Raising capital for rapid growth in young technology ventures: when business angels and venture capitalists coinvest

Abstract

We investigate the relational dynamics of raising equity finance to support strong growth in a technology venture when different investor types (business angels and venture capitalists) coinvest. Our objective is to ascertain which of two theoretical frameworks, agency theory or the cognitive approach to entrepreneurial finance, is the strongest predictor of the interactions between investors and entrepreneurs. We conducted a prospective case study whose analysis yields overall support for both approaches, while it also indicates that the relevance of agency-related and cognitive concerns clearly depends on the stage of the process and on investor-type. We conclude that first-time entrepreneurs may have an interest in addressing both formal and informal venture capitalists and that the proper timing and combination of investor-profiles may help to lower the cost of capital and contribute to future growth.

Keywords:

• business angels
• venture capital
• cognitive approach
• venture growth
• technology ventures

Acknowledgments

The present article is part of a larger research program on the dynamics of hypergrowth firms led by the COACTIS research center. Financial support from the French national research agency (ANR) is gratefully acknowledged. The authors are indebted to Tatyana Sokolyk and participants at the joint AOEF-ABF 2010 conference held in Chicago and to participants at the COACTIS research seminar in Lyon for helpful comments on an earlier version. Stéphane Jaumier provided invaluable research assistance with double-coding the interviews. We are also grateful to Roger Sørheim and Einar Rasmussen, the guest editors, as well as the two anonymous referees for their comments and remarks which helped improve the manuscript. The usual disclaimer applies.

Notes

1. The cognitive approach to entrepreneurial finance, as it is sketched out in the present contribution, very much in line with earlier theoretical work by Charreaux (2002) and Wirtz (2011a, 2011b), puts a strong (but non exclusive) emphasis on resource- and knowledge-based theories of the firm. Our goal is to analyze entrepreneur–investor interactions in a fast growing technology venture, and resource-/knowledge-based theory has been developed to explain the dynamics of firm growth (Penrose 1959) and resource acquisition (Barney 1986, 1991).

2. Entrepreneurial intuition is defined by Mitchell, Friga, and Mitchell (2005) as ‘the dynamic process by which entrepreneurial alertness cognitions interact with domain competence (e.g. culture, industry, specific circumstances, technology, etc.) to bring to consciousness an opportunity to create new value.’

3. Effectuation, or effectual logic, is a construct that aims at describing how entrepreneurs take strategic decisions in uncertain environments (Sarasvathy 2001).

4. In our case, that is the fundraising process (extending from first contacts with investors to signing the agreement) during which investors and entrepreneurs interact to reach an agreement on financial resources to be raised and on governance mechanisms to be implemented.

5. Completion of the financing round, in the present case.

6. Quotes are from interviews with the entrepreneurs (E1, who is the CEO, and E2, who is the technical manager), the business angels (A1 and A3), and the venture capitalists (C1 and C2). As two interviews were made with the entrepreneurs, E1_2 is a reference to the second interview with Entrepreneur 1, in order to maintain the ‘proof chain’ advocated by Yin (1994). Quotes have been translated from French. The original quotes can be obtained from the authors upon request.

7. For reasons of confidentiality, we have taken out the precise figures.