each country (using a variety of commercial and proprietary sources) and checked for reliability and consistency by a centralized data collection unit. The dataset consists of 8,370 companies, 759 of which VC-backed, and 1,125 VC investors. Detailed information was collected for each firm, investor, and investment, including accounting data, patenting data, and investor type and experience.
Access by SMEs to finance is constrained by demand-side weaknesses. Most businesses are not investment ready. Their owners are unwilling to seek external equity finance and those who are willing do not understand what equity investors are looking for or how to 'sell' themselves and their businesses to potential investors. These weaknesses, in turn, compromise the effectiveness of supply-side interventions, such as initiatives to stimulate business angels or which create public sector venture capital funds. This has highlighted the need for investment readiness programmes that seek to increase the pool of investable businesses. This paper reviews the design and delivery of investment readiness programmes in the UK and draws out lessons for best practice.
Venture capital (VC) has become an international phenomenon, and VC firms are a specific kind of service firm whose characteristics have distinctive implications for international behaviour. There is now a disparate body of research on international aspects of VC across a number of disciplines comprising finance, economics, strategy, entrepreneurship, international business and economic geography. A novel aspect of this paper is that we review and synthesize this disparate literature. A number of research gaps and limitations in the theoretical and methodological approaches involved in previous studies are identified and suggestions made for further research. We show that the vast majority of the literature relates to cross-country comparisons; that is, macro-level comparisons of VC industries across different countries and micro-level comparisons of VC behaviour across countries. From our review of the literature, we argue that an under-researched area concerns the influence of institutional contexts, especially the role of social networks and cultures. Furthermore, our review of the literature indicates that there is a major research gap in relation to work dealing with the crossing of country borders by VC firms. We suggest that resource-based, capabilities, institutional and network theories may be offer insights to further our understanding of the behaviour of VC firms in this area.
Explaining how entrepreneurs overcome information asymmetry between themselves and potential investors to obtain financing is an important issue for entrepreneurship research. Our premise is that economic explanations for venture finance, which do not consider how social ties influence this process, are undersocialized and incomplete. However, we also argue that organization theoretic arguments, which draw on the concept of social obligation, are oversocialized. Drawing on the organizational theory literature, and in-depth fieldwork with 50 high-technology ventures, we examine the effects of direct and indirect ties between entrepreneurs and 202 seed-stage investors on venture finance decisions. We show that these ties influence the selection of ventures to fund through a process of information transfer.
Can venture capital investors rely upon informants to be forthcoming with what they know? Or do they need to be concerned about self-serving conduct? These questions are investigated among two types of venture capital investors: business angels and venture capital firms.The results of the present study suggest that the more either type of investor is concerned with market or agency risk, the less likely he or she will be to use informal network informants (business associates and friends). Market risk is due to unforeseen competitive circumstances, whereas agency risk results from the separate and possibly divergent interests of investors and their informants. Investors with a higher concern for risk consult formal network informants (venture capital firm investors) for information about market risk, but concern with agency risk is not related to the frequency of use of venture capital firm sources. Agency risk deals with particular, self-interested individuals who are unlikely to be known to the formal informant network.Venture capital firm investors consult formal network sources more frequently than do business angels. Compared to business angels, they enjoy a much more efficient flow of information from their informants. As they gain more experience exchanging information, venture capital firm investors increase their reliance upon formal network informants. Because informal network informants have less experience exchanging information, it is possible that some informal sources could escape being detected if they decided to act in a devious, self-interested manner. Rather than relying upon informal informants, several investors indicated in face-to-face interviews that they prefer to perform their own due diligence.Business angels seem to distinguish between two types of informants: close associates with whom they have had extensive investment experience and mere acquaintances to whom they are only weakly tied by a referral from a close associate or someone else. It is quite likely that business angels rely upon informants who are close associates. However, the informants in this study were predominantly acquaintances, which may be fairly typical of most business angel informants. Because they were acquaintances and not close associates, they were not utilized much as informants.Venture capital firm investors rely heavily upon associates at other venture capital firms for market information. Because they do not trust other informants to the same extent, they may wish to de-emphasize their reliance upon them. Similarly, there are indications that business angels rely upon close associates to provide them with information about agency factors. Because angels do not trust others for this information and may in fact have limited access to other informants, they may wish to focus their search for information on business associates. This would enable them to avoid the expense of investigating the reliability of other informants.This research should be helpful to entrepreneurs who are searching for new venture funding. It suggests that certain types of informants may be more effective in championing the prospects of a deal to a venture capitalist. An entrepreneur with a technical or market advantage ought to approach a venture capital firm. Because the informant network for venture capital firms is highly interconnected with other venture capital firms, it is likely that presenting a request for funding to one of them will quickly result in the sharing of it among their informant associates. If entrepreneurs possess a market advantage, they ought to concentrate on obtaining funding from the first venture capital firm investor who reviews the deal.Entrepreneurs who can argue that they are trustworthy or competent, even if they lack a technical or market advantage, ought to present their deals to a business angel using a close business associate as an intermediary. A mere acquaintance used as an intermediary would be much less effective. Although statistical testing indicated that such an approach would not generate significant success, interviews with business angels suggested that using a close associate as an intermediary would improve an entrepreneur's prospects, especially if the business angel were relatively unconcerned about a deal's risk. Moreover, using an informant intermediary to contact a business angel would avoid the need to do an initial background check on the entrepreneur.
The popular media have been inundated with stories of the spectacular success of start-up companies whose very existence, let alone their meteoric growth, would not have been possible without the infusion of venture capital. By comparison, there is a dearth of scientific research on the topic of venture capital. In this article we take a systematic look at entrepreneurs in search of risk capital. This inquiry is based upon five data bases including surveys of venture capitalists and entrepreneurs. We have tracked 193 ventures which were denied venture capital, surveyed 179 new high-technology companies in Northern California, and reviewed the Dun & Bradstreet credit reports of 145 new ventures in California in SIC codes related to the high tech sector with follow-up interviews of 86 of these 145 start-ups.
Considering significant reasons why some newventures are more likely than others to receive capital from external sources,it isargued that new venture finance follows a pattern of multistage selection over time. Using a sample of the life stories of 221 of new Swedish ventures in 1998, the venture financing process is analyzed from the perspectives of the business founder and of the financier. Founders seek external funding based on their perceptions about business opportunity, including anticipated market growth, market competition,employment growth, and price competitiveness. Financiers, on the other hand, make their funding decisions based on objective verifiable indicators of venture development. Other control covariates of the study include start-up experience, industry experience, completed business plan, venture age, industry sales growth, number of firms in an industry, and average firm age in theindustry. The study offers several contributions by: (1) indicating that the financingof new ventures follows an evolutionary selection process; (2) examining empirically the role of founders in the process of new venture finance; (3) providing evidence about new venture finance that can be generalized to thetypical new venture; and (4) overcoming the problems of selection bias. (CBS)
This article draws on recent work in market design to evaluate the conditions under which a market for ideas or technology (MfTs) will emerge and operate efficiently. As highlighted by Roth (2007), effective market design must ensure three basic principles: market thickness, lack of congestion, and market safety. Roth also highlights the importance of dealing with "repugnance." Our analysis identifies the factors that are, in most circumstances, likely to inhibit the allocative efficiency of MfT. We show that key institutional developments such as the development of formalized IP exchanges suggest that effective market design may be possible for some innovation markets. Finally, our analysis suggests that markets for ideas are beset by the "repugnance" problem: from the perspective of market design, Open Science is an institution that places normative value on "free" disclosure and so undermines the ability of ideas producers to earn market-based returns for producing even very valuable "pure" knowledge. © The Author 2010. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.
Research Summary : We develop a two‐step selection model between entrepreneurial ventures and venture capital (VC) investors in a thin VC market. The model predicts that in a thin VC market, the availability of VC reduces the propensity of firms to self‐select into the market for VC (demand‐side selection) but not the probability that firms entering the market for VC will receive financing (supply‐side selection). We test these predictions using survey‐based data on 190 new technology‐based firms in Italy during the late 1990s and early 2000s. The empirical evidence supports the predictions of the model.
Managerial Summary : Venture capital (VC) is an important ingredient of an environment that is conducive to the birth and the growth of entrepreneurial ventures, but VC markets are often highly local and thin in terms of participants. We show that the scarcity of VC supply may cause a drop in the demand for VC because entrepreneurs, anticipating that competition for VC money will be tough, will not seek VC in the first place. The more a market is thin, the more the demand‐side selection is likely to become more important than the supply‐side selection of VC investors. Demand‐side selection may involve a significant number of otherwise good targets for VC investment, which will not be in the radar of VC investors. In turn, this may deter new VC investors from entering the local market, thus creating a vicious cycle that raises concerns for both policy makers and VC general partners.
This study empirically evaluates the certification and value-added roles of reputable venture capitalists (VCs). Using a novel sample of entrepreneurial start-ups with multiple financing offers, I analyze financing offers made by competing VCs at the first professional round of start-up funding, holding characteristics of the start-up fixed. Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10-14% discount. The evidence suggests that VCs' ''extra-financial" value may be more distinctive than their functionally equivalent financial capital. These extra-financial services can have financial consequences.
We show that venture capitalists' (VCs) on-site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large-scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities. This article is protected by copyright. All rights reserved
This paper explores whether and how governmental venture capital investors (GVCs) spur invention and innovation in young biotech companies in Europe. To gauge invention we focus on the simple patent stock at the company level, while innovation is proxied by the citation-weighted patent stock. Our findings indicate that GVCs, as stand-alone investors, have no impact on invention and innovation. However, GVCs boost the impact of independent venture capital investors (IVCs) on both invention and innovation. We conclude that GVCs are an ineffective substitute, but an effective complement, of IVCs. We also distinguish between technology-oriented GVCs (TVCs) and development-oriented GVCs (DVCs). We find that DVCs are better at increasing firm’s inventions, and that TVCs, combined with IVCs, support innovations.
We investigate the implications of venture capital (VC) investor type (government or private) on the operating efficiency of a sample of 515 Belgian portfolio firms up to 3 years after the investment. We find that the government VC-backed firms display significant reductions in productivity. No significant differences in efficiency are found in firms backed by private VC compared with their non-VC-backed peers. Finally, significant reductions in efficiency exist in targets of government VC compared to their non-VC-backed peers.
This article provides a comprehensive theoretical and empirical literature review of venture capital contracts. This outlines the differences between theoretical and practical uses of contract designs; that is, (1) how does the choice of securities give rise to different adverse selection problems in terms of attracting different types of entrepreneurial companies; how does the choice of securities in conjunction with cash flow and control rights provisions affect (2) the effort levels by the entrepreneur and the investor; and (3) ultimately affect entrepreneurial outcomes. This article highlights the major discrepancies between theory and practice and points out potential avenues for further research.
Empirical
We examine the way in which the exit mode (i.e., initial public offering – IPO, trade sale, or write-off) of venture capital (VC) investments is influenced by the additional exit opportunities brought by cross-border VC investors.
We perform our analysis on a sample of 1,062 VC investments in 462 young high-tech companies in seven European countries. Our findings indicate that, controlling for firm performance, investor characteristics, and local exit conditions, the probability of exiting via trade sale is positively correlated to the additional set of mergers and acquisitions (M&A) opportunities brought by cross-border investors. A similar effect, but with weaker statistical significance, is also identified for exits by IPO, which are positively affected by IPO volumes in the countries of cross-border investors.
Cross-border VC investment may, at least partially, compensate for inadequate local exit conditions. Cross-border investors can spillover the capital market activity of their home country and enhance exit options for young ventures. International syndicates are also quicker to write off their non-performing investments.
Not all exit modes are equally affected by international syndication. The impact of cross-border investors on the exit mode also depends on their country of origin and, more specifically, on the exit opportunities available there. The mechanism is stronger for trade sales than for IPOs.
This paper examines the impact of government versus private independent venture capital (VC) backing on the exit performance of entrepreneurial firms. Our analyses are based on the VICO dataset, which avoids the coding problems of VC type in the Thompson Financial SDC dataset. The data indicate that private independent VC-backed companies have better exit performance than government-backed companies. Mixed-syndicates of private-independent and governmental VC investors give rise to a higher (but not statistically different) likelihood of positive exits than that of IVC-backing. Our findings are not influenced by the composition of the syndicate in terms of size and institutional heterogeneity. Our results remain stable after controlling for endogeneity concerns, selection bias, omitted variables bias, legal and institutional differences across countries and over time through several econometric techniques. Moreover, our results are not driven by: i) the holding period of the different types of VC investors; ii) the potential signaling effect of GVC towards IVC investors; iii) the firm's financial structure and net cash-flow ratio; iv) the investment stage; v) the distance between the VC investor and the target company.
Using a new European Union-sponsored firm-level longitudinal dataset, we assess the impact of
government-managed (GVC) and independent venture capital (IVC) funds on the sales and employee
growth of European high-tech entrepreneurial firms. Our results show that the main statistically robust
and economically relevant positive effect is exerted by IVC investors on firm sales growth. Conversely,
the impact of GVC alone appears to be negligible. We also find a positive and statistically significant
impact of syndicated investments by both types of investors on firm sales growth, but only when led
by IVC investors. Our results remain stable after controlling for endogeneity, survivorship bias, reverse
causality, anticipation effects, legal and institutional differences across countries and over time and are
stable with respect to potential non-linear effects of age and size of entrepreneurial firms. Overall, our
analysis casts doubt on the ability of governments to support high-tech entrepreneurial firms through a
direct and active involvement in VC markets.
Many regions have realized that access to capital is an important prerequisite for establishment and growth of businesses, and have therefore focused policies to ensure an adequate supply of risk capital. The growth of the venture capital industry in the 1990s put pressure on venture capital firms (VCFs) to act more strategically. Many VCFs have thus specialized along one or more dimensions: certain industries, stages of development of the firm, or geographical areas. A theoretical dichotomy is developed in this paper to explain regionally focused venture capital. A competence-based theoretical view sees increased competition in the industry as promoting the growth of geographical specialization, while, according to financial theory, it would lead to diversification in order to spread risk. The empirical analysis illustrates the development in the average distance between VCFs and their Danish portfolio firms. All venture capital investments are included. Findings suggest that the process of geographical specialization follows an inverted V-shaped curve. This is interpreted in light of the developments in competition and in the competencies in the market. VCFs search broadly for investment opportunities in the first phase of the emergence of the venture capital industry, but when competition increases they tend to confine themselves to investments within a closer geographical distance. The implications of these findings are important both for funds-of-funds, regional governments, and VCFs.
This exploratory study attempts to estimate the external financing costs (EFCs) for a sample of new technology-based firms (NTBFs). A large body of literature describes the constraints these companies face when trying to obtain outside equity from venture capitalists or non-institutional investors. The theory explains some of these difficulties by the prevalence of information asymmetry, agency costs and moral hazard problems. For NTBFs, these phenomena cause the search for outside equity to be a time-consuming, costly process: the EFCs should thus be considerable, but are a largely unexplored aspect of the small business financing problem. We propose an estimation of these EFCs. Some of these costs are not reported in the financial statements and can be determined only through a field survey and case analyses. In this study, we identify the elements that generate the EFCs and estimate the time frames and costs associated with 18 financing rounds undertaken by 12 NTBFs in Canada. We show that these costs are indeed substantial and heavily penalize small companies, especially during the initial financing round and prior to the commercialization phase. Based on our initial propositions and observations, we conclude that the EFCs are higher for the first round of financing, for companies that have not reached the commercialization stage, and are lower as gross proceeds increase.
I find that companies funded by more experienced VCs are more likely to go public. This follows both from the direct influence of more experienced VCs and from sorting in the market, which leads experienced VCs to invest in better companies. Sorting creates an endogeneity problem, but a structural model based on a two-sided matching model is able to exploit the characteristics of the other agents in the market to separately identify and estimate influence and sorting. Both effects are found to be significant, with sorting almost twice as important as influence for the difference in IPO rates. Copyright 2007 by The American Finance Association.
The role of venture capital in economic development increasingly is recognized as central to the development of an entrepreneurial economy. However, the supply of venture capital is not distributed evenly across the space economy. In the UK, evidence for the 1980s demonstrated that venture capital investments were highly concentrated in Greater London and the South East, reinforcing the existing patterns of regional concentration of economic activity. This paper reviews the regional distribution of venture capital investments in the UK in the 1990s, a period of massive growth in venture capital investment activity. It concludes that the regional concentration of venture capital investment has been considerably reduced since the 1980s. However, more detailed analysis of the data demonstrates that this shift towards a less unequal regional distribution has been driven by so–called ‘merchant’ venture capital – investments in large–scale management buy–outs and buy–ins which facilitate corporate restructuring through ownership change and often have adverse consequences for employment. ‘Classic’ venture capital – investments in young entrepreneurial companies with high growth potential – remains highly concentrated in London and the South East, and also in Scotland. This reflects both supply– and demand–side factors. The Government’s new regional venture capital funds are unlikely to be effective in closing this regional finance gap. An alternative approach to intervention, in the context of the increasing globalization of venture capital investments, is to seek to attract venture capital money and expertise from elsewhere.
Ninety percent of new entrepreneurial businesses that don't attract venture capital fail within three years.
We investigate the investment behavior and exit performance of VCs that have pursued expansion outside their home locations, specifically, in Asia. Our findings indicate that, in the Asian VC markets, foreign VCs have relative advantages over local VCs in terms of size and experience while they are at a disadvantage in information collection and monitoring due to both geographic and cultural distances. When investing alone, foreign VCs are more likely to invest in more information-transparent ventures. Partnership with local VCs helps alleviate information asymmetry and monitoring problem and has positive implication for the exit performance of local entrepreneurial firms. Specifically, we find that after controlling for the endogeneity of selection, firms with both foreign and local VC partnership are about 5% more likely to successfully exit.
This article investigates factors that affect rejection rates in applications for outside finance among different types of investors (banks, venture capital funds, leasing firms, factoring firms, trade customers and suppliers, partners and working shareholders, private individuals and other sources), taking into account the non-randomness in a firm's decision to seek outside finance. The data support the traditional pecking order theory. Further, the data indicate that firms seeking capital are typically able to secure their requisite financing from at least one of the different available sources. However, external finance is often not available in the form that a firm would like.
In recent years, scholars have become increasingly critical of Kogut and Singh's [(1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3), 411-432] cultural distance index and of Hofstede's [(1980). Culture's consequences: International differences in work-related values. Beverly Hills: Sage Publications] underlying national culture framework. We therefore examine and compare the effects of five cultural distance measures on the choice by multinational enterprises (MNEs) between expanding abroad through greenfield or acquisition. Two of these measures are based on Hofstede (1980), another two on Schwartz [(1994). Beyond individualism/collectivism: New cultural dimensions of values. In U. Kim, H. C. Triandis, C. Kagitcibasi, S. C. Choi, & G. Yoon (Eds.), Individualism and collectivism: Theory, methods, and applications (pp. 85-119). Thousand Oaks: Sage Publications; (1999). A theory of cultural values and some implications for work. Applied Psychology: An International Review, 48(1), 12-47], and one on managerial perceptions. Analyzing a sample of foreign expansions by Dutch MNEs and controlling for other factors, we find that high scores on all cultural distance measures significantly increase the likelihood that MNEs choose greenfields, and that the explanatory power of the Hofstede and Schwartz-based measures is comparable, while that of the perceptual one is somewhat lower. We conclude that it may thus be premature to dismiss Hofstede's work as outdated or as inaccurately reflecting national cultures, and to consider Schwartz's framework to be superior.
To understand how ownership differences influence specific types of strategic decisions, we examine the investment decisions of venture capital (VC) firms, for which a variety of property rights arrangements exist. We describe how VC firms are characterized by important differences in how and to whom various property rights are allocated. On this basis, we develop a series of hypotheses regarding differences in the range and types of investment opportunities pursued by private, corporate, and bank affiliated VC firms. Evaluating our hypotheses using data on investments carried out by 3557 firms, we find that these types of firm perform distinct roles in the ecology of VC financing. Copyright (c) 2010 The Authors. Journal of Management Studies (c) 2010 Blackwell Publishing Ltd and Society for the Advancement of Management Studies.
Venture capitalists functioning as lead investors and the entrepreneur-CEOs of their portfolio companies responded to questionnaire surveys that asked them to rate the venture capitalists' involvement in the ventures. The perceived effectiveness of the investor's involvement weighted by its perceived importance was used as a proxy for the investor's value to the venture. The survey was administered in the early part of 1988. Eighty percent of venture capitalists and 85% of entrepreneurs surveyed responded; in all, 51 matched pairs of lead investor-CEO surveys were completed and returned. Over 50 hours of interviews were also conducted to help clarify information derived through the surveys.
Why does the level of venture capital activity vary across countries? This study suggests that the variation can be attributed to the different levels of formal institutional development. Further, this study proposes that venture capitalists respond differently to the incentives provided by formal institutions depending on different cultural settings. Analysis of VC activity for 68 countries during the 1996–2006 period shows that formal institutions have a positive effect on the level of venture capital activity, but this effect is weaker in more uncertainty-avoiding societies and in more collectivist societies. This study has useful theory and policy implications for venture capital and entrepreneurship development.
We analyze governance with a new dataset on investments of venture capitalists in 3848 portfolio firms in 39 countries from North and South America, Europe and Asia spanning 1971–2003. We provide evidence that cross-country differences in legality, including legal origin and accounting standards, have a significant impact on the governance structure of investments in the VC industry: better laws facilitate faster deal screening and deal origination, a higher probability of syndication and a lower probability of potentially harmful co-investment, and facilitate investor board representation of the investor. We also show that country-specific differences exist apart from legal and economic development.
This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an initial public offerings (IPO) involves a sale of all of the venture capitalist’s holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist’s holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a buyback exit (in which the entrepreneur buys out the venture capitalist) or a secondary sale, a partial exit entails a sale of only part of the venture capitalist’s holdings. A partial write-off involves a write down of the investment. We consider the determinants of full and partial venture capital exits for all five exit vehicles. We also perform a number of comparative empirical tests on samples of full and partial exits derived from a survey of Canadian and US venture capital firms. The data offer support to the central hypothesis of the paper: that the greater the degree of information asymmetry between the selling VC and the buyer, the greater the likelihood of a partial exit to signal quality. The data also indicate differences between the US and Canadian venture capital industries, and highlight the impact of legal and institutional factors on exits across countries.
We examine two data sets, one from the UK (n = 15,750) and one from the US (n = 3239), to show that SME financial behaviour demonstrates substantial financial contentment, or ‘happiness’. We find fewer than 10% of the UK firms seek significant growth and only 1.32% of US firms list a shortage of capital other than working capital as a problem. Financial performance indicators (growth, return on assets, profit margin) were not found to be determinants of SME financing activities, as might be expected in a ‘rational’ risk–return environment. Younger and less educated SME owners more actively use external financing – even though more education reduces the fear of loan denial – while older and more educated (‘wiser’) SME owners are found to be being less likely to seek or use external financing. The contentment hypothesis for SME financing also extends to high-growth firms in that we show that they participate more in the loan markets than low-growth firms. By way of contrast to the finance gap hypothesis, the contentment hypothesis observes the importance of social networks (connections) [for finance] and confirms the ‘connections – happiness’ linkage in the literature on happiness while doubting the theoretical suitability of Jensen and Meckling [Jensen, M., Meckling, W., 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3, 305–360.] base-case analysis for SMEs.
We show that inflows of capital into venture funds increase the valuation of these funds’ new investments. This effect is robust to (i) controlling for firm characteristics and public market valuations, (ii) examining first differences, and (iii) using inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with competition for a limited number of attractive investments being responsible for rising prices.
One of the most commonly observed features of the organization of markets is that similar business enterprises cluster in physical space. In this paper, we develop an explanation for firm co-location in high-technology industries that draws upon a relational account of new venture creation. We argue that industries cluster because entrepreneurs find it difficult to leverage the social ties necessary to mobilize essential resources when they reside far from those resources. Therefore, opportunities for high tech entrepreneurship mirror the distribution of critical resources. The same factors that enable high tech entrepreneurship, however, do not necessary promote firm performance. In the empirical analyses, we investigate the effects of geographic proximity to established biotechnology firms, sources of biotechnology expertise (highly-skilled labor), and venture capitalists on the location-specific founding rates and performance of biotechnology firms. The paper finds that the local conditions that promote new venture creation differ from those that maximize the performance of recently established companies.
This paper investigates actual Venture Capital (VC) decision making as it occurs over time in its natural decision environment. Our qualitative analysis is based on a comprehensive, longitudinal data set comprising 11 years of archival data from a European-based VC firm. During this time, the VC managed two funds, reviewed a total of 3631 deals, and made 35 investments. By adopting this research methodology, we can overcome several limitations of post-hoc methods and experiments commonly used in this research stream, and also have the opportunity to tackle some fundamental, yet hitherto elusive research topics. For example, our findings reveal how the importance of decision-making criteria varies between different stages of the evaluation process. They also show how VC portfolio composition and VC management time serve as important, yet to-date largely neglected decision-making criteria. Implications for research and practice are outlined.
Recent initiatives in a number of countries have sought to promote entrepreneurship through relaxing the legal consequences
of personal bankruptcy. Whilst there is an intuitive link, relatively little attention has been paid to the question empirically,
particularly in the international context. We investigate the relationship between bankruptcy laws and entrepreneurship using
data on self-employment over 16 years (1990–2005) and fifteen countries in Europe and North America. We compile new indices
reflecting how “forgiving” personal bankruptcy laws are. These measures vary over time and across the countries studied. We
show that bankruptcy law has a statistically and economically significant effect on self-employment rates when controlling
for GDP growth, MSCI stock returns, and a variety of other legal and economic factors.
We document geographic concentration by both venture capital firms and venture capital-financed companies in three metropolitan areas: San Francisco, Boston, and New York. We find that venture capital firms locate in regions with high success rates of venture capital-backed investments. Geography is also significantly related to outcomes. Venture capital firms based in locales that are venture capital centers outperform, regardless of the stage of the investment. This outperformance arises from outsized performance outside of the venture capital firms' office locations, including in peripheral locations. If the goal of state and local policy makers is to encourage venture capital investment, outperformance of non-local investments suggests that policy makers might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.
Many of the fastest growing global ventures are backed by cross-border venture capitalists. However, the role of foreign investors in internationalization has not been examined in prior research. To address this gap, we carried out a multiple case study to produce a grounded theory of the effects of foreign investors in new venture internationalization. Our findings suggest that foreign venture capitalists located in a venture's target market of internationalization can be valuable for the venture by legitimizing the unknown new venture in that market. However, foreign investors tend to drive portfolio companies towards their home markets, and the benefits may turn into disadvantages if the target market differs from the home markets of the foreign investors.
Although published works rarely include causal estimates from more than a few model specifications, authors usually choose
the presented estimates from numerous trial runs readers never see. Given the often large variation in estimates across choices
of control variables, functional forms, and other modeling assumptions, how can researchers ensure that the few estimates
presented are accurate or representative? How do readers know that publications are not merely demonstrations that it is possible to find a specification that fits the author's favorite hypothesis? And how do we evaluate or even define statistical properties
like unbiasedness or mean squared error when no unique model or estimator even exists? Matching methods, which offer the promise
of causal inference with fewer assumptions, constitute one possible way forward, but crucial results in this fast-growing
methodological literature are often grossly misinterpreted. We explain how to avoid these misinterpretations and propose a
unified approach that makes it possible for researchers to preprocess data with matching (such as with the easy-to-use software
we offer) and then to apply the best parametric techniques they would have used anyway. This procedure makes parametric models
produce more accurate and considerably less model-dependent causal inferences.
We document that the fraction of entrepreneurs working in the region where they were born is significantly higher than the corresponding fraction for dependent workers. This is more pronounced in more developed regions and positively related to the degree of local financial development. Firms created by locals are bigger, operate with more capital-intensive technologies, and obtain greater financing per unit of capital invested, than firms created by nonlocals. This suggests that there are so many local entrepreneurs because locals can better exploit the financial opportunities available in the region where they were born. This helps to explain how local financial development causes persistent disparities in entrepreneurial activity, technology, and income. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
I. Introduction, 488. — II. The model with automobiles as an example, 489. — III. Examples and applications, 492. — IV. Counteracting
institutions, 499. — V. Conclusion, 500.
Estimates of the effect of college selectivity on earnings may be biased because elite colleges admit students, in part, based
on characteristics that are related to future earnings. We matched students who applied to, and were accepted by, similar
colleges to try to eliminate this bias. Using the College and Beyond data set and National Longitudinal Survey of the High
School Class of 1972, we find that students who attended more selective colleges earned about the same as students of seemingly
comparable ability who attended less selective schools. Children from low-income families, however, earned more if they attended
selective colleges.