More than capital? Transaction costs, trade-offs, and value for small businesses in novel funding transactions

ABSTRACT

The transaction cost economics framework has been used for more than three decades to explain how firms transact and organize in hierarchies and markets. However, when market innovations and societal changes occur, organizing theories should be updated to reflect the novel aspects of the environment. In this paper, we leverage recent technology and social innovations as a catalyst for synthesizing and extending transaction cost theory. Venture funding transactions today only vaguely resemble funding transactions from decades past. Yet, scholars still frequently rely on theoretical tenets that were established before the advent of the internet to explain funding transactions. In this research, we codify venture-funding modalities along a continuum from more market-esque to more hierarchical and develop funding transaction propositions for the new funding context.

KEYWORDS:

• Transaction cost economics
• venture funding
• venture capital
• lead user theory
• entrepreneurial decisions

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ It is important to note that many existing platforms allow equity crowdfunding by investors. In addition, investment clubs and syndicates have also been introduced by portals. Nonetheless, the relative dispersion and openness of ownership is much greater on ECF platforms in comparison to angel deals and seed-stage VC deals (see Table 1). For our purposes we follow Cowden and Young (2020) and specify that the ECF context consists of semi-open portals, that is, those that require backers to sign up for full access and investment purposes.

Table 1. Comparison of funding modes.