Beyond environmental scarcity: Human and social capital as driving forces of bootstrapping activities

Although entrepreneurship scholars highlight bootstrapping as a key resource acquisition approach to respond to the inherent resource constraints that nascent ventures face, little is known about what causes nascent ventures to engage in bootstrapping. Theory highlights the environment as an important determinant of bootstrapping activity. Analyzing bootstrapping behavior of 298 nascent ventures, we find that beyond perceived environmental factors, individual characteristics of the nascent entrepreneurs and factors relating to the embeddedness of the entrepreneurs in the environment determine their venture's bootstrapping behavior. In a more fine-grained analysis we gain insights into how these antecedents shape the use of particular bootstrapping strategies. Findings contribute to our understanding of factors driving resource management approaches in nascent ventures.     

Reassessing the relationships between private equity investors and their portfolio companies

The scope and purpose of this special issue is to reassess the relationships between private equity (PE) investors and their portfolio companies in the light of the need for venture capital/ private equity (VC/PE) firms to adapt their strategies for value creation in the light of the recent financial crisis. We particularly focus upon VC/PE characteristics that differently contribute to portfolio firm performance. The papers presented in this special issue capture this aim in various ways, reflecting the heterogeneity of VC/PE investors and the firms in which they invest. We begin this introductory paper by providing a brief overview of each paper’s contribution. We articulate themes for an agenda for future research relating to the heterogeneity of investor types and the contexts in which they invest.     

The Impact of Human and Social Capital on Entrepreneurs’ Knowledge of Finance Alternatives

Building upon prior research that demonstrates how the limited knowledge of finance alternatives of entrepreneurs may cause suboptimal finance decisions, this paper examines how entrepreneurs’ human and social capital influence their knowledge of finance alternatives. For this purpose, we use survey data from 103 Belgian start‐ups. Results demonstrate that entrepreneurs with a business education and entrepreneurs with experience in accountancy or finance have a broader knowledge of finance alternatives. Having a strong network in the financial community is further positively associated with the knowledge of finance alternatives. However, generic human capital, including higher education, industry experience, and management experience, is almost not related with the knowledge of finance alternatives.     

The founding rate of venture capital firms in three European countries (1970–1990)

In this article, the sectorial and environmental forces that facilitate or inhibit the creation of venture capital companies are studied in the three European countries where the industry is most developed: the United Kingdom, France, and the Netherlands. The focus is on the start-up phase of the industry, the period from 1970–1990. The founding of firms can be studied on four different levels: entrepreneurial, organizational, population, and macroeconomic. In this study, a population approach is taken; this implies that we do not attempt to explain any single founding, but rather the aggregate number of foundings that occur in an industry in a certain period in a certain country.According to the organizational ecology theory, the population density (i.e., the total number of organizations in a population) is the major environmental factor that affects the founding rate through two processes. Initially, when the density is low, each founding eases new foundings, because the simple prevalence of a form tends to give it legitimacy (thereby spurring imitations), the training ground for qualified personnel grows and the supporting networks are widened and strengthened. The legitimation process does not grow forever: once enough organizations of a certain kind exist, legitimation attains a ceiling. As the number of organizations increases, the second process becomes dominant: the competition for resources (raw material, personnel, customers, capital) grows, leading to a negative relationship between the density and the founding rate, everything else being equal. Thus, the founding rate declines as the number of organizations increases, once a threshold is reached. The major hypothesis that is tested here is that the population density has an inverted U-shaped effect on the founding rate of venture capital organizations.In addition, the effect that the venture capital firms of the three countries have on each other is studied. Two populations are said to interact when the populations affect each other's growth rate, but the interaction need not be symmetrical. The second hypothesis, tested in this study, is that populations in different countries have a positive effect on each other and not a competitive effect because the legitimating effect does not halt at geographical borders. Yet, the competition for resources (capital, people, deals) among geographically different populations is limited in this industry.This study is valuable because until now, the existing ecological studies focus on long-established industries. Testing, the theory in a young industry that emerged only in the seventies (in Europe) has merits in its own right, because the technological progress after the Second World War has altered the organizational environment tremendously. The communication and transportation revolutions may have especially influenced the way in which organizations interact with each other and with the environment. The venture capital firms are furthermore special in the way they are organized with the dual structure of management company and investment fund(s). If the theory holds in this young industry, important additional evidence will be given that the theory is truly applicable to “populations of all types, in any time period, and in any society” (Carroll 1988, p. 18). Finally, this study extends the theory by giving evidence on how industries in different countries may interact upon each other.We show empirically that the major factor that influences the overall founding rate in each of the three countries is the density of the industry, i.e., the number of organizations that already exist in the industry; this confirms the population ecology theory. When the density is low, adding a new organization to the industry raises the probability of a subsequent founding; when the density is high, the contrary is true. The institutional changes considered here, such as the establishment of tax transparent legal entities or state guarantees against losses (in the Netherlands) and the establishment of secondary stock markets, do not significantly influence the founding rate in any of the three countries. Moreover, the Dutch foundings are positively influenced by the British density and the French foundings by the Dutch density; the British foundings are, on the contrary, negatively influenced by the Dutch density. The competitive effects between the Netherlands and the U.K. are thus more important than initially thought.The relationship between the density and the founding rate is the strongest, most consistent, and most significant relationship found in this study. Thus, the number of organizations that already exist in an industry is very important in explaining the founding of organizations, apart from, for example, the personality of the entrepreneur or from the networks in which he or she is involved. This indicates that, when trying to explain the founding of organizations, the industry structure, and more specifically the number of organizations that exist at the moment of the founding, cannot be ignored.     

Venture Capital Investors, Capital Markets, Valuation and Information: US, Europe and Asia

This paper uses a large multi-country sample of venture capital firms to compare the approaches to investee valuation and sources of information used by venture capital investors in English, French and German legal systems as well as geographical regions. Different legal systems are significantly associated with the valuation mechanism used. In particular, compared to English-based Common Law systems, VC firms operating in a Germanic legal system are significantly more likely to use DCF based measures and significantly less likely to use PE comparators. This latter result is also the case for VC firms operating in a French legal system who are also significantly more likely to adopt historic cost valuation methods. VC firms in Europe and Asia are significantly less likely than US VC firms to make use of liquidation value methods but significantly more likely to use PE comparators. European firms are significantly less likely to adopt DCF methods compared to US VC firms. VC firms operating under a Germanic legal system are less likely to utilise information from the financial press but significantly more likely to use interviews with entrepreneurs. VC firms operating under a French legal system are more likely to utilise interviews with company personnel as well as sales and marketing information. VC firms in Europe and Asia are significantly more likely than US VC firms to use financial press. VC firms in Asia are significantly less likely to make use of interviews with entrepreneurs or business plan data. VC firms in Europe are significantly more likely to utilise sales and marketing information.     

From distress to exit: determinants of the time to exit

This paper analyses the duration of the time to exit of distressed firms, differentiating between court driven exits (mainly bankruptcies) and voluntary liquidations. It examines how long firms survive after initial signs of economic distress. The study is conducted on an extensive dataset of 5,233 Belgian distress-related exits of mature firms, the majority being privately held. The results highlight that slack resources have an opposite effect on the timing of court driven exits and voluntary liquidations. On the one hand, high levels of available and potential slack increase the time to court driven exit, as they allow distressed firms to postpone an impending court driven exit. On the other hand, high available slack resources shorten the time to voluntary liquidation, since they make voluntary liquidation easier. Further, a high level of stakeholder dependence increases the time to exit after distress, whether the firm exits through voluntary liquidation or through a court decided exit. This is explained by the fact that stakeholder dependence increases the complexity of the exit decision and the exit procedure.     

Private Equity Syndication: Agency Costs, Reputation and Collaboration

Abstract:  Syndicates are a form of inter-firm alliance in which two or more private equity firms invest together in an investee firm and share a joint pay-off, and are an enduring feature of the leveraged buyout (LBO) and private equity industry. This study examines the relationship between syndication and agency costs at the investor-investee level, and the extent to which the reputation and the network position of the lead investor mediate this relationship. We examine this relationship using a sample of 1,122 buyout investments by 80 private equity companies in the UK between 1993 and 2006. Our findings show that where agency costs are highest, and hence ex-post monitoring by the lead investor is more important, syndication is less likely to occur. The negative relationship between agency costs and syndication, however, is alleviated by the reputation and network position of the lead investor firm.     

Financing High Technology Startups in Belgium: An Explorative Study

The results of an explorative study on the financing of 18 high technology Belgian startups are reported. On a counts basis, the most important sources of financing at the startup are the entrepreneurs and the banks, but the sources that provide the largest amounts of funds are the venture capital companies and private investors. Private investors and venture capitalists have a complementary role, with the former investing mostly at the startup and the latter financing the early growth. The role of the government, universities and other companies is limited.     

Partner Selection Decisions in Interfirm Collaborations: The Paradox of Relational Embeddedness

By combining insights from relational network theory and agency theory we identify the boundary conditions to the embeddedness approach to partner selection decisions in interfirm collaborations. Employing a longitudinal dataset comprising the investment syndicates for the population of UK management buyouts between 1993 and 2003, we find that relational embeddedness is less important for selecting partners when agency risks are low, allowing firms to expand their networks. Furthermore, reputational capital may act as a partial substitute for relational embeddedness, again permitting firms to expand their networks. Our findings enhance understanding of the boundary conditions associated with the relational network approach to partner selections and network behaviour.     

Venture capitalists, investment appraisal and accounting information: a comparative study of the USA, UK, France, Belgium and Holland

The differences between the information used for the pre‐investment valuation and the valuation methods used by venture capital investors in five countries (USA, UK, France, Belgium and Holland) are empirically studied. The analysis is based on postal questionnaire surveys of representative samples of senior venture capitalists in each country. Differences are found, which may be attributed to the dominant corporate governance mechanism or the level of development of the venture capital market. Between‐country differences persist even after taking into account between‐country differences in the relative importance of investment stages and venture capital types. Apparently similar systems and venture capital markets place varying emphases on different valuation methods, with theoretically 'correct' methods not always being preferred in practice. The findings of the study highlight the need for venture capital firms entering non‐domestic markets to invest considerable effort in understanding the operation of these markets if they are to exploit fully their perceived competitive advantages and minimize the likelihood of repeating the problems experienced by venture capital entrants into foreign markets in the late 1980s.