Human capital signals and entrepreneurs’ success in equity crowdfunding

Grounding on research about the role of signals in the attraction of equity finance, this paper studies the effects of diverse human capital signals on entrepreneurs’ success in equity crowdfunding. We argue that the human capital of an entrepreneur, who launches (alone or with other teammates) an equity crowdfunding campaign to finance her start-up, constitutes a set of signals of the start-up quality. The impact of each human capital signal on entrepreneur’s success in equity crowdfunding depends on both signal fit with start-up quality and signal ambiguity. Empirical estimates on 284 entrepreneurs who launched equity crowdfunding campaigns indicate that only entrepreneurs’ business education and entrepreneurial experience, two human capital signals that have both a good fit with start-up quality and a low degree of ambiguity, significantly contribute to entrepreneurs’ success in equity crowdfunding.     

Illegal entrepreneurship experience: Does it make a difference for business performance and motivation?

Existing studies show a positive relationship between entrepreneurs' business performance and their conventional human capital as measured by previous business experience and formal education. In this paper, we explore whether illegal entrepreneurship experience (IEE), an unconventional form of human capital, is related to the performance and motivation of entrepreneurs operating legal businesses in a transition context. Using regression techniques on a sample of 399 private business owners in Lithuania, we find that, in general, IEE is significantly and positively associated with subjective measures of business motivation. Moreover, younger entrepreneurs benefit from their IEE in terms of business performance, indicating that they have been more successful than older entrepreneurs in transferring their IEE to a market oriented setting. In addition, IEE and business performance are positively related for entrepreneurs who started completely new legal businesses. Thus, our research partially supports the notion that prior experience in the black or gray market may signal and provide valuable human capital for legal enterprising.     

Founders’ human capital and the performance of UK new technology based firms

This paper investigates the role of entrepreneurs?? general and specific human capital on the performance of UK new technology based firms using a resource based approach to the entrepreneurship theory. The effect of entrepreneurial human capital on the performance of NTBFs is investigated using data derived from a survey of 412 firms operating in both high-tech manufacturing and the services sectors. According to the resource based theory it is found that specific human capital is more important for the performance of NTBFs in relation to general. More specifically individual entrepreneurs or entrepreneurial teams with high levels of formal business education, commercial, managerial or same sector experience are found to have created better performing NTBFs. Finally it is found that the performance of a NTBF can improve through the combination of heterogeneous but complementary skills, including, for example, technical education and commercial experience or managerial technical and managerial commercial experience.     

Entrepreneur opportunity costs and intended venture growth

This study investigates how entrepreneur opportunity costs influence the intended future size of new ventures. In particular, using a survey of nascent entrepreneurs in the process of starting a venture, this paper examines how intended future sales revenue is influenced by entrepreneur current household income, education, and managerial experience. Consistent with opportunity cost and human capital arguments, it is found that individuals with higher current household income and greater supervisory experience have higher levels of intended firm size in 5 years time. While this study finds that entrepreneur stated preferences for growth also influence intended future sales of the venture, the association between nascent entrepreneur opportunity costs and venture scale is complementary to these stated preferences.     

The higher returns to formal education for entrepreneurs versus employees

How valuable is formal education for entrepreneurs’ income relative to employees’? And if the income returns to formal education are different for entrepreneurs vis-à-vis employees, what might be a plausible explanation? To explore these questions, we analyze a large representative US panel. We show that entrepreneurs have higher returns to formal education than employees. We refer to this as the entrepreneurship returns puzzle. We run post hoc analyses to explore a number of potential explanations of this puzzle. Indirectly, our analysis indicates that the higher returns to formal education for entrepreneurs might be due to the fewer organizational constraints they face, leading to more personal control over how to use their human capital, compared to employees.     

Start-Up Capital: "Does Gender Matter?"

Female and male entrepreneurs differ in the way they finance their businesses. This difference can be attributed to the type of business and the type of management and experience of the entrepreneur (indirect effect). Female start-ups may also experience specific barriers when trying to acquire start-up capital. These may be based upon discriminatory effects (direct effect). Whether gender has an impact on size and composition of start-up capital and in what way, is the subject of the present paper. The indirect effect is represented by the way women differ from men in terms of type of business and management and experience. The direct effect cannot be attributed to these differences and is called the gender effect. We use of a panel of 2000 Dutch starting entrepreneurs, of whom approximately 500 are female to test for these direct and indirect effects. The panel refers to the year 1994. We find that female entrepreneurs have a smaller amount of start-up capital, but that they do not differ significantly with respect to the type of capital. On average the proportion of equity and debt capital (bank loans) in the businesses of female entrepreneurs is the same as in those of their male counterparts.     

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.     

The missing link: knowledge diffusion and entrepreneurship in endogenous growth

The intellectual breakthrough contributed by the new growth theory was the recognition that investments in knowledge and human capital endogenously generate economic growth through the spillover of knowledge. However, endogenous growth theory does not explain how or why spillovers occur. This paper presents a model that shows how growth depends on knowledge accumulation and its diffusion through both incumbents and entrepreneurial activities. We claim that entrepreneurs are one missing link in converting knowledge into economically relevant knowledge. Implementing different regression techniques for the Organisation for Economic Co-operation and Development (OECD) countries during 1981 to 2002 provides surprisingly robust evidence that primarily entrepreneurs contributed to growth and that the importance of entrepreneurs increased in the 1990s. A Granger test confirms that causality goes in the direction from entrepreneurs to growth. The results indicate that policies facilitating entrepreneurship are an important tool to enhance knowledge diffusion and promote economic growth.     

The process of female borrower discouragement

Recent entrepreneurial finance literature identifies ‘borrower discouragement’ as an important phenomenon explaining why female entrepreneurs hold less capital to grow their venture. But how do you become a discouraged borrower? We apply grounded theory to interviews with Tanzanian female entrepreneurs and model the process via which these entrepreneurs become discouraged. Our model suggests that entrepreneurs hold negative perceptions regarding loan application, allocation and payback procedures shaped by both internal and external information sources. We demonstrate that negative perceptions cause an unfavorable attitude towards formal loans which together with entrepreneurs' perceptions of societal norms lead to a low intention to apply.     

Innovative opportunity pursuit, human capital and business ownership experience in an emerging region: evidence from Ghana

This study explores whether an entrepreneur??s ability to assemble and leverage human capital, particularly specific human capital relating to prior business ownership experience, is associated with seven types of product and work practices innovation in an emerging region, namely, Ghana. Logistic regression estimation revealed that portfolio entrepreneurs were more likely than novice entrepreneurs to report ??innovation tried??. Multinomial logistic regression analysis revealed that portfolio entrepreneurs were more likely than other entrepreneurs to report ??innovation tried and introduced??. If the goals of policy are to increase the ??quality?? of new business start-ups and maximize investment returns, there is a case to target assistance to portfolio entrepreneurs.     

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.     

Venture capitalist governance and value added in four countries

The rapid internationalization of markets for venture capital is expanding the funding alternatives available to entrepreneurs. For venture capital firms, this trend spells intensified competition in markets already at or past saturation. At issue for both entrepreneurs and venture capital firms is how and when venture capitalists (VCs) can provide meaningful oversight and add value to their portfolio companies beyond the provision of capital. An important way VCs add value beyond the money they provide is through their close relationships with the managers of their portfolio companies. Whereas some VCs take a very hands-off approach to oversight, others become deeply involved in the development of their portfolio companies.Utilizing surveys of VCs in the United States and the three largest markets in Europe (the United Kingdom, the Netherlands, and France), we examined the determinants of interaction between VCs and CEOs, the roles VCs assume, and VCs' perceptions of how much value they add through these roles. We examined the strategic, interpersonal, and networking roles through which VCs are involved in their portfolio companies, and we analyzed how successful such efforts were. By so doing we were able to shed light on how and when VCs in four major markets expend their greatest effort to provide oversight and value-added assistance to their investment companies.Consistent with prior empirical work, we found that VCs saw strategic involvement as their most important role, i.e., providing financial and business advice and functioning as a sounding board. They rated their interpersonal roles (as mentor and confidant to CEOs) as next in value.Finally, they rated their networking roles (i.e., as contacts to other firms and professionals) as third most important. These ratings were consistent across all four markets. VCs in the United States and the United Kingdom were the most involved in their ventures, and they added the most value. VCs in France were the least involved and added the least value; VCs in France appeared to be least like others in terms of what factors drove their efforts. Our theoretical models explained a greater proportion of variance in governance and value added in the United States than elsewhere. Clear patterns of behavior emerged that reflect the manner in which different markets operate. Among the European markets, practices in the United Kingdom appear to be most like that in the United States.Determinants of Governance (Face-to-Face Interaction)We operationalized VC governance or monitoring of ventures as the amount of face-to-face interaction VCs had with venture CEOs. We found some evidence that VCs increase monitoring in response to agency risks, but the results were mixed. Lack of experience on the part of CEOs did not prompt significant additional monitoring as had been predicted. A more potent determinant was how long the VC-CEO pairs worked together; longer relationships mitigated agency concerns and reduced monitoring. Contrary to expectations, perceived business risk in the form of VCs' satisfaction with recent venture performance had little impact on face-to-face interaction. Monitoring was greatest in early stage ventures, indicating that VCs respond to high uncertainty by increased information exchange with CEOs. We measured two types of VC experience and found different patterns for the two. Generally speaking, VCs with greater experience in the venture capital industry required less interaction with CEOs, whereas VCs with greater experience in the portfolio company's industry interacted more frequently with CEOs than did VCs without such experience.Determinants of Value AddedWe argued that VCs would most add value to ventures when the venture lacked resources or faced perceived business risks, when the task environment was highly uncertain, and when VCs had great investing and operating experience. Contrary to expectations, VCs added most value to those ventures already performing well. As we had predicted, VCs did add relatively more value when uncertainty was high: e.g., for ventures in the earliest stages and for ventures pursuing innovation strategies. Finally, we found that VCs with operating experience in the venture's focal industry added significantly more value than those with less industry-specific experience. These results are consistent with anecdotal evidence that entrepreneurs have a strong preference for VCs with similar backgrounds as their own. We found no evidence that experience in the venture capital industry contributed significantly to value added. Together, these results suggest that investigations of the social as well as economic dimensions of venture building may prove a fruitful avenue for future study. Overall, the results showed that value-added is strongly related to the amount of face-to-face interaction between VC-CEO pairs and to the number of hours VCs put in on each individual venture.Implications for Venture CapitalistsThe competition for attractive investments is heating up as economies become more globalized. Thus, the pressure on venture capital firms to operate both efficiently and effectively is also likely to build. It is as yet unclear whether the recent trend toward later stage, safer investments will continue, and how those venture capital firms following this path can differentiate themselves from other sources of capital. Venture capital firms that are able to choose the appropriate bases for determining governance effort and the appropriate roles for delivering added value to their portfolio companies will be those most likely to survive.In the largest, most robust markets (i.e., the United States and the United Kingdom), more effort is expended by venture capitalists to deliver something of value beyond the money. This suggests that the tradeoff preferred by those succeeding is to be more rather than less involved in their investments. Our results indicate that VCs clearly economize on the time they devote to involvement in their portfolio companies. However, our results also indicate that they do this at the great peril of producing value insufficient to justify the cost of their product.Implications for EntrepreneursOur findings provide two important insights for entrepreneurs. First, they show that where and when they obtain venture capital is likely to have an impact on the extent and nature of effort delivered by their venture capital investors. It appears that on average entrepreneurs receiving venture capital in the United States and the United Kingdom will be more closely monitored and will receive more value-adding effort from their VCs than will those in France or the Netherlands. Needless to say, entrepreneurs should consider their preferences for level and type of involvement from their investors as they consider their choice of partners. In France, for example, VCs put great emphasis on their financial role in comparison with other roles, but they contribute much less than VCs elswhere via other strategic, interpersonal, and networking roles.The second key implication of our findings is that entrepreneurs may be able to gauge what roles VCs will see as most important, when VCs are more or less apt to become involved in their companies, and when they believe they can most add value. Such knowledge may help CEOs anticipate VC activity, be aware of the parameters of VCs' preferences, communicate their own preferences, and negotiate the timing and extent of interaction. For example, although our results indicate that geographic distance significantly limits face-to-face interaction, it appears to have less impact on the amount of value added.Implications for ResearchersMuch more can be learned about the relative efficiency and effectiveness of alternative governance arrangements. Little is known about how formal structures such as contract covenants and board control work in conjunction with informal oversight and interaction. Even less is known about how value is added and how it is best measured. Although this study took a step toward developing a model of the circumstances under which value is added, the theory and its operationalization await further development.     

The advantage of experienced start-up founders in venture capital acquisition: evidence from serial entrepreneurs

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.     

Access (Not) Denied: The Impact of Financial, Human, and Cultural Capital on Entrepreneurial Entryin the United States

Entrepreneurship contributes to business dynamics in all economies, and the individual benefits of starting a business are clear. Nonetheless, access to business start-ups may not be available to all people because of resource constraints. Using a unique new data set for the United States, we examine the relative importance of three forms of resources in pursuing start-up ventures: financial, human, and cultural capital. Our analysis of the Panel Study of Entrepreneurial Dynamics shows that neither financial nor cultural capital resources are necessary conditions for entrepreneurial entry. By contrast, potential entrepreneurs gain significant advantages if they possess high levels of human capital. Specifically, advanced education and managerial experience are significantly positively associated with entrepreneurial entry. Our findings suggest that attempts at entering entrepreneurship, at least in the short-term, may be increasing, as opportunities to acquire human capital are becoming more widespread.     

The impact of human capital on the early success of necessity versus opportunity-based entrepreneurs

This paper examines whether founders’ backgrounds influence new firm survival in the early years after startup, focusing, in particular, on the impact of unemployment-driven entrepreneurship. For entrepreneurs who left their previous employment to found a new firm, both general and specific human capital play a key role in enhancing early survival chances. However, various forms of human capital have little effect on early survival of unemployment-driven entrepreneurs, who rely mostly on previous entrepreneurial experience to persevere. Results suggest that pre-entry capabilities play an important role in the early success of opportunity-based entrepreneurs, but have little influence on the early success of necessity-based ones.     

Behaviors of Pre-Venture Entrepreneurs and Perceptions of Their Financial Needs

Some studies have examined different barriers faced by entrepreneurs in starting their firms. For example, lack of business education, training, or managerial experience may have an impact on the firm's success. This study sought to determine whether there were any differences in the assistance and training needs between male and female pre-venture entrepreneurs as well as between Hispanic and Anglo pre-venture entrepreneurs. The training needs focused on the areas of finance and accounting. A sample of 133 clients of a regional Small Business Development Center (SBDC) was used to make this comparison. The results indicated differences between males and females in most cases and especially between Hispanic females and Hispanic males. The Hispanic males felt they needed less assistance in the areas of finance and accounting than the Hispanic females did. However, the SBDC consultants felt that both the Anglo and Hispanic females needed less assistance in those areas than the Anglo and Hispanic males needed.     

Linking family-to-business enrichment and support to entrepreneurial success: Do female and male entrepreneurs experience different outcomes?

This study used survey data from 253 entrepreneurs who founded small to medium sized enterprises (SMEs) to examine how experiences in their family domain may benefit their experiences in their business domain. Specifically, it hypothesized that affective family-to-business enrichment, instrumental family-to-business enrichment, and family-to-business support would be positively related to entrepreneurial success and that each relationship would be more positive for female entrepreneurs than male entrepreneurs. Entrepreneurial success was assessed by economic measures (business performance, growth in employment) and measures of satisfaction with the entrepreneurial experience (satisfaction with status, satisfaction with employee relationships). Results offered substantial support for the notion that female entrepreneurs benefit from the linkages of family-to-business enrichment and support to entrepreneurial success, whereas they offered no support for the notion that male entrepreneurs benefit from these linkages. Female entrepreneurs may experience such benefits because of their relative lack of access to other resources such as human, social, and financial capital and because the female gender role encourages them to pursue work–family synergies. In contrast, male entrepreneurs may fail to experience such benefits because of the relative abundance of other resources available to them and because the male gender role discourages them from pursuing work–family synergies.     

On the survival prospects of men's and women's new business ventures

In this study, we examine the relationship between owner and business characteristics and business survival. Our findings are based upon analyses of the Census Bureau's 1982 and 1987 Characteristics of Business Owners (CBO) survey data on a sample of white male and female sole proprietors. Two aspects of this study distinguish it from any related studies to date. First, we separately examine issues affecting the survival prospects of female-owned businesses, whereas previous studies have focussed solely on businesses owned by men. Second, we use data on cohorts of businesses started or acquired in two different time periods, namely 1980–1982 and 1985–1987. Overall, the mean survival rates of male-owned businesses in these two cohorts are 4- to 6% higher, respectively, that those of businesses owned by women.We hypothesize that wage employment provides opportunities for men and women to acquire the financial and human capital necessary for success in business ownership. In fact, most male and female business owners had some prior spell of employment in the wage sector. But there are gender differences in the status of wage workers that, we further hypothesize, could differentially impact the survival prospects of men's and women's new business ventures. First, women's lower average wage earnings may imply more binding financial constraints on the initial scale of women's businesses relative to men's. Second, we find that female owners in both cohorts are less likely than their male counterparts to have had any prior managerial experience or to have 10 or more years of general, prior paid employment experience, which may imply that female entrepreneurs are more constrained in the amount and quality of human capital that they acquire during wage employment. Female entrepreneurs' access to debt and equity capital has not been overlooked by policy makers. What has been largely overlooked are possible gender differences in the amount and quality of human capital of new entrepreneurs. Women's fewer years of general work experience and lesser exposure to managerial occupations may indicate a role for remedial education or mentoring of would-be female entrepreneurs.Women in both cohorts tended to use less financial capital to start or acquire their businesses than men did, and for the 1982 cohort, business survival is found to be positively related to the amount of start-up capital, other factors held constant. The survival prospects of both male- and female-owned businesses are greater for owners with 10 or more years of prior work experience and/or 4 or more years of college. So at least in terms of education and quantity of work experience, female entrepreneurs are at something of a disadvantage relative to their male counterparts. We find that prior managerial experience has no systematic positive or negative effects on the survival prospects of either men's or women's new business ventures, however.Finally, our research indicates that issues concerning business formation and survival must be considered within the context of prevailing macroeconomic conditions. For example, we find that the survival rates of both male- and female-owned businesses started in the 1985–1987 time period were considerably higher than those of businesses started in 1980–1982. Moreover, we uncover systematic differences in owner and business characteristics between our 1982 and 1987 cohorts, as well as differences in how these characteristics influence business survival. Specifically, both male and female owners in our 1982 cohort were better educated, were more likely to have had prior, paid managerial experience, and had more years of prior, paid employment experience, in general. Researchers interested in assessing the survival prospects of businesses over a given time period must consider changes in both product and labor markets over that period. Strength of demand in product markets will have an obvious, direct effect on business viability. The tightening and loosening of labor markets imply changes in potential wage earnings (an opportunity cost of being self-employed) and in this way can affect business dissolution.     

Knowledge and internationalization of returnee entrepreneurial firms

This study aims to answer whether and how returnee entrepreneurs’ international experience and returnee entrepreneurial firms’ international market knowledge influence these firms’ internationalization. Anchored in a framework combining an entrepreneurial and knowledge-based view, we develop a model and four hypotheses on the relations between returnee entrepreneurs’ international experience, international market knowledge, international market commitment, and level of internationalization of the returnee entrepreneurial firm. Empirical evidence of the proposed model is derived from a recent sample of Chinese returnee SMEs in knowledge-intensive and high-technology industries. The main finding is that returnee entrepreneurs’ international experience nurtures international market knowledge of returnee entrepreneurial firms, which in turn has a positive effect on these firms’ international market commitment and level of internationalization. In terms of theory, the study extends our understanding of returnee entrepreneurial firms by uncovering the role of returnee entrepreneurs’ international experience and returnee firms’ international market knowledge during their initial and early international expansion.