Following the Crowd—Does Crowdfunding Affect Venture Capitalists’ Selection of Entrepreneurial Ventures?

Given the increasing popularity of crowdfunding as a new means to finance entrepreneurial ventures, we assess whether and how crowdfunding campaign‐specific signals that affect campaign success influence venture capitalists’ selection decisions in ventures’ follow‐up funding process. Our study relies on cross‐referencing a proprietary data set of 56,000 crowdfunding campaigns that ran on Kickstarter between 2009 and 2016 with 100,000 investments in the same period from the Crunchbase data set. Drawing on signaling theory and the microfinance literature, our empirical findings reveal that a successful crowdfunding campaign leads to a higher likelihood to receive follow‐up venture capital (VC) financing, and that there exists an inverted U‐shaped relationship between the funding‐ratio and the probability to receive VC funding. Further, we find statistical evidence that an endorsement by the platform provider has a likewise positive impact on the receipt of VC. Contrary to our expectations, word‐of‐mouth volume seems to be a negligible factor when it comes to follow‐up VC financing. Our results support the view that crowdfunding signals are factored into the VC’s funding decision in order to evaluate the potential of entrepreneurial ventures.     

What patents are used as collateral?—An empirical analysis of patent reassignment data

Only anecdotal evidence exists that ventures use patents as collateral to access debt financing. In this paper, we use a novel dataset on patent reassignments with a security interest to explore quantitatively what patents are used as collateral. We analyze characteristics of patents to disentangle whether it is the technology underlying a patent or the patent's exclusion right per se matters for collateralization. We do find empirical support only for technology-related characteristics, suggesting that lenders use patents to collateralize high-quality technology that can, in case of default, be redeployed to ventures in similar technology fields. On the other hand, patent-related characteristics like scope, which are, in general, related to patent value and are particularly important for non-practicing entities, do not matter.     

Signaling by early stage startups: US government research grants and venture capital funding

Entrepreneurship researchers have documented that early stage startups rely on signals to demonstrate the transitions in their identities that they must make when they cross organizational life cycle thresholds. However, early stage startups in emerging industry contexts tend to have few good signals upon which to rely. Public agencies can play a valuable role in this process, but prior research has not sufficiently examined how startups effectively leverage this support. In this paper, therefore, we develop a framework to investigate the role that signals can play for early stage startups when they win prestigious government research grants. We test this framework in the setting of the emerging U.S. clean energy sector and find that in comparison to a matched sample of clean energy startups that have not won prestigious research grants, startups with these grants were 12% more likely to acquire subsequent venture capital (VC) funding. Another significant result is that the value of this signaling is greater for startups that have fewer patents. The important contribution of this finding is that it shows that signaling has the potential to redistribute benefits rather than just provide an additional accrual of advantages to the already high status actors. Together these results highlight the advantages for startups in emerging industries of pursuing signaling strategies with public agencies when they attempt to make important transitions through the stages of their organizational life cycles.

Sold,not bought: Market orientation and technology as drivers of acquisitions of private biotechnology ventures

Acquisitions are an important exit strategy for technology entrepreneurs and investors, but what can technology ventures do to increase their chances of achieving an acquisition? We draw on signaling theory to examine the role that market orientation plays behind acquisitions. We test our hypotheses in a sample of young biotechnology ventures, and our findings are three-fold. First, we show that a target's market orientation is an important direct driver of acquisitions, thus incorporating a marketing perspective into a literature that has hitherto focused primarily on technological and reputational factors. Second, we find a substitutive interaction effect between market orientation and new product development stage, indicating that for exits through acquisitions, a high level of market orientation can compensate for an early stage of product development. Third, a fuzzy-set Qualitative Comparative Analysis (fsQCA) shows that in some contexts, the monopoly power afforded by patents can further amplify the positive effect of market orientation on acquisition likelihood. Taken together, our findings contribute to a more nuanced understanding of how different signals interact, and suggest that technology ventures should invest in market orientation early on in their life cycle.     

非正式投资影响因素研究：基于浙江创业观察的实证分析

虽然非正式资本是创业企业早期阶段重要的融资来源,但是并不清楚像中国这样的转型经济国家中个体非正式投资倾向的影响因素。文章利用浙江创业观察（2016）调查数据,从个体创业特质和创业活动参与两个方面,分析个体是否进行非正式投资以及他们的非正式投资去向的影响因素。研究结果表明,认识企业家和商业机会感知是影响个体非正式投资倾向两个最重要的因素,创业活动参与的不同类型对于个体的非正式投资倾向存在替代或者互补效应。文章最后对于发展非正式资本提出相应的对策建议。     

Letting Go to Grow—Empirical Findings on a Hearsay

Research to date has largely neglected the role of management style in new entrepreneurial ventures. We address this gap by investigating the impact of management style on company performance and how the impact is different contingent on the life cycle stage of new entrepreneurial ventures. By employing the concept of microinvolvement, our study demonstrates that management style significantly impacts company performance and that the merits of a highly involved management style are less in later‐stage new entrepreneurial ventures. This finding provides support for the saying “letting go to grow” and raises important implications for management.     

组织学习、社会资本与公司创业——江苏与广东新兴企业的实证研究

This study examines the roles of organizational learning, social network and corporate entrepreneurship (CE) in Chinese new ventures at different developmental stages. Several conclusions are drawn from structural equation modeling based on a large sample of 676 new ventures. First, most of the recursive positive relationships are supported by data of the overall sample, such as those between radical CE and exploration, incremental CE and exploitation, and strong ties and exploitation. Second, in the sub-samples, we only find support for the recursive positive relationships between radical CE and exploration, and incremental CE and exploitation among all the three subsamples. Third, for new ventures in the early stage, relationships are emphasized concerning incremental CE, strong ties, and exploitation; for new ventures in the middle stage, new relationships concerning weak ties, exploration, and radical CE come into effect and previous ones still have influence; and for new ventures in the late stage, new relationships begin to dominate and old ones evade. Translated and revised from Guanli Kexue Xuebao 管理科学学报 (Journal of Management Science in China), 2008, (6): 61–76     

Out of sight but not out of mind: Why failure to account for left truncation biases research on failure rates

We note at least three major issues in entrepreneurship theory that can be clarified by studying the survival chances of new ventures: the extent to which entrepreneurs are so constrained by initial founding conditions that they are unable to learn; the degree to which heterogeneity and innovative capabilities are lost due to the failure of new ventures; and the imprinting effects of new ventures' early days on their subsequent development. However, previous research on these issues has been inconclusive because of problems in research design and data analysis. In this paper, we shed light on new venture failure rates by assessing the validity and generalizability of previous findings. We argue that research using registration data to study new ventures is very likely to generate biased results and that research attempting to track new ventures from a very early stage can still suffer from selection bias due to left truncation. Using a sample of new ventures from the Panel Study of Entrepreneurial Dynamics II, we provide evidence for the extent of such biases. We offer a statistical solution to left truncation that can be easily applied in widely used statistical programs.     

The Size of the Informal Venture Capital Market in the United Kingdom

Despite its undoubted importance to the financing of entrepreneurial ventures, there are few reliable measures of the size of the informal venture capital market. This paper reviews three methods used to generate such estimates – market-based approaches, firm-based approaches and the capture-recapture approach – and develops an alternative approach that is based on scaling up from the visible segment of this market represented by business angel networks. This methodology is applied to provide the first formal estimate of the size of the informal venture capital market in the United Kingdom. Informal venture capital investment is shown to broadly equate to the amount of institutional venture capital provided to start-up and early stage ventures. Reflecting the smaller average size of investments in the informal venture capital market, however, eight times as many businesses raise finance from business angels than from institutional venture capital funds.     

The Economics of State Subsidies in Early Stage Financing

We analyze the effect of state subsidies on early stage investments. In a two‐period investment model with incomplete stage financing contracts, we describe optimal and second‐best investment levels. Optimality depends on external effects: given that private early stage financing generates positive external effects, the subsidies might be designed to use scarce state money most efficiently to mobilize private investment capital. However, a subsidy might also contribute to greater efficiency of the contractual relationship itself without regard to external effects. Refinancing subsidies can be optimal under both perspectives and are always optimal under last of the two approaches. The comparison of the main types of subsidies, i.e. refinancing subsidies, guarantees and direct investments, speaks against the use of guarantees. Finally, we show that our results do also hold if some investors (e.g. venture capitalists) have a superior screening capability.     

Strategic Commitment and Timing of Internationalization from Emerging Markets: Evidence from China,India, Mexico,and South Africa

In a study of 257 new ventures from China, India, Mexico, and South Africa, we find support for the mediating effect of strategic early internationalization on international sales intensity. We argued that when new ventures from emerging markets internationalize early and with commitment, the legitimacy they acquire helps them overcome liabilities of newness and foreignness. We develop a typology of international new ventures that, based on strategic intent and timing of internationalization, distinguishes strategic early internationalizers from persistent, serendipitous, and long‐term internationalizers. We show that strategic early internationalization accounts for over half of the explained variance in international sales intensity and either fully or partially mediates the effects of managerial knowledge and market orientation on international sales intensity.     

Family involvement and new venture debt financing

New ventures often require debt financing but face difficulties convincing lenders of their creditworthiness because of agency problems. Researchers have shown that social capital can help small firms reduce lenders' agency concerns but new ventures do not yet have their own social capital. We propose that family involvement increases a venture's ability to borrow family social capital for the purpose of obtaining debt financing. Empirical tests with 1267 new ventures suggest that family involvement directly and indirectly improves a new venture's access to debt financing.     

An examination of the influence of industry structure on eight alternative measures of new venture performance for high potential independent new ventures

This study examined the influence of the structure of new ventures’ entered industries on eight alternative measures of new venture performance for 199 high potential independent new ventures. Each of the 199 entrepreneurial ventures had undertaken an initial public offering (IPO) within the first 6 years of the venture’s founding date and were free of corporate sponsorship or prior corporate parentage.Specifically, this research examined the influence of: (1) stage of the life cycle; (2) industry concentration; (3) entry barriers; and (4) product differentiation on eight alternative measures of new venture performance. The eight measures of new venture performance examined in this research consisted of: (1) change in sales; (2) sales level; (3) net profit; (4) earnings before interest and taxes; (5) return on sales; (6) return on assets; (7) return on invested capital; and (8) return on equity.Most prior research examining the influence of industry structure on new venture performance has: (1) utilized only one or two measures of new venture performance as indicators of the venture’s overall effectiveness and efficiency; (2) often failed to provide theoretical justification for the measure(s) of new venture performance or industry structure examined; and (3) utilized data derived from questionnaires and/or the PIMS data base of corporate-sponsored new ventures. In addition, prior industry structure studies examining independent new ventures have often utilized relatively small sample sizes.This study sought to advance the progress in the field of entrepreneurship with regard to understanding the influence of the structure of new ventures’ entered industries on new venture performance by: (1) examining eight alternative measures of new venture performance; (2) providing theoretical justification for the measures of new venture performance and industry structure examined; and (3) utilizing the largest nonquestionnaire data base of independent new ventures developed to date.This research found that the stage of the life cycle of the venture’s entered industry was the most important determinant of new venture performance among the four industry structural elements examined. Stage of the life cycle had a statistically significant relationship, at a 0.05 level, with the majority of the new venture performance measures examined in this research. In addition, ventures entering industries in the introductory stage of the life cycle achieved the highest levels of venture performance, particularly when compared with those ventures that entered industries in the mature stage of the life cycle.However, this study did not find a statistically significant relationship between stage of the life cycle and change in sales. This suggests that there is a trade-off between profitability and sales growth, and that new ventures that undertake an IPO have a stronger focus on achieving profitable operations rather than sales growth during the initial years after their IPO. This may be due to pressures placed on the new ventures to achieve profitability by the external credit market.Conversely, this research found that: (1) industry concentration; (2) entry barriers; and (3) product differentiation did not have statistically significant relationships, at a 0.10 level, with any of the eight alternative measures of new venture performance examined in this research. However, this research did find that over 90% of the new ventures entered industries characterized by: (1) a low degree of industry concentration and (2) a high degree of product differentiation.The relative absence of new venture entry into industries characterized by: (1) high degrees of concentration and (2) low degrees of product differentiation provides support for prior theory, which suggests that successful entry into such industry environments may be substantially more difficult.In sum, the results of this research suggest that high potential independent new ventures that undertake an IPO should enter industries in the introductory stage of the life cycle. In addition, the results of this research suggest that industries characterized by: (1) relatively low degrees of industry concentration and (2) highly heterogenous products may be necessary but not sufficient conditions for successful entry by high potential independent new ventures seeking to raise equity capital through an IPO.     

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.     

International perspectives on the supply of informal venture capital

Despite major changes in the number and range of sources of finance for new and small ventures in the United Kingdom in recent years, there continues to be a shortage of risk capital for ventures actively seeking external equity finance. In the United States the informal venture capital market plays a major role in filling this equity gap, particularly in the early stages of venture development.However, there is little comparable information on the size of the informal venture capital pool in the United Kingdom or other European economies, despite recent recognition that the apparent underdevelopment of this market in the U.K. represents a major barrier to the development and growth of new ventures. This paper, therefore, presents the first analysis of the informal venture capital market in the U.K. and compares the characteristics and attitudes of U.K. informal investors with those in the U.S.The data reported in this paper have been obtained from a combination of postal survey and snowball sample techniques that generated useable information from 86 informal investors. Informal investors are playing an important role in venture financing in the U.K. in three ways: they make small scale investments in new and early stage ventures, where the equity gap is most significant; they are more permissive in their financing decisions than the formal venture capital industry in terms of having lower rejection rates, longer exit horizons, and lower target rates of return; and they invest locally and can thereby close the regional equity gap arising from the overconcentration of venture capital investment in the core South-East region in the U.K.In terms of demographics, U.K. informal investors share many of the characteristics of North American informal investors: they are predominantly male, with an entrepreneurial background, financially well-off without being super-rich, and identify investment opportunities from friends and business associates. There are a number of key differences, that may be attributable to differences in contextual factors such as personal tax regimes, regulatory environments, wealth distribution, and the structure of the formal venture capital and IPO markets. For example, U.K. informal investors are significantly older than those in the U.S. reflecting the influence of higher U.K. tax rates on the rate of capital and wealth accumulation.More generally, in comparison to U.S. investors, U.K. informal investors: have more investment opportunities brought to their attention; seriously consider more proposals but invest in no more opportunities; operate independently with syndication and joint investment relatively uncommon, reducing the average total investment per financing round available to ventures; fail to identify entrepreneurs themselves as a primary source of information on investment opportunities; have higher rate of return and capital gains expectations; are slightly less patient investors; and are rather less satisfied with the overall performance of their informal investment portfolios, reflecting intercountry and intertemporal variations in investment climate and conditions. It appears, therefore, that the general inefficiency of the informal capital market identified by Wetzel (1987) (which reflects the invisibility of informal investors, the fragmented nature of the market, and the imperfect channels of communication between investor and entrepreneur) is compounded in the U.K. case. The extent to which this reflects contextual differences on the one hand or simply a slower developmental process in the U.K. will only be common methodological basis. Based on the evidence presented in this paper, however, a key conclusion is that the information networks available to U.K. informal investors are less effective than those in North America, and in particular appear to contain lower quality information and a higher degree of redundant information. Specific forms of intervention in the market by, for example, stimulating the flow of information through the promotion of informal investment networking and brokerage services along the lines of U.S. and Canadian examples such as VCN and COIN therefore appear defensible.     

A venture capital model of the development process for new ventures

For years, researchers have hypothesized that new ventures develop in a fairly predictable chronological process by evolving through various functional and strategic developmental stages. However, cross-comparable longitudinal data from large numbers of ventures are still not available to validate these “stages of development” hypotheses. The study sought to determine whether venture capital firms, which have extensive experience with the longitudinal development of new ventures, operate in accord with a common theory about how this process operates. These findings also represent a first step toward empirically validating various elements of “stages of development” theories.The study analyzed the perceptions of the CEO or managing partner of 73 U.S. venture capital firms about key features of the development process for new businesses. Venture capital firms were asked whether they differentiated stages in the development process. For each such stage information was elicited on what the stage was called, distinguishing characteristics of ventures in that stage, key developmental goals or benchmarks typically accomplished in that stage, and the major risks involved. Sufficient consensus was found on these aspects of the development process for a “venture capital model” of this process to be constructed. The model consists of five sequential stages: 1) “seed” ; 2) “start-up” ; 3) “second stage” ; 4) “third stage” ; and 5) “exit stage.” Strong consensus was found on distinguishing characteristics of ventures in early stages of development, key developmental goals or benchmarks in various stages, and major developmental risks associated with each stage. Consensus on developmental characteristics diminished somewhat in later stages, presumably because of differential rates of development among investees, as well as differing degrees of success in accomplishing earlier objectives. Nevertheless, sufficient differences in functional characteristics remained to clearly distinguish later stage investees from early stage investees, and to enable differentiations in maturity between “third stage” and “exit stage” investees.The venture capital developmental model exhibits both similarities and differences from “stages of development” paradigms. First, the venture capital model is primarily strategic and market-oriented in focus. It gives lesser emphasis to the elements of organizational structure, management style, and management specialization than some “stages of development” theories, although these elements are identified by venture capitalists as potential areas of risk should problems arise. Second, like “stages of development” paradigms, the venture capital model is universal and not venture specific. Venture capital firms appear to view all potentially feasible business concepts, despite differences in product, organizational complexity, rate of development, or ultimate size, as passing through the same process sequence, albeit at different speeds and with varying degrees of success. Third, the model, while reflecting the financial objectives of venture capital investors, is primarily shaped by the naturally occurring functional development of investees. It does not represent arbitrary requirements imposed on investees to segment the developmental process into steps that would not otherwise occur.The development of venture capital investees is influenced by the strategic and financial objectives of venture capital firms. Thus the model does not necessarily mirror the strategic and dynamic elements of the development process for firms that are not intended by their founders to grow rapidly and then go public or be acquired by a larger corporation, or for ventures that must depend upon internally generated funds or bank loans to finance development.The venture capital model, representing perceptions of 73 venture capital firms derived from longitudinal data for many hundreds of new ventures, appears to empirically confirm the concept of an evolutionary progression through key functional and strategic steps, which is a central element of most “stages-of-development” hypotheses. The study did not go into sufficient depth, however, to provide detail on the influence of factors such as organizational structure and management styles and control systems on development. These factors are central elements in several “stages of development” theories, and are arguably of critical importance in the growth, survival, and financial success of new ventures.     

Signaling for more money: The roles of founders' human capital and investor prominence in resource acquisition across different stages of firm development

We use signaling theory to explain how new ventures effectively signal future prospects to acquire external resources. Based on a sample of 235 new ventures drawn from a unique dataset combining multiple sources, we examine the signals of founders' human capital (i.e., education, industry experience, and founding experience) and investor prominence and their influence on the amount of external funding received across two stages of venture funding. We find that founders' founding experience and education have the greatest effects for acquiring first-round financing, but in later stages, only the signaling effect from education remains. Furthermore, we find important interactions between founders' human capital and investor prominence in the second round of funding. By utilizing lagged funding information, we show that different types of signals have a dynamic and temporal impact on new ventures' resource acquisition, including the persistence of some signals and the temporariness of others.     

Seasoned equity offerings by small and medium-sized enterprises

Most analyses of small firms’ decision to seek outside equity financing and the conditions thereof concern private firms. Knowledge of the risk and return of entrepreneurial ventures for outside investors is consequently limited. This paper attempts to fill this gap by examining the Canadian context, where small and medium-sized enterprises (SMEs) are allowed to list on a stock market. We analyze seasoned equity offerings launched by SMEs over the last decade. These public issuers can be considered low quality firms with poor operating performance. Managers issue equity before a large decrease in operating and stock market performance. Individual investors do not price the stocks correctly around the issue and incur significant negative returns in the years following the issue. This is particularly true for constrained issuers. We confirm that entrepreneurial outside equity attracts lemons and that individual investors cannot invest wisely in emerging ventures. Probably as a consequence of individual investors’ lack of skill and rationality, the cost of outside equity financing of Canadian public SMEs is abnormally low.     

Orchestrating boundaries: The effect of R&D boundary permeability on new venture growth

While established firms can efficiently manage their resource portfolio, new ventures must construct resource boundaries by assembling resources. In doing so, new ventures are often pushed to utilize resources that are owned by other actors. These inter-organizational relationship strategies do not expand organizational boundaries, but rather create permeable boundaries. We theorize that boundary permeability confers greater access to resources, but limits control over them. Therefore, new ventures face a risky option: utilize fewer but fully controlled resources or access a broader range of resources under limited control. We examine the effects of R&D boundary permeability across growth dimensions of sales, profitability, and employees using a sample of young knowledge intensive ventures. In doing so, we explore early stage boundary management decisions and reveal opportunities and threats to opening venture boundaries.     

Angels and non-angels: Are there differences?

The market for informal venture capital is an elusive and nearly invisible source of financing for entrepreneurial ventures. This market consists of a diverse set of high net worth individuals (business angels) who invest a portion of their assets in high-risk, high-return entrepreneurial ventures. The emerging consensus of the characteristics of the individual investor is that of a well-educated,middle-aged individual with considerable business experience and a substantial net worth. These informal investors appear to prefer investing in the early start-up stage of the venture and, if given a choice, prefer that their investments be located close to home. One consequence of this consensus is the tendency to assume that the traits of these business angels are as tightly clustered around the norm as are the traits of venture capital funds. They are not. In terms of their competence in the many areas of venture investing, these Individual investors range from the successful, cashed-out entrepreneur on the one hand to individuals with little or no experience with venture investing on the other. At the same time, little is known about the characteristics of high net worth individuals who never ventured where angels dare to tread, or about these non-angels' propensity to join the fold. Thus, this study seeks to fill the void by examining the characteristics of high net worth individuals regardless of their investment history or their interest in venture investing.An analysis of the data reveals three groups of high net worth Individuals: business angels with experience investing in entrepreneurial ventures, interested potential investors with no venture investment history but who express a desire to enter the venture investment market, and uninterested potential investors who under no circumstances would consider investing in entrepreneurial ventures as part of their investment strategy. Business angels and potential investors (both the interested and non-interested segment) share similar views about the economic significance of the entrepreneur and the difficulty in securing the equity capital for development of the venture. As the issues move from the general to the specific, divergence in investment attitudes takes place among the two groups, but this divergence is in terms of magnitude or intensity, rather than in contrasting or opposing views of the process. The potential investor tends to view investing in entrepreneurial ventures on a smaller scale than the active investor, especially in terms of the dollar amount committed to any one investment. While the business angel is more interested than the potential investor across all stages of financing, the interest for both groups increases as the type of financing progresses from the seed stage to expansion financing. In contrast, the potential investor is more likely to seek diversification as a motivation for venture investing than their angel counterparts.The potential investor pool is segmented into those potential investors who appear willing to take on the role of business angels and those individuals who have no desire to participate in the venture market. For the interested group to increase their interest in providing venture capital, these potential investors want assistance in monitoring the performance of the venture investment, followed by assistance in pricing and structuring. Both of these resources relate more to the technical aspects of venture investing and Indicate that these are the areas where the potential investor is least likely to have expertise. Other resources, such as finding and evaluating the investment opportunity, appear to represent less of a stimulus for the potential investor. In many respects, interested potential investors act like business angels across several dimensions. Both consider the later stages of the development of the venture as the preferred stage to invest. The business angel and interested potential investor prefer investments to be located relatively close to their primary residence and share similar views on the amount of the investment portfolio to allocate to venture investing. Where the interested potential investor and business angel clearly differ is on the scale of the commitment and the motivation for investing. The potential investor will commit a smaller dollar amount to any one venture, is more inclined to participate with other investors, and is more apt to see venture investing as a diversification strategy than is the seasoned business angel.