ABSTRACT
The last decade has seen the emergence of alternative sources of early-stage finance, which are radically changing and reshaping the start-up eco-system. These include incubators, accelerators, science and technology parks, university-affiliated seed funds, corporate seed funds, business angels – including “super-angels”, angel groups, business angel networks and angel investment funds – and both equity- and debt-based crowdfunding platforms. In parallel with this development, large financial institutions that have traditionally invested in late-stage and mature companies, have increasingly diversified their investment portfolios to “get into the venture game”, in some cases, through the traditional closed-end funds model and, in other cases through direct investments and co-investments alongside the closed-end funds. This paper reviews the main features, investment policies and risk-return profiles of the institutional and informal investors operating in the very early stage of the life cycle of entrepreneurial firms. It concludes that traditional closed-end venture capital funds continue to play an important role in early stage finance because of their unique competences (e.g. screening, negotiating and monitoring) in what has become a wider and more complex financing ecosystem.
Acknowledgments
We are deeply indebted to Josh Lerner for the inspiring keynote lecture given at the Conference “Emerging Trends in Entrepreneurial Finance” at Stevens Institute of Technology (Hoboken, NJ, US) in May 2017. Josh Lerner also read the current draft and offered insightful suggestions. We thank Università del Piemonte Orientale and Stevens Institute of Technology for their financial support. We are grateful for the helpful comments from Tiago Botelho, Douglas Cumming, Richard Harrison, Colin Mason, Peter Wirtz. Any error is our responsibility.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. See the annual statistics about venture capital and private equity investments collected and processed by NAVCA for the US, Invest Europe (formerly, EVCA) for Europe, and by AVCJ for Asia.
2. Internal finance could possibly be complemented by entrepreneurial bootstrapping (Winborg and Landström Citation2001) and trade credit, which is more likely than short-term bank debt to be offered to start-ups and credit-constrained SMEs (Petersen and Rajan Citation1997). However, due to the high mismatch between the maturities of assets and liabilities, both such sources of financing are not to be used to meet the fixed asset investment needs companies typically have to face in their start-up phase, ultimately further increasing business risk.
3. The authors use the following proxies as measures of entrepreneurship-friendliness of a country: (i) the depth of the venture capital market as a fraction of the domestic GDP and (ii) the number of regulatory procedures while incorporating a firm (consistent with Djankov et al. Citation2002).