Entrepreneurial Finance: Banks versus Venture Capital (original) (raw)
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Banks Versus Venture Capital When the Venture Capitalist Values Private Benefits of Control
SSRN Electronic Journal, 2000
If control of their …rms allows entrepreneurs to derive private bene…ts, it also allows other controlling parties. Private bene…ts are especially relevant for venture capitalists, who typically get considerable control in their portfolio …rms, but not for banks, which are passive loan providers. We incorporate this di¤erence between banks and venture capital and analyze entrepreneurs'…nancing strategy between the two. We …nd that, in all strict Nash Equilibria, entrepreneurs who value private bene…ts more choose banks while the rest choose venture capital. Thus, bank-…nanced entrepreneurs allocate more resources to tasks that yield private bene…ts while VC-backed entrepreneurs have higher pro…tability.
SSRN Electronic Journal, 2018
The main strategic objective of bank-affiliated venture capital funds (BVCs) is to enhance demand of debt capital from portfolio companies. This paper investigates the channels through which banks pursue such a strategy. Using detailed data from seven Western European countries in the period 1991-2010, we show, first, that BVC deals are more likely in larger syndicates led by independent venture capitalists, and in "safe" countries. Second, syndicates involving BVCs strategically select investees with a lower liquidity than matched peers and have a negligible impact on their investees' operational performance. Third, investees do not show an increase in debt exposure, compared to matched non-VC-backed firms, but, instead, show a stable need of cash over time. These findings demonstrate that while BVCs aim to enhance demand of debt capital from investees that need liquidity to invest and grow, they still seek to avoid acerbating the default risk of their investees. Finally, syndicates involving BVCs have a large positive impact on the likelihood of IPOs and acquisition exits.
Follow-On Financing of Venture Capital–Backed Companies
Oxford Handbooks Online, 2012
We study the financing strategies of 191 start-ups after they have received venture capital (VC) and thereby contribute to the staging literature. The VC backed start-ups have raised financing on 345 occasions over a five-year period after the initial VC investment.
A demand-side perspective on venture capital financing
Chalmers University of Technology, 2020
Entrepreneurial high growth firms are recognized as having a disproportionate impact on economic development and job creation. It is further recognized that many of these firms need access to venture capital if the high-growth potential is to be realized. Intervention by governments to improve access to finance for entrepreneurial ventures have often focused on supply-side measures. However, there is a growing recognition that access to finance can also be hindered by weaknesses on the demand-side where entrepreneurs need information and advice on the process of raising equity finance and what it means to be investment ready. This thesis focuses on the demand-side of financing and the entrepreneur's point of view on venture capital. Although there is a vast literature about how venture capitalists (VCs) screen and select the entrepreneurial firms they wish to invest in, only a handful of studies have examined venture capital investments from an entrepreneur's perspective. Based on interviews with 53 venture capital backed entrepreneurs and a quantitative longitudinal study of 273 venture capital backed startups, this thesis aims to better understand the "knowledge gap" on the demand-side and how entrepreneurs handle problems and challenges when raising and being funded by venture capital. The findings in this thesis are related to the full venture capital cycle, from the initial selection phase, through the investment process to after the exit. In paper ONE and TWO we argue that entrepreneurs might be considered as a more active part in the VC-entrepreneur relationship than most previous studies have assumed. To avoid the VC's asymmetric information advantage I suggest in paper ONE that the entrepreneurs develop informal tools to mitigate potential problems and risks. In paper TWO we show how entrepreneurs in "thin" venture capital markets recognize the opportunities that a "thick" venture capital market can provide. In paper THREE we propose that entrepreneurs who are in the process of raising venture capital have reasons to negotiate around future exit choices with the VC when considering the long-term effects of venture capital.
Venture Capital, 2019
The last decade has seen the emergence of alternative sources of early-stage finance, which are radically changing and reshaping the start-up ecosystem. These include incubators, accelerators, science and technology parks, university-affiliated seed funds, corporate seed funds, business angelsincluding "super-angels", angel groups, business angel networks and angel investment fundsand both equity-and debt-based crowdfunding platforms. In parallel with this development, large financial institutions that have traditionally invested in late-stage and mature companies, have increasingly diversified their investment portfolios to "get into the venture game", in some cases, through the traditional closed-end funds model and, in other cases through direct investments and coinvestments alongside the closed-end funds. This paper reviews the main features, investment policies and risk-return profiles of the institutional and informal investors operating in the very early stage of the life cycle of entrepreneurial firms. It concludes that traditional closed-end venture capital funds continue to play an important role in early stage finance because of their unique competences (e.g. screening, negotiating and monitoring) in what has become a wider and more complex financing ecosystem.
Empirical Essays on Entrepreneurial Finance
2018
This dissertation contains three chapters, covering analyses on crowdfunding, mutual fund, and entrepreneurial ecosystem. The chapters are connected at a theoretical level by the study of information asymmetries among financial intermediaries and the value added (or lack thereof) that intermediaries provide in different contexts. The first essay on crowdfunding focuses on platform due diligence. Crowdfunding platform due diligence comprises background checks, site visits, credit checks, cross-checks, account monitoring, and third party proof on funding projects. I conjecture that due diligence is associated with the busyness of platform employees and sophistication of platform service indicated by fee structure. Due diligence screens lower quality projects and mitigates information asymmetries between project issuers and funders; it is associated with higher percentage of successful campaigns and larger amount of capital raised on platforms. I test these propositions with platform-level data and find strong supportive evidence. The second essay on mutual fund studies agency problems associated with fund fee structure. Distinguishing between switches, pre-authorized contributions, systematic withdrawal plans, reinvestments, and distributions, I find that different types of flow exhibit distinct characteristics to retail fund flow with respect to fund fees and past performance. I argue that the positive correlation between retail fund inflow and switch-out reflects information asymmetry between incoming investors and current unitholders. I further show that this information asymmetry, attributed to biased purchase advice, is negatively associated with fund performance. A large sample of proprietary Canadian data from 2003-2014 support the findings. III The third essay on entrepreneurial ecosystem studies the joint impact of venture capitalist and technology parks on small business development. I argue two alternative routes that lead entrepreneurial start-ups to acquisition outcomes instead of liquidation. On one hand, acquisitions can come about through the control route with external financers such as venture capitalists (VCs). On the other hand, acquisitions can come about through more advice and support provided to the start-up, such as that provided by a technology park. Empirical analyses on a sample of 251 Crunchbase companies in the U.S. strongly support these propositions. IV To my lovely wife, Yanan and my parents V AKNOWLEDGEMENTS This dissertation could not have been completed without the guidance of my supervisor, Douglas Cumming. I am deeply indebted to him for his continuous support and encouragement. I also acknowledge the great support from other members of my supervisory committee, Kee-Hong Bae and Ming Dong, whose comments and suggestions have significantly improved the quality of this dissertation. Special thanks to Chad Zutter, external examiner and Benjamin Sand, internal member. VI
1 Advice and Monitoring in Venture Finance *
2014
This paper studies the advising and monitoring activities of 14 European venture capitalists (VCs) in 74 entrepreneurial firms. We distinguish between VC advising versus monitoring activities based on the congruence versus dissonance with entrepreneurial interests. The data indicate that the allocation of greater cash flow and control rights to the VCs gives rise to more intensive VC advice, but not more intensive monitoring. VC monitoring is attributable to the need for monitoring due to entrepreneurial firm-specific characteristics. The data further indicate a strong effect of portfolio size on both advice and monitoring, consistent with recent theoretical work on the optimal size of VC portfolios. Finally, the data indicate a country’s legality index is closely connected with the propensity for conflicts between entrepreneurs and their investors. The results are robust to the potential for endogeneity, among various other robustness checks.
Banks versus Venture Capital: A Role for Nonmonetary Returns
Control of a …rm entitles entrepreneurs to enjoy nonmonetary returns that cannot be con-tracted to banks. A typical venture capital …nancing contract, however, allocates considerable control of the …rm to the venture capitalist, which allows the venture capitalist to gain access to nonmonetary returns. We consider a model in which entrepreneurs di¤er in their concern about nonmonetary returns and the venture capitalist give certain importance to them while banks do not care about them at all. The model exhibits many empirical facts. In one equi-librium, banks prefer not to …nance startup …rms. In another equilibrium, entrepreneurs who care less about nonmonetary returns raise funds from a venture capitalist while the rest choose bank-…nancing. Thus, in equilibrium, bank-…nanced entrepreneurs divert more resources in a …rm to tasks that yield nonmonetary returns while venture-capital-backed …rms have higher internal rate of return.
The Determinants of Venture Capital: Additional Evidence
2004
This paper attempts to identify and evaluate the main determinants of venture capital (VC). We develop a theoretical model where macroeconomic conditions, technological opportunity, and the entrepreneurial environment affect the demand and supply of VC. The quantitative results, based on a panel dataset of 16 OECD countries from 1990 to 2000, show that VC intensity is pro-cyclical. Interest rates affect more the demand side of VC (entrepreneurs) than the supply side. Indicators of technological opportunity, such as the stock of knowledge and the number of triadic patents affect positively and significantly the relative level of VC. Labour market rigidities reduce the impact of the GDP growth rate and of the stock of knowledge, whereas a minimum level of entrepreneurship is required in order to have a positive effect of the available stock of knowledge on VC intensity.