Entrepreneurial finance H1

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Differences EF with CF

focus on deals with decision-making by investors and focus on new ventures and privately held businesses

investment and financing not separated

rather active than passive (also management services by venture capitalists)

risks difficult to diversify

monetizing investment important and hard (realizing returns later via IPO or acquisition)

Why is EF important?

New high-tech business could become large multinational

Can be profitable to invest in vc/private equity

These high-tech businesses create jobs and lead to innovation

Role of VC to economy

Kortum and Lerner (2008) find that amount of VC activity in industry significantly increases its rate of patenting. They show that VC accounts for about 15% of industrial innovations.

Hellman and Puni (2000) find that presence of a venture capitalist is associated with significant reduction in time taken to bring product to market.

Decker et al. (2014) show that new business creation is in turn important for job creation and economic growth, disproportionally for high-growth startups. Most startups fail, but a few account for majority of job creation.

Venture capital & GDP

American trend: VC-investments went up from 2018, with peak in 2019 (more than 0,9% of GDP). Growth almost full allocated to investments in Later stage venture. Earlier times (seed & start-up) stay stable and small.

World trend: Singapore and Israel invest most in VC as % of BBP. United States and United Kingdom score very low. Also Germany, France and Japan low.

Level A countries

Countries with high job-opportunity and income, so people who create startup are creative or passionate. They do this because they have an innovation, not because there are no other options. So less amount of startups than level C.

Level C countries

Countries with low job-opportunity and income, people have large incentive to create startup themselves.

Entrepreneurs’ personal traits

Sees and seizes commercial opportunity

Tends to be doggedly optimistic (perhaps even to a fault)

plans to obtains physical, financial and human resource needed for venture to succeed

Has clear focus on how strategic choices and implementation decisions affect rewards

Unlikely to be succesful as entrepreneur

Are seldom able to see an opportunity, until it ceases to be one (Mark Twain)

View the glass as being half empty instead of half full

Fail to plan which may be viewed as planning to fail

Why do entrepreneurs make risk-averse choices?

All sane people want to avoid risk (Sahlman, 1997, HBR)

True entrepreneurs want to capture to all of the reward and give risk to others. The best business is a post office box to which people send cashiers checks. Yet risk is unavoidable. What is a rational person to do? (Howard Stevenson)

Entrepreneurs behave like parents

Parenting as metaphor for examining entrepreneurship. The entrepreneurial process follows the social cycle of dating, commitment and the bearing and raising of children.

Which less rational aspects can parenting explain?

Cognitive biases that minimize risk (love is blind)

Persistence despite poor results (a parent never gives up)

Extreme devotion to the business often entailing self-sacrifice

Problems of founder succession (separation anxiety)

Overcontrolling founders (parents)

Are you likely to be an entrepreneur? The number of entrepreneurial activities in 18 months is dependent on

If you took a business class

Previous start-up experience

Have supporting friends and family

Have friends and neighbors who are also in business

Are a member of business network or start-up team

If you are married

Selfemployed workers

Have no particular personality traits, compared to salary workers, work less hours and earn less than salaried workers.

Entrepreneurs

Engage in skills that involve creative and problem solving, complex interpersonal communications as persuading, selling and managing.

Greater tendency of becoming entrepreneur?

People who both engage in illicit activities as teenagers and score highly on learning aptitude tests.

Is there diversity among entrepreneurs?

Mostly white european men who are venture capitalists or entrepreneurs. Not much diversity

Within VC also not much diversity, mostly in software. Other sectors grow, but slowly. So market shows great inequality between sectors, but there is a trend towards more diversity.

Not all investors are VCs

Entrepreneurs receive funding from various sources, late stage companies can be backed by multiple investors

Typical VC funds: sequia Capita, Accel

Not all traditional VC funds: some crossovers like Goldman Sachs

Bootstrapping

Entrepreneurs start by financing company themselves. After that the initial funds come from FFF. After that entrepreneurs need to attract external resources

External funding resources

Angel financing provided by high net worth individuals

VC funds

Crowdfunding

Public equity and bonds

Bank

How Startups use External Funding

Firms with greater growth/profits/capex more likely to seek finance and apply for more external finance. Banks less likely to finance new startups completely, while VC funds more likely to finance innovative and growth-oriented firms.