Venture Capital Business Resource Materials
Entrepreneurship Law Editorial Team
Spencer E. Ante, CREATIVE CAPITAL: GEORGES DORIOT AND THE BIRTH OF VENTURE CAPITAL (2008).
Abstract (from publisher): Venture capitalists are the handmaidens of innovation. Operating in the background, they provide the fuel needed to get fledgling companies off the ground--and the advice and guidance that helps growing companies survive their adolescence. In "Creative Capital," Spencer Ante tells the compelling story of the enigmatic and quirky man--Georges Doriot--who created the venture capital industry. The author traces the pivotal events in Doriot's life, including his experience as a decorated brigadier general during World War II; as a maverick professor at Harvard Business School; and as the architect and founder of the first venture capital firm, American Research and Development. It artfully chronicles Doriot's business philosophy and his stewardship in startups, such as the important role he played in the formation of Digital Equipment Corporation and many other new companies that later grew to be influential and successful. An award-winning Business Week journalist, Ante gives us a rare look at a man who overturned conventional wisdom by proving that there is big money to be made by investing in small and risky businesses. This vivid portrait of Georges Doriot reveals the rewards that come from relentlessly pursuing what-if possibilities--and offers valuable lessons for business managers and investors alike.
Joseph W. Bartlett, FUNDAMENTALS OF VENTURE CAPITAL (1999).
Abstract (from publisher): Written in highly readable layman's language, Fundamentals of Venture Capital is a concise introduction to the key issues facing both investors and entrepreneurs as they embark on the journey of turning a good idea into a profitable reality.
Stephen Bloomfield, VENTURE CAPITAL FUNDING: A PRACTICAL GUIDE TO RAISING FINANCE (2008).
Abstract (from product description at Amazon.com):
Though the book is firmly rooted in UK and EU practice, US entrepreneurs will nonetheless find the discussion of the nuts and bolts of venture capital of interest. The practicalities of competing for, and winning, additional capital are broken down into key areas, such as: the significance of the business plan, types of investor, targeting and attracting a funder, negotiation and initial valuations, the due diligence process, and the available investment vehicles. It also explores the many reasons why companies seek out additional funding, and discusses the points in the business life cycle when such injections are appropriate.
William D. Bygrave & Jeffry A. Timmons, VENTURE CAPITAL AT THE CROSSROADS (1992).
Abstract (from publisher): The National Science Board notes that an overwhelming majority (70 percent) of high-tech companies formed in the United States during the 1980s relied exclusively on private investment for business start-up or expansion. Only 6 percent of these companies relied solely on venture capital investment. Eleven percent relied on a mix of private and venture capital investments.
Paul A. Gompers & Josh Lerner, THE VENTURE CAPITAL CYCLE (2d ed. 2006).
Abstract (from review at Amazon.com): Venture Capital Cycle is an academic examination of the form and function of venture-capital funds. Beginning with a historical overview of entrepreneurial finance, the book examines how venture partnerships are structured, how venture capitalists are compensated, the staging of investments in operating companies, and the relative performance of venture-capital-backed offerings. Large information gaps between entrepreneurs and investors create conflicted interests, and the book looks at some of the novel checks and balances most often employed. One of the book's themes is that the whole venture-capital process is best understood as a cycle: from the raising of a fund; to investing in, monitoring, and adding value to firms; then exiting deals; returning capital to investors; and finally renewing itself by raising additional funds. The need to exit an investment successfully shapes all aspects of the venture-capital cycle, from the ability to raise capital to the types of investments made.
Paul A. Gompers & Joshua Lerner, The Venture Capital Cycle (2d ed. 2004).
Abstract (from Amazon.com Review):
In the last 25 years, the venture-capital industry has grown from a less than $1 billion to an over $60 billion business--growth that has far surpassed any other class of investment products. Today, the industry consists of several thousand professionals working at about 500 funds concentrated in California, Massachusetts, and a handful of other states. Despite the industry's size, there are many misconceptions about the nature and role of venture capitalists; their trade remains shrouded in mystery. Beginning with a historical overview of entrepreneurial finance, this book examines how venture partnerships are structured, how venture capitalists are compensated, the staging of investments in operating companies, and the relative performance of venture-capital-backed offerings. There's also an interesting comparison of corporate venture organizations, such as Xerox PARC, with those of independent and other venture groups. Venture capitalists use industry knowledge and monitoring skills to finance projects with significant uncertainty, typically concentrating investments in early-stage companies and high-tech industries. Large information gaps between entrepreneurs and investors create conflicted interests, and the book looks at some of the novel checks and balances most often employed. One of the book's themes is that the whole venture-capital process is best understood as a cycle: from the raising of a fund; to investing in, monitoring, and adding value to firms; then exiting deals; returning capital to investors; and finally renewing itself by raising additional funds. The need to exit an investment successfully shapes all aspects of the venture-capital cycle, from the ability to raise capital to the types of investments made. Another theme is that because venture funds must make long-term illiquid investments, they need to secure funds from their investors for periods of 10 years or more. The supply of venture capital consequently cannot adjust quickly to changes in the investment environment.
Paul A. Gompers & William Sahlman, ENTREPRENEURIAL FINANCE: A CASEBOOK (2008).
Abstract (from publisher): Entrepreneurial Finance: A Casebook spans a wide range of US and non-US ventures in a diverse set of industries, including high technology, low technology, and service, these cases provide you with an inside look into the real world of entrepreneurial finance. The cases are organized according to four major topics: investment analysis; financing the entrepreneurial firm; harvesting the rewards; and reinventing the entrepreneurial enterprise.
Brian E. Hill & Dee Power, INSIDE SECRETS TO VENTURE CAPITAL (2001).
Abstract (from product description at Amazon.com):
The authors spent three years surveying 250 venture capital firms to find out what venture capitalists look for when putting their money in young businesses. They relate their findings in a series of chapters covering topics from developing a business plan to business valuation techniques.
Brian E. Hill and Dee Power, ATTRACTING CAPITAL FROM ANGELS: HOW THEIR MONEY—AND THEIR EXPERIENCE—CAN HELP YOU BUILD A SUCCESSFUL COMPANY (2002).
Abstract (from publisher): This book is the product of fifteen years working with, observing, and listening to entrepreneurs and angel investors as they pursued the entrepreneurial dream. It features top-notch research supplemented by in-depth interviews with angel investors and entrepreneurs. The personal stories presented here will help you learn from the mistakes of other entrepreneurs and model your approach on their successes. From the entrepreneurs point of view, gaining an understanding of the angel as an individual is an important factor in determining whether the partnership will be successful. As such, this book provides an inside look at angel investors and a comprehensive understanding of the "how" and the "why" of what they do. It provides guidance on finding the right angels, avoiding the wrong ones, and making a business work after an angel buys into it.
Henry Kressel & Thomas V. Lento, INVESTING IN DYNAMIC MARKETS: VENTURE CAPITAL IN THE DIGITAL AGE (2010).
Product Description (from Amazon): Without venture capital, many of the companies whose technical innovations sparked the digital revolution would not exist. Venture investments funded these firms to develop their bright ideas into commercial products that created new business models and established whole new markets.
Hans Landstroom, HANDBOOK OF RESEARCH ON VENTURE CAPITAL (2007).
Abstract (from product description at Amazon.com): The book opens with a thorough survey of venture capital as a research field; conceptual, theoretical, methodological and geographic aspects are explored, and its pioneers revisited. The focus then shifts to the specific environs of venture capital. Firstly, formal (institutional) venture capital is discussed. The analysis encompasses considerations such as: structure, pre-investment processes, venture capitalist's value-adding, performance, and impact on economic development, early-stage financing as well as management buyouts. Business angel research, their investment decision making, and business angel networks are then discussed under the wider umbrella of informal venture capital. Finally, the corporate venture capital market is explored from the entrepreneur's perspective as well as the supply side of corporate venture capital. Also providing a lively and stimulating debate on policy implications and possible directions for future venture capital research, this all-encompassing Handbook will prove an invaluable reference tool for those with an interest in business, management, entrepreneurship and the financing of new enterprises.
Josh Lerner, BOULEVARD OF BROKEN DREAMS: WHY PUBLIC EFFORTS TO BOOST ENTREPRENEURSHIP AND VENTURE CAPITAL HAVE FAILED--AND WHAT TO DO ABOUT IT (2009).
Abstract (from product description at Amazon.com):
Silicon Valley, Singapore, Tel Aviv--the global hubs of entrepreneurial activity all bear the marks of government investment. Yet, for every public intervention that spurs entrepreneurial activity, there are many failed efforts that waste untold billions in taxpayer dollars. When has governmental sponsorship succeeded in boosting growth, and when has it fallen terribly short? Should the government be involved in such undertakings at all? Boulevard of Broken Dreams looks at the ways governments have supported entrepreneurs and venture capitalists across decades and continents.
Jack S. Levin, STRUCTURING VENTURE CAPITAL, PRIVATE EQUITY, AND ENTREPRENEURIAL TRANSACTIONS (2004).
Abstract (from publisher): Now, you can minimize your clients' tax liability and avoid legal pitfalls, as well as maximize returns on successful transactions and be prepared for all of the potential benefits, with "Structuring Venture Capital, Private Equity and Entrepreneurial Transactions". Here at last is one-step-at-a-time, start-to-finish structural guidance for the following common business transactions: venture capital financing; new business start-ups; brains-and-money deals; growth-equity investments; leveraged and management buyouts; industry consolidations; troubled company workouts and reorganizations; going public; selling a business; and forming a private equity fund. Guided by Jack S Levin's dynamic, transaction-by-transaction approach, you'll make the tax, legal, and economic structuring consequences of every deal benefit your client every time. In this extraordinary hands-on resource by the most sought-after authority in the field, you'll see exactly how to: distribute the tax burden in your client's favor; maximize returns on successful.
Andrew Metrick & Ayako Yasuda, Venture Capital & the Finance of Innovation (2d ed. 2011).
Abstract (from Amazon Product Description):
This useful guide walks venture capitalists through the principles of finance and the financial models that underlie venture capital decisions. It presents a new unified treatment of investment decision making and mark-to-market valuation. The discussions of risk-return and cost-of-capital calculations have been updated with the latest information. The most current industry data is included to demonstrate large changes in venture capital investments since 1999. The coverage of the real-options methodology has also been streamlined and includes new connections to venture capital valuation. In addition, venture capitalists will find revised information on the reality-check valuation model to allow for greater flexibility in growth assumptions.
Susan L. Preston, ANGEL FINANCING FOR ENTREPRENEURS: EARLY-STAGE FUNDING FOR LONG-TERM SUCCESS (2007).
Abstract (from product description at Amazon.com): Angel Financing for Entrepreneurs will give you the information you need to understand how angel investors think, as well as how to identify investor expectations, understand the investment analysis process, and prepare for post-investment requirements. This hands-on resource, explains the factors that determine how private equity investors spend their money and what they expect from entrepreneurs.
Yinglan Tan, THE WAY OF THE VC: HAVING TOP VENTURE CAPITALISTS ON YOUR BOARD (2010).
Product Description (from Amazon):
Venture capital funds are the fastest growing sector of the financial industry, and possibly the least understood. In this book, the author provides a primer on what some of the world's best venture capitalists have in common.
Andrew L. Zacharakis & Dean A. Shepherd, The Nature of Information and Venture Capitalists’ Overconfidence in Venture Capital (Mike Wright, et al., eds. 2003.)
Abstract (from publisher):
In putting together this three-volume reader of previously published articles, Wright (financial studies, Nottingham U. Business School, UK), Sapienza (entrepreneurship, U. of Minnesota, US), and Busenitz (management, U. of Oklahoma, US) aimed to demonstrate the disciplinary diversity of the academic literature on the venture capital market and identify the leading contributions from the past couple decades. They also sought to highlight international differences in venture capital markets. The first volume follows an introduction summarizing the main contributions of the collected papers in the set with 17 papers covering systemic macro- perspectives, policy issues, and sources of funds for venture capital investment. The next two volumes adopt a venture capital life-cycle approach in addressing the behavior of venture capital firms. The 22 papers of volume two include discussions of deal generation, screening, and assessment; valuation and structuring; and strategies of venture capital firms. Volume three contains 26 papers considering post-investment involvement issues such as monitoring and protecting value as well as relational perspectives of investor-entrepreneur issues and examinations of harvesting and exits.
Jeffrey Zygmont, The VC Way: Investment Secrets from the Wizards of Venture Capital (2002).
Abstract (from Amazon Product Description):
A resource for anyone who wants to match strategies with master investors. Also offers a brief tutorial in crafting a portfolio of holdings.
Guillaume Andrieu, Optimal Allocation of Control Rights in Venture Capital Contracts (International Conference of the French Finance Association (AFFI), 2011), available at http://ssrn.com/abstract=1833417.
(adapted from author):
This article questions the allocation of control rights to venture capitalists with particular focus on liquidation decisions. The literature has shown that the venture capitalist acts as the principal to prevent the agent (i.e., the entrepreneur) from pursuing private objectives and destroying value. The author develops a two-staged model in which an entrepreneur asks a venture capitalist to finance her project. The VC (venture capital) firm immediately makes a first investment but may not make the second investment, depending on its horizon preference (e.g., short-term or long-term). The results show that the investor makes optimal decisions only if he is able to remain throughout the lifetime of the project. If this is not possible, he will opportunistically decide to sell the project, whatever its quality, thereby generating inefficient continuation of bad projects. If the entrepreneur holds control rights, she will follow the same strategy. However, under certain conditions (especially projects with higher liquidation proceeds), she will make the correct decisions, unlike the investor. This proves that the short-term constraints of VC investors create inefficiencies and that allocating control rights to entrepreneurs may reduce them. An empirical study on the portfolio of two venture capitalists illustrates this result.
Amitrajeet A. Batabyal & Hamid Beladi , The Effects of Collateralizable Income and Debt Overhang on Entrepreneurial Investment in an Open Regional Economy, 51 J. Reg. Sci. 768 (2011), also available at http://ssrn.com/abstract=1934635.
(adapted from authors):
The authors use a two
‐period model to analyze the contractual relationship between entrepreneurs and venture capitalists in an open regional economy. First, they describe the first best investment contract, the authors study the second best investment contract in the presence of private information, and then examine the impact of an exogenous second period income endowment (collateralizable income) on investment by entrepreneurs. Next, they analyze the interaction between entrepreneurs and venture capitalists when the regional government (RG) must pay off a per capita debt (debt overhang) which it finances by taxing successful second period entrepreneurs. The authors show that a rise in the per capita debt has an effect on investment that is analogous to a fall in the second period income endowment. In addition, the overhang of the RG's debt discourages entrepreneurial investment.
John R. Becker-Blease & Jeffrey E. Sohl, The Effect of Gender Diversity on Angel Group Investment, 35 Entrepren. Theory & Prac. 709 (2011).
(adapted from journal):
The authors examine the impact that gender diversity has on angel group investment behavior for a sample of 183 group-years between 2000 and 2006. The evidence suggests that gender diversity is a significant predictor of group investment behavior, and that the proportion of women angels in the group has a negative though nonlinear effect on investment likelihood. These data are most consistent with a situational interpretation that women invest differently when they are in the small minority compared with other situations. These results have important implications for the availability of funds for women entrepreneurs and call for greater participation of women investors in the angel marketplace.
Ola Bengtsson & Frederick Wang, What Matters in Venture Capital? Evidence from Entrepreneurs’ Stated Preferences, 39 Fin. Mgmt. 1367 (2010).
Abstract (from author):
We study how entrepreneurs evaluate the ability of different US venture capitalists (VCs) to add value to start-up companies. Analyzing a large data set of entrepreneurs’ stated preferences regarding VCs, we demonstrate that entrepreneurs view independent partnership VCs more favorably than other VC types (e.g., corporate, financial, and government sponsored VCs). Although entrepreneurs are able to correctly identify VCs with better track records, they do not believe them to be more desirable investors. We also find that an entrepreneur’s rankings are affected by their overall exposure to VCs, emphasizing the role of experiential learning in the venture capital market.
Allen N. Berger & Klaus Schaeck, Small and Medium-Sized Enterprises, Bank Relationship Strength, and the Use of Venture Capital, 43 J. Money, Credit & Banking 461 (2011).
Abstract (from author):
We investigate the nexus between small and medium-sized enterprises’ (SMEs’) use of venture capital and bank financing relationships using a unique data set with detailed information on SME finance in Italy, Germany, and the UK. The empirical regularities we uncover show that that entrepreneurial firms substitute venture capital for multiple banking relationships. This substitution effect is primarily driven by expertise substitution, and there is also some suggestive, yet inconclusive, indication in the data that SMEs turn to providers of venture capital to avoid rent-extracting behavior by the firm’s main bank. Our results do not support the view that firms obtain venture capital in instances when bank financing is difficult to obtain. Instead, venture capital funds are used if bank funding is deemed not appropriate, and firms do seem to be aware of which type of financing is more appropriate for them.
Lowell W. Busenitz & James O. Fiet,The Effects of Early-Stage Venture Capitalists Actions on Eventual Venture Disposition,5 Entrepreneurial & Small Bus. Fin. 97-114 (1996).
Abstract: Presents information on a study which examines the relationship between venture capitalist actions, and the eventual disposition of a venture through an Initial Public Offerings (IPO). Actions included in the study; Relationship between IPO exit and the amount of their investment.
Annamaria Conti et al., Show Me the Right Stuff: Signals for High Tech Startups, (NBER Working Paper Series, Vol. w17050, 2011), available at http://ssrn.com/abstract=1841287.
Abstract (from author):
We examine the potential for technology startups to use patents and founders, friends and family money (FFF money) as signals to attract business angel and venture capital funds, patents reflect technology quality and FFF money reflects founder commitment. We find that if investors value technology quality more (less) than founder commitment, the optimal mix of signals is a relatively higher (lower) use of patents than FFF money. Regardless of investor preferences, high quality founders should invest more in both signals than in the absence of private information. This investment is inversely related to the opportunity cost of investing in the signals. We test these predictions empirically and find evidence in support of this proposition. When we distinguish between venture capitalist and business angel investment, we find that patents serve as a signal for venture capitalists and FFF money is a signal for business angels (but not vice versa).John Freear, Jeffrey E. Sohl & William Wetzel, Jr., Angels: Personal Investors in the Investment Capital Market, 7(1) Entrepreneurship & Reg’l Dev. 85-94 (1995).
Douglas Cumming & April M. Knill, Disclosure, Venture Capital and Entrepreneurial Spawning (2012), available at http://ssrn.com/abstract=2016540.
(adapted from authors):
Venture capital funds have been facing increasing regulatory scrutiny since the 2007 financial crisis, particularly with respect to calls for increased disclosure requirements. In this paper the authors examine the effect of more stringent securities regulation on the supply and performance of venture capital as well as new business creation (i.e., entrepreneurial spawning). Using country- and investment-level data from 34 countries over the years 2000-2008, they find that more stringent securities regulation is positively associated with the supply and performance of venture capital around the world. More stringent securities regulation is also positively associated with entrepreneurial spawning induced by venture capital. Among different forms of securities regulation, disclosure stands out as having the most economically meaningful impact, which casts doubt on the oft repeated objections to disclosure in VC – that it would stifle the VC industry because secrets would have to be revealed to competitors and the public. These findings are robust to numerous robustness checks for endogeneity. The policy implications are clear regardless of endogeneity concerns, however: VC and entrepreneurship markets are enabled, not curtailed, in countries with better disclosure standards when one compares the existing differences in disclosure around the world and changes thereto over the 2000-2008 period.
Jerome S. Engel, Accelerating Corporate Innovation: Lessons from the Venture Capital Model: What Can Corporate Innovators Learn from the Innovation Practices of Agile Start-Ups? 54 Research-Technology Mgmt. 36 (2011).
Abstract (from author):
The last half century has seen the emergence of a new model of business innovation featuring the convergence of
entrepreneurs , rapid technological change, and venture capital. This combination has proven an effective force at realizing disruptive innovation that has often left incumbents shattered in their wake. What can the mature enterprise learn from this venture capital model of innovation management? What is the role of the CTO in identifying and adopting these approaches? This article investigates the ten leading strategies employed by venture capitalists and entrepreneurs to test new ideas and commercialize innovations quickly. The most disruptive innovations are seen to be those that go beyond technical discovery to embrace business model innovations that disrupt supply chains, disintermediate incumbents, and create new markets. This article presents the tools the modern CTO needs to participate in this dynamic process.
Richard Fairchild, An Entrepreneur’s Choice of Venture Capitalist or Angel-Financing: A Behavioral Game-Theoretic Approach, 26 J. Bus. Venturing 359 (2011).
This article examines the consequences of an entrepreneur choosing between venture capital and angel financing, taking into account economic factors and behavioral factors, and the trade-offs they entail.
Luis Armando Garcia, Teaching Private Equity Investment in Higher Education: An Entrepreneurship Approach (2011), available at http://ssrn.com/abstract=1944809.
A determining factor in entrepreneurship is the level of education of the entrepreneur. Universities and institutions of higher learning are called to design courses and support to potential entrepreneurs. European universities taking part in the European Higher ducation Area (EHEA) should exploit the potential business network that students have at their reach inside the EU area. Entrepreneurship education warrants an improvement of financial literacy, for studies have shown that in many developed nations consumers are poorly informed about financial products and practices. Venture Capitalists consider universities as sources of truly exceptional innovations and inventions, which can develop into successful companies within a short period of time. The Private Equity Investment industry has acquired enormous popularity as an alternative investment asset class over the past two decades. Its backers claim that its extensive economic benefits come from a model that aligns the interest of both owners and management. Perhaps it has never been easier than right now for companies and start-ups to locate, contact and engage potential sources of Private Equity Investment and/or Venture Capital Funds. Entrepreneurship and financial Literacy should be taught openly in Business Schools around the world. The entrepreneurship industry is ready to join forces with academics and students in order to confront the unharmonious aspects of the current curriculum of entrepreneurship education.
Martin Kenney, How Venture Capital Became a Component of the U.S. National System of Innovation (2011), available at http://ssrn.com/abstract=1847203.
Abstract (from author):
Venture capital (VC) is a relatively recent addition to the U.S. national system of innovation (NSI). Tracing the history of the VC industry in the U.S. provides an interesting example of how NSIs can add new institutions and in the process be transformed. The history encompasses important exogenous events, endogenous developments, and actions by individual actors. The story of the development of VC is set in the technological trajectories where it has experienced its greatest success, the ICT and biomedical industries. The emergence of VC is intimately related to various government actions, and yet the paper does not attribute a ach ex achine role to government actors. While NSI theory provides the framework, it is also recognized that VC is geographically localized in a few regions, and a regional innovation system perspective is also valuable.
Arthur G. Korteweg & Morten Sorensen, Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies, 23 Rev. Fin. Stud. 3738 (2011), also available at http://ssrn.com/abstract=1949366.
Abstract (from authors):
Valuations of entrepreneurial companies are only observed occasionally, albeit more frequently for well-performing companies. Consequently, estimators of risk and return must correct for sample selection to obtain consistent estimates. The authors develop a general model of dynamic sample selection and estimate it using data from venture capital investments in entrepreneurial companies. This selection correction leads to markedly lower intercepts and higher estimates of risks compared to previous studies. The methodology is generally applicable to estimating risk and return in illiquid markets with endogenous trading.
Oskari Lehtonen & Tom Lahti, The Role of Advisors in the Venture Capital Investment Process, 11(3) Venture Cap. 229 (2009).
Abstract (from authors): Despite the extensive research on venture capitalists and entrepreneurs, there is at least one group of actors whose role has been overlooked, namely advisors that specialise in helping entrepreneurs raise venture capital funding. This explorative study aims to fill this gap. Based on qualitative case study data, this paper shows that the activities of advisors have several benefits for entrepreneurs seeking funding. Advisors appear to accelerate the process of acquiring funding and improve the terms and conditions of the funding. By participating in the preparation of written documents that are required when approaching investors advisors can contribute to increasing the investment readiness of an entrepreneurial venture. They also typically participate in investment negotiations. This may reduce the possibility that negotiations between the venture capitalist and the entrepreneur become confrontational which could, in turn, adversely affect the venture capital-entrepreneur post-investment relationship. The findings in this study strongly suggest that using advisors increases the likelihood that entrepreneurs will successfully obtain venture capital funding. This paper recommends that inexperienced entrepreneurs in particular should seek support from advisors when seeking to raise venture capital.
Yong Lia & Shaker A. Zahra, Formal Institutions, Culture, and Venture Capital Activity: A Cross-Country Analysis, 27 J. Bus. Venturing 95 (2012).
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.
Tatiana S. Manolova, Candida G. Brush & Linda F. Edelman, Touched by an Angel: Entrepreneurs Seeking and Obtaining Private Equity Financing, 31 W. New Eng. L. Rev. 745 (2009).
Abstract (from authors):
The purpose of this exploratory study is to fill this gap by investigating the characteristics of entrepreneurs who seek and secure angel financing. More specifically, we ask two questions: (1) what are the characteristics of entrepreneurial new ventures that seek informal equity financing? and (2) what are the characteristics of entrepreneurial new ventures that obtain informal equity financing? To address the two research questions, we examined all investment proposals submitted to an angel financing network based in the Northeast over a two-year period. Following the multi-stage selection process implemented by informal equity providers, we focused on the characteristics of the entrepreneur and his new venture that are associated with increased likelihood of being funded. Our preliminary findings indicate that entrepreneurs who seek angel financing tend to be male and well educated, and their new ventures have predominantly business-to-business models that boast a variety of sources of competitive advantage. While the median investment sought is around $ 1.5 million, angel investors funded new ventures seeking lower amounts of investment, coupled with higher revenue and profit projections. The rest of our paper is organized as follows: after a brief review of the literature on angel financing and the relationship between entrepreneurs seeking informal equity financing and the capital providers, we present our methodology and research design. We next report and discuss our findings. The study concludes with some implications for future research and managerial practice.
Colin M. Mason & Richard T. Harrison, Closing the Regional Equity Capital Gap: The Role of Informal Venture Capital, 9(4) Small Bus. Econ. 153-172 (1995).
Ashish Mathur & Meeta Nihalani, Promotion of Ventures by the Entrepreneurs in the Modern Era (2011), available at http://ssrn.com/abstract=1968237.
The concept of entrepreneurship has a wide range of meanings. On one extreme end, the entrepreneur is a person with high aptitude to take changes and on the other hand, entrepreneur is a person who takes economic activities for himself. The concept of entrepreneur venture differs from the small scale business in this the amount of wealth created is more and the speed of wealth created is high. The risk associated with the venture is high and is designed by the innovative abilities of the entrepreneurs. The entrepreneur is a person with high aptitude for changes and he works for himself. The venture capital has significant benefits and the venture back companies generally grow at a faster and accelerated pace. With venture capital in place, customer, supplier’s staff and even the banks have higher confidence. The basic aim of the paper is to analyse the potential opportunities to build the ventures by the entrepreneurs so to design the world of creativity by his innovative abilities.
Andrew Metrick & Ayako Yasuda, Venture Capital and Other Private Equity: A Survey (2010), available at http://ssrn.com/abstract=1723882.
Abstract (from author):
We review the theory and evidence on venture capital (VC) and other private equity: why professional private equity exists, what private equity managers do with their portfolio companies, what returns they earn, who earns more and why, what determines the design of contracts signed between (i) private equity managers and their portfolio companies and (ii) private equity managers and their investors (limited partners), and how/whether these contractual designs affect outcomes. Findings highlight the importance of private ownership, and information asymmetry and illiquidity associated with it, as a key explanatory factor of what makes private equity different from other asset classes.
Charles Murnieks et al., ‘I Like How You Think': Similarity as an Interaction Bias in the Investor–Entrepreneur Dyad, 48 J. Mgmt. Stud. 1533 (2011), also available at http://ssrn.com/abstract=1932523.
(adapted from authors):
Investigating the factors that influence venture capital decision-making has a long tradition in the management and entrepreneurship literature. However, few studies have considered the factors that might bias an investment decision in a way that is idiosyncratic to a given investor–entrepreneur dyad. The authors do so in this study. Specifically, they build from the literature on the ‘similarity effect’ to investigate the extent to which decision-making process similarity (shared between the investor and the entrepreneur) might bias or otherwise impact the investor's evaluation of a new venture investment opportunity. The findings suggest venture capitalists evaluate more favourably opportunities represented by entrepreneurs who ‘think’ in ways similar to their own. Moreover, in the presence of decision-making process similarity, the impacts of other factors that inform the investment decision actually change in counter-intuitive ways.
Alvaro Pina-Stranger & Emmanuel Lazega, Bringing Personalized Ties Back In: Their Added Value for Biotech Entrepreneurs and Venture Capitalists Interorganizational Networks, 52 Soc. Q. 268 (2011).
This article studies the value of personal relationships between entrepreneurs and VCs at different organizations, confirming their importance.
Jean-Michel Sahut & Jean-Sebastien Lantz, Corporate Venture Capital and Financing Innovation (2011), available at http://ssrn.com/abstract=1762247.
Abstract (from author):
Corporate venture capital (CVC) is a real driving force behind the development of technology-based innovation. It is an entrepreneurial strategy used by big corporations who go outside the company because they can no longer depend solely on creating innovations in-house. CVC enables them to reduce the risk of innovation whilst keeping some control over the target firm or a purchase option on the innovation once it has passed the early stage. This type of operation offers technology-based start-ups both an input of equity capital and technical and strategic expertise and experience. In spite of economic downturns, CVC continues to develop in the high-tech sectors which have been least affected; in particular in biotechnologies. The advantages which it brings to each stage of the project (launching, refinancing and exiting) compared to financing by traditional venture capital funds make its future development secure.
Yochanan Shachmurove, First-Round Entrepreneurial Investments: Where, When and Why? (PIER Working Paper No. 11-017, 2011), available at http://ssrn.com/abstract=1873356.
This paper examines the where, when and why of first round entrepreneurial investment activity in the United States from the first quarter of 1995 until the second quarter of 2010. The paper analyzes these venture capital investments taking into consideration the role of macroeconomic variables, region, and industry. Additionally, trends in regional and industrial investments are evaluated using statistical and graphical analyses. By studying these findings, the authors are able to understand the impact of different periods of economic growth on venture capital investments. Lastly, the shock of the dot.com bubble and recent financial crisis are integrated into the findings.
Jeffrey E. Sohl, The Early-Stage Equity Market in the USA, 1(2) Venture Capital 101-120 (1999).
Abstract (from author): As recently as 20 years ago the USA began a transition from a declining industrial and manufacturing economy to an emerging entrepreneurial/innovation-driven economy. With this transition, the early-stage equity market has also evolved. As the institutional venture capital industry continues to focus on later stage and larger investments, the private investor market now provides the major source of seed and start-up capital. However, imperfections in the seed and start-up market have led to market inefficiencies for the high-growth firm. Two funding gaps appear to exist in the US equity market, both largely as a result of these market inefficiencies. This paper provides a broad overview of the early-stage equity market for high-growth ventures in the USA. In light of the critical role of business angels in the early-stage market, special attention will be given to this population. Also included is a discussion of angel markets and recent trends in the early-stage equity financing of entrepreneurial ventures.
Krishnamurthy Subramanian, The Color of Money: A Start-Up’s Choice Among Venture Capitalists (2011), available at http://ssrn.com/abstract=1785097.
Abstract (from author):
Venture Capitalists (VCs) differ significantly from one another with respect to the non-financial resources — from business expertise to the network of contacts with potential suppliers, customers, employees and IPO underwriters — they offer their portfolio firms. In this paper, I develop a theoretical model incorporating such differences in resources to examine an entrepreneur’s choice among VCs. By relating the costs and benefits of associating with a VC ab initio to the resources offered by the VC, the model examines the conditions under which financing by a more resourceful VC is optimal. The results rationalize the empirical findings that: (1) Startups prefer more resourceful VCs even though they have to offer equity at a considerable discount to such VCs. (2) More resourceful VCs may not only create successful startups but are also able to appropriate the benefits from the same and thereby consistently outperform their less resourceful competitors. However, the model points out that these results may only hold locally depending upon the intensity of product market competition and the entrepreneur’s and VC’s ability to hold each other up. The model generates the following new predictions: (1) In contrast to the hold-up by an informed bank, hold-up by a VC does not necessarily dampen entrepreneurial incentives and can therefore be value-adding. (2) While hold-up involving physical assets is zero-sum, hold-up involving intangible assets is not necessarily so. (3) Financing from a more (less) resourceful VC is optimal when product market competition is low (high) and the likelihood of hold-up is low (high).
Gregory F. Udell et al., Disciplining Delegated Monitors: Evidence from Venture Capital (2011), available at http://ssrn.com/abstract=1782238.
Abstract (from author):
Information-based theories of financial intermediation focus on delegated monitoring. However, there is little evidence on how markets discipline financial intermediaries who fail at this function. This paper uses the venture capital (VC) market to address this gap in the empirical literature by looking at how VC’s reputations are affected when they fail in their monitoring role to prevent fraud by their portfolio firms. We find that VCs who fail to prevent fraud experience greater difficulty in taking future portfolio firms public, and that the negative effect prevails over ten years after the fraud surfaces. In addition, reputation-damaged VCs interact differently in the future with their limited partners, other VCs in the community, and their IPO underwriters because they are perceived by these groups as inefficient monitors.
Manuel A. Utset, Time-Inconsistent Preferences and Venture Capital Contracting (Florida State University College of Law, Public Law Research Paper No. 498, Handbook of Venture Capital Finance, forthcoming 2011), available at http://ssrn.com/abstract=1810147.
Agency explanations of the venture capital process routinely assume that entrepreneurs and venture capitalists have time-consistent (“TC”) preferences, and thus perfect self-control. Given the growing evidence on self-control problems, from both experiments and field studies, it is natural to ask how our understanding of the venture capital process would change if one were to relax the TC assumption. This paper begins this process. It develops a model of venture capital contracts in which time-inconsistent (“TI”) parties may repeatedly procrastinate undertaking onerous tasks — e.g., innovators may procrastinate finishing the innovation, and venture capitalists may procrastinate monitoring and advising entrepreneurs. Similarly, TI entrepreneurs and venture capitalists may overindulge in self-dealing. The time-inconsistent contracting model developed in the paper helps explain why venture capital contracts include incentive and governance mechanisms that are much more high-powered than those used in innovation-intensive publicly traded companies, which not only have many of the same types of moral hazard problems, but are also more complex and less transparent. The model also helps explain some of the standard features of contracts between venture capitalists and their investors.
Howard E. Van Auken, A Model of Community-based Venture Capital Formation to Fund Early-stage Technology-based Firms, 40 J. Small Bus. Mgmt. (2002).
Abstract (from author): This paper suggests a model of capital formation that concurrently establishes a mechanism to fund early-stage technology-based firms and meets the economic development needs of rural communities. Investors in a community capital investment fund can gain high rates of return on investment while firms realize all of the benefits associated with the investment, community support, and expanded network. The model includes factors associated with the community environment (community-based factors that impact community members' participation) and external support environment (factors that facilitate the accumulation of investment capital within a community). The result of a community effort can be an environment in which members of the community contribute to an investment fund, cooperate in attracting firms, and provide networking assistance to new business owners. Communities benefit through job creation and economic stability. Community members benefit through wealth creation.
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Dana M. Warren, Venture Capital Investment: Status and Trends, 6 Ohio St. Entrepren. Bus. L.J. 505 (2011).
This article looks at the status of macro trends in venture capital investing in light of the Great Recession and then examines whether those trends have had an impact on the transaction terms presented to entrepreneurs by venture capital investors.
William Wetzel, Jr., Angels and Informal Risk Capital, 3 Sloan Mgmt. Rev. 23-34 (1983).
Abstract (from author): Raising risk capital is always a challenging and difficult task. "Business angels" play a key role in the risk capital market by providing seed capital for inventors, and start-up and growth capital for small, technology based firms. This article discusses the investment characteristics of a sample of angels active in New England, offers suggestions for entrepreneurs looking for angels, and recommends steps to improve the efficiency of the informal risk capital market.
Andrew L. Zacharakis, Truls Erikson & Bradley George, Conflict Between the VC and Entrepreneur: The Entrepreneur's Perspective, 12(2) Venture Cap. 109 (2010).
Abstract (from author):
In this study, the effects of conflict on confidence in partner cooperation are explored. While the literature on VC-entrepreneur interactions is well developed, viewing the impact of conflict within the dyad is less developed. The data are based on a survey of 57 entrepreneurs who have received venture capital investments. Whereas past research finds that VCs view task conflict favorably, the current study finds that entrepreneurs do not, which leads to reduced confidence in partner cooperation. Furthermore, intragroup conflict within the entrepreneurial team increases conflict between the entrepreneurial team and VC. The implications of the findings suggest that it is important for the entrepreneurial team to build cohesion both within the team and with the VC so that if conflict arises, it doesn't lead to lower overall performance.
Andrew L. Zacharakis & Dean A. Shepherd, A Contingent Decision-Aid for Venture Capitalists’ Investment Decisions, Eur. J. Operational Res. (2003).
Andrew L. Zacharakis, Dean A. Shepherd & Robert A. Baron, Venture Capitalists’ Decision Processes: Evidence Suggesting More Experience May Not Always Be Better, J. Bus. Venturing (2003).
Abstract (from publisher): Decision-making processes employed by venture capitalists (VCs) varying in experience were compared. Results show that for relatively inexperienced VCs, increasing experience is associated with improvements in reliability and performance relative to a benchmark (a bootstrapping model). Beyond a specific point, however, further gains in experience are associated with actual reductions in reliability and performance. Thus, greater experience at the venture capital task may not always result in better decisions.
Andrew L. Zacharakis, Dean A. Shepherd & Joseph E. Coombs, The Development of Venture Capital-Backed Internet Companies: An Ecosystem Perspective, J. Bus. Venturing (2003).
Abstract (from publisher): The current paper uses an “environmental ecosystem” perspective to explore the development of the Internet sector. The findings suggest that different geographic regions possess different ecosystem qualities that benefit some Internet sectors and not others. For example, Internet hardware seems concentrated in northern California; Internet software in the Southwest; and some evidence that e-commerce and content is concentrated in the Rocky Mountains. We also found that the development of the Internet sector is iterative with Internet software companies developed first followed by Internet Infrastructure, Internet hardware, Internet service providers, and finally e-commerce companies.
Junfu Zhang, The Advantage of Experienced Start-up Founders in Venture Capital Acquisition: Evidence from Serial Entrepreneurs, 36 Small Bus. Econ. 187 (2011).
Abstract (from author):
Entrepreneurs with prior firm-founding experience are expected to have more skills and social connections than novice entrepreneurs. Such skills and social connections could give experienced founders some advantage in the process of raising venture capital. This paper uses a large database of venture-backed companies and their founders to examine the advantage associated with prior founding experience. Compared with novice entrepreneurs, entrepreneurs with venture-backed founding experience tend to raise more venture capital at an early round of financing and tend to complete the early round much more quickly. In contrast, experienced founders whose earlier firms were not venture-backed do not show a similar advantage over novice entrepreneurs, suggesting the importance of connections with venture capitalists in the early stage of venture capital financing. However, when the analysis also takes into account later rounds of financing, all entrepreneurs with prior founding experience appear to raise more venture capital. This implies that skills acquired from any previous founding experience can make an entrepreneur perform better and in turn attract more venture capital.
Yanfeng Zheng, In Their Eyes: How Entrepreneurs Evaluate Venture Capital Firms, 14 J. Private Equity 72 (2011).
Abstract (from author):
Although the literature on the venture capital industry is extensive, how entrepreneurs perceive their VC investors remains an under-researched topic. The dominant principal-agent model provides a crude picture based on rational assumptions. As such, we still lack accurate understanding of how exactly entrepreneurs view and why they evaluate their VC investors in certain ways. This study attempts to address this gap through a systematic content analysis on 4,653 online comments for 261 VC firms and statistical analyses on numerical ratings. Our results show that entrepreneurs are attentive to certain attitude and behaviors exhibited by VC firms such as late responses and ethical concerns. Statistical analyses also reveal that, surprisingly, VC firms with success records appear to have lower ratings and VC geographic density seems to boost ratings. The implications for practitioners and scholars are discussed..
Asher Bearman, Understanding VC Financings, The Venture Alley, http://www.theventurealley.com (last visited June 6, 2011).
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