Policies of promoting entrepreneurship and Angel Investment: Evidence from China

Using a sample of angel investments in China from 1994 to 2013, we examine effects of government policies that are favorable to start-ups on angel investment. Our findings show that positive effects of these policies on the amounts of angel investments are more significant in provinces with higher economic growth than those in provinces with lower economic growth. Policies that promote entrepreneurship affect the returns from high-amount angel investments more than those from low-amount ones. These findings indicate that such policies help to shape the new venture market in China and guide angel investors in making more efficient investments.     

Passion for entrepreneurship or passion for the product? A conjoint analysis of angel and VC decision-making

Passion is important to venture investors, but what specifically do they want entrepreneurs to be passionate about? This study theorizes that angel investors and venture capitalists consider both entrepreneurs' passion for activities related to the product or service the venture provides (i.e., product passion) and passion for founding and developing new ventures (i.e., entrepreneurial passion). We demonstrate that both types of passion become more appealing when the investor perceives that the entrepreneur is highly open and receptive to feedback, suggesting that openness to feedback mitigates potential concerns associated with passion in its extremes. We further find that venture investors differ in their consideration of passion; angel investors and venture capitalists with more investing experience place greater emphasis on the combination of product passion and openness to feedback, whereas those with more entrepreneurial experience emphasize the combination of entrepreneurial passion and openness to feedback.     

Valuation of Angel‐Backed Companies: The Role of Investor Human Capital

This article examines how angel investors' human capital affects the valuation of their portfolio companies, based on the pre‐money valuation of 123 investment rounds in 58 Belgian companies. We argue that angel investors with higher levels of human capital will perceive a higher value‐creating potential in entrepreneurial opportunities through their ability to see more value‐creating options, a higher value‐adding potential post‐investment, and an enhanced legitimacy provided to the venture. Economic theories suggest they appropriate these rents through lower valuations, whereas stewardship theory suggests they share value creation with entrepreneurs. Consistent with stewardship theory, we show angel investors negotiate higher valuations when they have higher levels of human capital, more specifically if they studied longer, have a business degree, more entrepreneurial experience, or previous professional law experience. As such, our results contrast with the behavior of venture capital investors who negotiate lower valuations when they have more experience.     

Do women-owned businesses have equal access to angel capital?

Women-owned businesses are the fastest growing sector of new venture ownership in the United States. Although women's access to, and use of, debt and venture capital financing have been explored, comparatively little is known about women's access to capital from private equity investors. In this paper, we examine the equality of women's access to angel capital. The research suggests that women seek angel financing at rates substantially lower than that of men, but have an equal probability of receiving investment. We also document that women are more likely to seek, and to a lesser extent receive, financing from women angels.     

Is it worth it? The rates of return from informal venture capital investments

Despite growing interest in venture capital, there is a paucity of information on the rate of return to these investments and the limited research that is available refers almost entirely to portfolio returns for venture capital funds. The investment returns to business angels have been virtually ignored. This paper provides the first attempt to analyse the returns to informal venture capital investment using data on 128 exited investments from a survey of 127 business angel investors in the UK. The paper finds that the distribution of returns is highly skewed, with 34% of exits at a total loss, 13% at a partial loss or break-even, but with 23% showing an IRR of 50% or above. Trade sales are the main way in which business angels harvest their investments. The median time to exit for successful investments was 4 years. Large investments, large deal sizes involving multiple coinvestors, and management buyouts (MBOs) were most likely to be high-performing investments.     

A theoretical analysis of optimal financing strategies for different types of capital-constrained entrepreneurs

In this paper, we compare two alternative financing strategies that capital-constrained entrepreneurs can adopt: they can either wait until they raised enough money to complete their project (the more conservative strategy) or use limited resources to achieve some intermediate milestone before contacting large outside investors such as venture capitalists (the more adventurous strategy). We examine how the choice of financing strategy is affected by entrepreneurial types (life-style, serial and pure profit-maximizing entrepreneur). We show that specific entrepreneurial characteristics may ultimately affect the shape of firms as they may pursue different strategies to achieve similar goals. The paper generates a number of empirical predictions on security design, the interplay between angel and venture capital finance, and the professionalization of the venture capital market.     

Perceived risks and choices in entrepreneurs' new venture decisions

Though risk plays a central role in most entrepreneurial decision making, little empirical research has explicitly examined how the elements of risk, risk perceptions, and entrepreneurs' propensities to take risks influence choices among potentially risky entrepreneurial ventures. This experimental study asked a sample of entrepreneurs leading America's fastest growing firms to make choices among a series of hypothetical new ventures. The results indicate that such choices are influenced by the risks inherent in the new ventures, as evidenced by the pattern of outcomes anticipated in each venture, the entrepreneurs' differing perceptions of those risks, and differences in their personal propensities to take risks.The subjects in our sample of entrepreneurs tended not to choose ventures having a high degree of variability in their pattern of anticipated outcomes. This avoidance of outcome variability suggests that the sensitivity analyses commonly prescribed for examining new venture attractiveness may inhibit risk taking, and may deter potential investors from investing in their firms. New approaches to assessing and presenting new venture risk, other than the traditional best case/expected case/worst case approach, may be advisable, as well as sufficiently through market research to provide evidence of the degree to which market acceptance is likely for the venture's products or services.We also found an effect of differences in risk propensities among entrepreneurs on their new venture choices. This effect suggests not only that entrepreneurs should be wary of any biases they bring to their new venture decisions, but that prospective investors should consider the degree to which entrepreneurs in whom they choose to invest are well-matched to the investors' own risk-taking propensities.Finally, while our sample of entrepreneurs tended to shun high levels of variability in their new venture choices, they appeared willing to accept a considerable degree of hazard, or possible downside, in their new venture choices, presumably in pursuit of potentially significant gains. Entrepreneurs are advised to seek a clear understanding of the downside entailed in their proposed ventures, and develop strategies to mitigate the likelihood of adverse outcomes. Thus they will not jeopardize chances for near term success and attracting support of investors and others in later stages of the venture or in subsequent ventures.Our research did not attempt to examine how our subjects' choices would have played out in terms of performance, but the apparent biases which entrepreneurs' risk propensities bring to their assessment of proposed new ventures is a potentially important issue that merits further scrutiny. On one hand, such biases may lead to patterns of suboptimal decisions. On the other hand, our results suggest that investors should entrust their new venture investments to entrepreneurs whose risk propensities (and perhaps other personal characteristics) best match the needs of both the opportunity at hand and the investor's objectives. As many venture capitalists attest, the management of a proposed new venture should lie at the heart of their investment decision.     

Startup Success Factors in the Capital Attraction Stage: Founders’ Perspective

Only a small percentage of startups attract capital from venture capital investors. To determine the factors which owners of startups consider the most important for attracting seed venture investments, the founders of 40 startups in Latvia and Russia were questioned. The researchers compared organizational and financial factors’ importance for two groups of entrepreneurs: those who succeeded and those who failed in attracting funding. The results of the study indicate certain differences between the viewpoints of founders and investors regarding success factors. Based on the factor and regression analysis, the authors developed a model to forecast success in capital attraction.     

Venture capitalists and serial entrepreneurs

Habitual entrepreneurship is receiving growing attention, much of which has focused on entrepreneurs who have started more than one venture. This paper examines the importance of habitual entrepreneurs to the venture capital industry, with particular emphasis on those who have exited from an initial investment in the venture capitalist's portfolio, termed serial entrepreneurs. As venture capital markets mature, increasing numbers of entrepreneurs are likely to exit from their initial enterprises, creating a pool of entrepreneurs with the potential for embarking on subsequent ventures. Venture capitalists making investments may invest both in entrepreneurs starting new ventures and those who purchase a venture through a management buy-out or buy-in. On this wider basis, the paper develops a classification of types of serial venture. A number of issues are raised for venture capitalists, notably the relative attractiveness of reinvesting in exited entrepreneurs and the policy they adopt in tracking and assessing such individuals.The paper addresses venture capitalists' perspectives on investing in serial entrepreneurs based on a representative sample of 55 UK venture capitalists (a response rate of 48.7%, and a follow-up survey of those who had more extensive experience of serial entrepreneurs (23 respondents). The results of the survey show that despite a strong preference for using an entrepreneur who had played a major role in a previous venture, the extent to which exiting entrepreneurs are funded from their own portfolio again is limited, though there is more extensive use of such individuals in a consultancy capacity. In screening entrepreneurs exiting from previous ventures for subsequent investments, venture capitalists scored attributes relating to commercial awareness, experience in a particular sector, and personal ambition of the entrepreneur most highly.Venture capitalists do make extensive use of serial entrepreneurs who have exited from other venture capitalists' portfolios, primarily to lead management buy-ins. Indications from the survey are that venture capitalists rarely assess entrepreneurs formally at the time of exit and that it is unusual to maintain formal links with entrepreneurs after they have exited. These apparent shortcomings suggest that perhaps investment opportunities are being missed. Those venture capitalists preferring serial entrepreneurs generally had a larger volume of funds under investment and were rather older than those venture capitalists who do not prefer to use serial entrepreneurs, reflecting the possibility that longer established venture capitalists have had more opportunity and experience in relation to second-time entrepreneurs.Investment appraisal factors were subject to a principal components analysis to identify underlying dimensions/relationships between them. With respect to the general investment appraisal factors, five factors were identified. Two factors were related to track record; one of these reflected ownership experience, while the other represented management experience. The third factor was related to personal attributes such as age, knowledge, and family background. The fourth factor represented links to the funding institution, and the final factor (a single variable factor) concerned financial commitment. The principal components analysis for screening factors on management buy-ins produced a single factor comprising all variables. These factors were then subject to a multivariate analysis of variance (MANOVA), with preference for use of a serial entrepreneur as the independent variable. The results suggest that there are significant differences between venture capitalists who prefer serial entrepreneurs and those who do not in respect to their business ownership experience, the length of their entrepreneurial careers, and the number of their previous ventures.The results of the study have implications for practitioners. First, the findings emphasize the importance of not considering previous venture experience in isolation but in the context of other key investment criteria. Second, the lack of strongly greater performance from serial, versus novice, entrepreneurs further emphasizes the care to be taken in assessing experienced entrepreneurs. Third, the relatively low degree of formal and rigorous post-exit assessment and monitoring by venture capitalists suggests that important opportunities to invest in experienced entrepreneurs may be missed.     

The capital gap for small technology companies: public venture capital to the rescue?

In this paper, we analyze effectiveness of public intervention for fostering private venture-capital market in Spain. We use a sample obtained from VentureXpert database, consisting of 755 investments made by 83 Spanish public and private venture capitalists that closed at least one fund between 1997 and 2008. We compare the investments undertaken by private and public investors before and after public venture capital programs were started. We found that Spanish venture-capital market has rapidly developed in the last 10 years and that this development coincides with the establishment of public policies for encouraging technology entrepreneurship. We also found that other factors, such as previous experience of investors and size, have also contributed to fostering more high-risk investments. These results may encourage governments in other countries to start or keep working to promote private venture-capital investments.     

Social trust and angel investors' decisions: A multilevel analysis across nations

The decisions made by angel investors are embedded in and influenced by their institutional settings. This paper advances a multilevel model of the direct and indirect effects of social trust on individuals' angel-investment decisions. It is postulated that two dimensions of social trust, namely the level and radius, can enhance information transmission, collaboration, and sanctioning mechanisms within a society. Consequently, they facilitate angel investment and moderate the relationship between it and individual factors. A multilevel model of data from 191,907 individuals across 25 countries shows that individuals in countries with a high level of trust are more likely to make angel investments. Whereas both the level of trust and the radius of trust are found to heighten the positive relationship between an individual's perceived entrepreneurial skills and angel investment, it is interesting to note that these factors weaken the relationship between the perception of new business opportunities and angel investment. These direct and moderating effects are robust after controlling for wealth, cultural values, and other factors. This study contributes to the crossover between research on entrepreneurship and social-trust research.     

Institutional Distance and Cross‐Border Venture Capital Investment Flows

Cross‐border investments are an increasingly important part of venture capitalists' portfolios. In order to better understand venture capitalists' international investment decisions, we use dyadic pairings of European countries over a 10‐year time span to examine how regulative, normative, and cultural‐cognitive institutional differences are related to cross‐border venture capital investment flows. Results demonstrate that increased normative and cultural‐cognitive distance reduce cross‐border investments, whereas regulative distance shows no relationship. Together, these findings suggest that institutional dimensions do influence venture capital investment decisions and that the type of distance can have differing effects.     

Angel Financing and the Performance of High‐Tech Start‐Ups

In this paper, we investigate what drives the performance of high‐tech start‐ups receiving angel financing, while taking a closer look at the capabilities (i.e., experience) and investment behavior of business angels (BAs). We exploit a new data set (extracted from Crunchbase), which consists of 1,933 high‐tech start‐ups that received at least one financing round from a BA. The results indicate that the experience of BAs in early stage investments is positively associated with additional receipt of follow‐on rounds of financing and sequential capital injections from venture capitalists (VCs). Later‐stage experience is positively associated with the start‐up's success (i.e., probability to be listed or acquired), but reduces the need for new VCs to invest in the start‐up. Furthermore, we find consistent evidence that start‐ups that combine BA and VC financing experience higher levels of funding amounts, additional VC financing, and an improved likelihood of success. Finally, we find that the co‐localization of BA investors and start‐ups in the same area facilitates the attraction of VC financing.     

Business Angel Networks and the Development of the Informal Venture Capital Market in the U.K.: Is There Still a Role for the Public Sector

Business angel networks (BANs) provide a channel of communication between private venture capital investors (business angels) and entrepreneurs seeking risk capital. Most operate locally on a not-for-profit basis with their costs underwritten by the public sector. However, the recent establishment of BANs by private sector organisations in the U.K. has led to a questioning of the government's continuing role in the financing of BANs. This paper demonstrates that there are significant differences between public sector and other not-for-profit BANs and private sector, commercially-oriented BANs in terms of the investments that they facilitate. Private sector BANs are primarily involved with larger, later stage deals whereas investments made through not-for-profit BANs are generally smaller, involve start-ups and other early stage businesses and are local. The emergence of private sector BANs has therefore not eliminated the need for public sector support for locally-oriented networks.     

Alternative investments in emerging markets: A review and new trends

This paper provides a review of the alternative investments literature in emerging markets, with a focus on art and wine, angel investment, venture capital and private equity, private debt, hedge funds, crowdfunding, and IPOs. We show that there has been relatively more growth in the scholarly interest in alternative investments in emerging markets compared to alternative investments and compared to emerging markets over the period 2000–2016. We highlight topics that have been the subject of scholarly focus, and identify topics for future research.     

Investment Patterns of Informal Investors in the Alberta Private Equity Market*

This study identifies three main types of informal investors in private equity markets: relationship investors, opportunity‐based investors, and angel investors. We find evidence that the first two investor types are a major total source of capital and they prefer to invest smaller amounts close to home and in the context of existing relationships. With respect to angel investors, we find evidence of stratification in their desired investment amount which is consistent with a model where their investments evolve though a life cycle of investing. We also find evidence that changes to capital market regulations that allow for lower investment amounts by this type of investor increase the amount of capital available for early‐stage firms.     

Crowdfrauding: Avoiding Ponzi entrepreneurs when investing in new ventures

Crowdfunding has gained substantial interest in the U.S., allowing entrepreneurs to raise startup capital in exchange for equity in their ventures. This approach to equity capital can open up new sources of venture finance to legitimate entrepreneurs, but little attention has been given to how it offers new opportunities for illegal entrepreneurs to defraud investors. We adopt a forensic approach to examine entrepreneurs who launch Ponzi ventures—businesses that continually bring in new investors in order to use their money to pay returns to earlier investors—to demonstrate the ease, creativity, and audacity with which these illegal entrepreneurs operate. The provided examples of Ponzi entrepreneurs show how easily they can circumvent the safeguards purported to protect investors: screening by ‘the crowd,’ transparency and documentation requirements, independent audit reports, and withholding of funds until the venture's financial goal has been met. In this article, we offer possible solutions to help protect investors, legitimate entrepreneurs, and business in general from the damage created by illegal entrepreneurs.     

Determinants of early entry: governance choices and syndicate networks in US venture capitals' Internet investments

This research addresses the issues of governance choices and attributes of network participants as determinants of early entry by integrating a network perspective into the strategic management literature. Our arguments are tested using data on 813 Internet portfolio companies' investments by the venture capitals (VCs), one of the most rapidly developing sectors of the financial service industry in the USA. The results provide little evidence that governance choices between sole investments and syndicate networks may affect the decision to invest in early movers in the Internet industry. Nevertheless, the attributes of VC investors in initial investments affect the likelihood of investing in early movers. The propensity for syndicate investments in early start-ups in the Internet industry increases with the presence of heterogeneous investors' attributes but decreases with the presence of homogeneous investors' attributes.     

Chinese venture investments in the United States, 2010–2017

This article contributes to the understanding of Chinese venture investors in the United States by comprehensively measuring the amount and type of venture investments coming to the United States from China. Venture activity is examined by focusing on the number of investments made by venture capital funds, both U.S.‐ and China‐based that include Chinese corporations undertaking corporate venture capital (CVC). Chinese participation in venture funding of United States emerging companies increased from 21 investments in 2010 to 407 in 2016 and 2017. Venture capital funds account for 78% of the investment activity, with Chinese CVC undertaking 22% of the investments. We contribute to the literature of CVC by providing definitions of three specific types of investing firms: corporate funds, strategic investors, and strategic partnerships. In addition, we provide data and examine the motivations of Chinese firms forming strategic partnerships with United States startups.     

Why do venture capital firms exist? theory and canadian evidence

This paper investigates the role of venture capitalists. We view their “raison d’être” as their ability to reduce the cost of informational asymmetries. Our theoretical framework focuses on two major forms of asymmetric information: “hidden information” (leading to adverse selection) and “hidden action” (leading to moral hazard). Our theoretical analysis suggests four empirical predictions.1. Venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors. This suggests strong industry effects in venture capital investments. Venture capitalists should be prominent in industries where informational concerns are important, such as biotechnology, computer software, etc., rather than in “routine” start-ups such as restaurants, retail outlets, etc. The latter are risky, in that returns show high variance, but they are relatively easy to monitor by conventional financial intermediaries.2. Within the class of projects where venture capitalists have an advantage, they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe. Thus, within a given industry where venture capitalists would be expected to focus, we would also expect venture capitalists to favor firms with some track records over pure start-ups. To clarify the distinction between point 1 and point 2, note that point 1 states that if we look across investors, we will see that venture capitalists will be more concentrated in areas characterized by significant informational asymmetry. Point 2 says that if we look across investment opportunities, venture capitalists will still favor those situations which provide better information (as will all other investors). Thus venture capitalists perceive informational asymmetries as costly, but they perceive them as less costly than do other investors.3. If informational asymmetries are important, then the ability of the venture capitalist to “exit” may be significantly affected. Ideally, venture capitalists will sell off their share in the venture after it “goes public” on a stock exchange. If, however, venture investments are made in situations where informational asymmetries are important, it may be difficult to sell shares in a public market where most investors are relatively uninformed. This concern invokes two natural reactions. One is that many “exits” would take place through sales to informed investors, such as to other firms in the same industry or to the venture’s own management or owners. A second reaction is that venture capitalists might try to acquire reputations for presenting good quality ventures in public offerings. Therefore, we might expect that the exits that occur in initial public offerings would be drawn from the better-performing ventures.4. Finally, informational asymmetries suggest that owner-managers will perform best when they have a large stake in the venture. Therefore, we can expect entrepreneurial firms in which venture capitalists own a large share to perform less well than other ventures. This is moral hazard problem, as higher values of a venture capitalist’s share reduce the incentives of the entrepreneur to provide effort. Nevertheless, it might still be best in a given situation for the venture capitalist to take on a high ownership share, since this might be the only way of getting sufficient financial capital into the firm. However, we would still expect a negative correlation between the venture capital ownership share and firm performance.Our empirical examination of Canadian venture capital shows that these predictions are consistent with the data. In particular, there are significant industry effects in the data, with venture capitalists having disproportionate representation in industries that are thought to have high levels of informational asymmetry. Secondly, venture capitalists favor later stage investment to start-up investment. Third, most exit is through “insider” sales, particularly management buyouts, acquisitions by third parties, rather than IPOs. However, IPOs have higher returns than other forms of exit. In addition, the data exhibit the negative relationship between the extent of venture capital ownership and firm performance predicted by our analysis.