Contracting, signaling, and moral hazard: a model of entrepreneurs, ‘angels,’ and venture capitalists

Investment by wealthy individuals, known as ‘angels,’ in startup firms is quite significant and has taken off in the last few years. Angels invest in the company at an earlier stage than venture capitalists (VCs) do. This paper examines the relationship between an entrepreneur, an angel, and a VC from the seed investment made by the angel to the exit stage. The study characterizes the equilibrium contracts among the players and provides insights into the related institutional arrangements. Next, the study examines the signaling aspects of the game. The paper also analyzes the moral hazard problems of the entrepreneur and the VC. It shows that the outcome in a startup firm is not efficient because of the free-rider phenomenon.     

Signaling and initial public offerings: The use and impact of the lockup period

To reduce information asymmetries for potential investors considering investment in an IPO venture, owners can signal the firm's longer-term viability and quality in several ways. The lockup period, is one signal that can be offered. We investigated the lockup period of a sample of 640 ventures going through the IPO and find that a longer lockup period acts as a substitute signal to venture capital (VC) and prestigious underwriter backing. Furthermore, we find that ventures which have a going concern issue can reduce the amount of underpricing at the time of the IPO by accepting a longer lockup period.     

The cumulative nature of the entrepreneurial process: The contribution of human capital,planning and environment resources to small venture performance

The study is theoretically grounded in the resource-based view and applied to a service industry-tourism. It examined the performance of small ventures by utilizing an integrated dynamic model of entrepreneur choices and resource accumulation. Each phase in the process is added to previous one. Findings from 305 small tourism ventures revealed that the human capital of the entrepreneur, particularly managerial skills, were the greatest contributing factor to performance. This was followed by venture type. The study illustrates the unique nature of the entrepreneurial process among small ventures, often defined as “lifestyle businesses”.