Articles
Gordon K. Adomdza & Thomas B. Astebro, The Effect of Entrepreneurial Cognition on Investments for Commercialization Success (2012), available athttp://ssrn.com/abstract=2061022.
Abstract (from author): Entrepreneurs’ cognitions may affect performance directly but also indirectly through their effects on own as well as others’ investment. The authors study the effects of planning fallacy, optimism, and overconfidence on commercialization investments and success. Optimism directly increased commercialization success. The effect of planning fallacy on commercialization success was mediated by the entrepreneur’s own as well as others’ investments. Strong ties were more likely to supply funds with increased planning fallacy and optimism, while weak ties were less likely to supply funds with increased planning fallacy and optimism. Overconfidence was not of importance in this study. The results show the need to study the effects of entrepreneurs’ cognitions on different stakeholders’ perceptions of the entrepreneur in the entrepreneurial process.
Valentina Assenova et al., The Present and Future of Crowdfunding, 58 Cal. Mgmt. Rev. 125 (2016).
Abstract (from authors): A group of experts discuss their thoughts about the current state of crowdfunding, its future, important emerging trends in the field, and the opportunities and challenges facing investors and entrepreneurs in the space. Across the board, these experts highlight the importance of crowdfunding as a means for mobilizing resources. They also maintain that crowdfunding has already emerged as an important force in global finance, one which appears here to stay, but one where we have only begun to see the ways in which it will transform the financial sector.
Bernrdao Balboni, Ulpiana Kocollari & Ivana Pais, How Can Social Enterprises Develop Successful Crowdfunding Campaigns? An Empirical Analysis on Italian Context (2014),http://ssrn.com/abstract=2430463.
Abstract (from authors): Crowdfunding has been recognized by media narrations as a disruptive approach to funding social entrepreneurship while there is a lack of evidence in academic literature about those factors that are able to support social entrepreneurs in developing successful CrowdFunding (CF) campaigns. This paper is aimed to improve academic knowledge on those elements that can effectively support social entrepreneurs in managing their campaigns. An empirical analysis on 250 CF campaigns launched by Italian social enterprises was carried out. We focus on the effect on the overall funding level achieved of three main types of issues: the social enterprise’s network, the choice of CF platform, and the CF campaign’s design. Our results show how the social enterprise’s presence on Twitter, the choice of a specific reward-based platform, and an active management of the CF campaign have a significant impact on the achievement of the funding goal.
Amitrajeet A. Batabyal, Project Financing, Entrepreneurial Activity, and Investment in the Presence of Asymmetric Information (RIT Economics Department Working Paper No. 11-07, 2011), available athttp://ssrn.com/abstract=1953467.
Abstract (from author): The authors analyze a two-period signaling model in which a representative entrepreneur in a regional economy has a project that generates a random cash flow and that requires investment that the entrepreneur raises from a competitive market. The project’s type is known to the entrepreneur but not to the investors. Further, the entrepreneur is restricted to issuing debt only or equity only. The authors first show that there is no separating perfect Bayesian equilibrium (PBE) contract involving the issuance of equity only, that there exists a pooling PBE contract involving the issuance of equity only, and that a debt contract is preferred to an equity contract by the entrepreneur. Next, they suppose that the entrepreneur incurs a non-pecuniary cost of financial distress F>0 whenever he is unable to make a repayment at time t=1. The authors provide conditions on F under which a pooling PBE contract with debt exists and a separating PBE contract with debt and equity exists. Finally, the authors examine whether a high type entrepreneur will prefer a setting with a cost of financial distress (F>0) or a setting in which there is no such cost (F=0).
Bat Batjargal et al., Institutional Polycentrism, Entrepreneurs’ Social Networks, and New Venture Growth (William Davidson Institute, Working Paper No. 1060, 2013), available athttp://ssrn.com/abstract=2370597.
Abstract (from authors): What is the interrelationship among formal institutions, social networks, and new venture growth? Drawing on the theory of institutional polycentrism and social network theory, we examine this question using data on 637 entrepreneurs from four different countries. We find the confluence of weak and inefficient formal institutions to be associated with a larger number of structural holes in the entrepreneurial social networks. While the effect of this institutional order on the revenue growth of new ventures is negative, a network’s structural holes have a positive effect on the revenue growth. Furthermore, the positive effect of structural holes on the revenue growth is stronger in an environment with a more adverse institutional order (i.e., weaker and more inefficient institutions). The contributions and implications of these findings are discussed.
K. A. Bauer, Buying and Selling a High-Tech Business, 29 Managing Intell. Prop. 19-24 (1993).
Albert V. Bruno & Tyzoon T. Tyebjee, The Entrepreneur's Search for Capital, 1(1) J. Bus. Venturing 61-74 (1985).
Abstract: Provides information on the factors considered by entrepreneurs in search of risk capital. Discussion on the financing of new businesses; Details of venture capital; Analysis of risk capital.
Rodrigo Canales, From Ideals to Institutions: Institutional Entrepreneurship in Mexican Small Business Finance (2011), available athttp://ssrn.com/abstract=1763385.
Abstract: This paper analyzes the creation of the market for small business credit in Mexico, which presents a rare opportunity to explore the mechanisms of institutional entrepreneurship. The paper analyzes successful and unsuccessful attempts to activate small business lending to determine the organizational, structural, and personal aspects that allowed certain groups of individuals and not others to succeed. The paper proposes that, contrary to conventional thought, institutional change is not rare because institutional entrepreneurs are scarce. In fact, they are quite prevalent. What keeps most institutional entrepreneurs hidden from view is preference falsification, or the distinction that institutions function through the coordination of common beliefs, while private beliefs can diverge wildly. A central challenge of institutional entrepreneurship, therefore, is the transformation of the private beliefs of a few into common beliefs that can support new institutions. The paper argues that institutional entrepreneurship, while common, seldom succeeds because it entails a sequence of relatively unlikely events, including the recognition of an opportunity, the execution of organizational experiments, and the creation of public knowledge. Each stage of institutional entrepreneurship requires a combination of personal and structural qualities that are rarely found in a single individual, which explains why so few of them succeed.
Colleen Casey, Critical Connections: The Importance of Community-Based Organizations and Social Capital to Credit Access for Low-Wealth Entrepreneurs, 50 Urb. Aff. Rev. 366 (2014).
Abstract (adapted from author): This article studies the relationship between linking social capital and credit access for low-wealth entrepreneurs. The author argues that the support provided by community-based organizations facilitates critical linkages to credit access for low-wealth entrepreneurs. Data on nascent firms engaging in start-up efforts in the United States in 2005 from the Panel Survey of Entrepreneurial Dynamics II (PSED II) are used to test the effects of government, bank, and community-based organization supports. The results suggest that government support has a positive effect for entrepreneurs overall. However, among low-wealth entrepreneurs, support provided by community-based organizations significantly increases access to credit for start-up activities.
Ben R. Craig et al., Public Policy in Support of Small Business: The American Experience, 6 Ohio St. Entrepren. Bus. L.J. 457 (2011).
Abstract (from authors): Information problems in small enterprise credit markets can result in a market equilibrium characterized by credit rationing. These information problems are potentially more severe during sharp economic downturns such as the recent Great Recession. Government interventions to alleviate credit constraints on small firms need to be designed to correct the specific market failure resulting in socially suboptimal credit flows. The authors argue that Small Business Administration loan guarantees are a potentially appropriate intervention and provide a review of empirical research that supports the authors’ contention.
Douglas J. Cumming, Oliver M. Rui & Yiping Wu, Political Instability, Access to Private Debt, and Innovation Investment in China (2015), available at http://ssrn.com/abstract=2632450.
Abstract (adapted from authors): In this paper the authors provide evidence from China that access to loans positively affects the probability that a firm will invest in innovation. However, the positive effect of private debt on innovation investment is significantly moderated by political instability. The cost of political instability on innovation is less severe when the entrepreneur has political connections to party leaders. Furthermore, the authors show that political connections increase the probability that an entrepreneur has access to direct governmental support for innovation investment. These findings are more pronounced for technology intensive industries.
Douglas J. Cumming, Sofia A. Johan & Minjie Zhang, The Economic Impact of Entrepreneurship: Comparing International Datasets (2013), available athttp://ssrn.com/abstract=2262829.
Abstract (adapted from authors): Based on a comprehensive sample of all available countries and years, with the World Bank data being the most comprehensive, the authors find entrepreneurship has a significantly positive impact on GDP/capita, exports/GDP, and patents, and a negative impact on unemployment. Inferences from the Compendia data are very consistent. By contrast, inferences from the OECD data are not supportive of any of these propositions. The data highlight the importance of access to finance without downside costs so that entrepreneurs are encouraged to take risk. Further, the data highlight institutional differences in risk attitudes more generally inhibit risk taking and thereby limit the effectiveness of entrepreneurship. As well, the data highlight a central role for careful measurement of entrepreneurial activities, and for inclusion of as many countries and years as possible in order to effectively analyze the impact of entrepreneurship.
Geoffrey Desa & Sandip Basu, Optimization or Bricolage? Overcoming Resource Constraints in Global Social Entrepreneurship, 7 Strategic Entrepren. J. 26 (2013), available at http://ssrn.com/abstract=2177185.
Abstract (adapted from authors): Resources play a vital role in the development of an entrepreneurial venture. For ventures operating in the public interest, the process of effective resource mobilization can be especially critical to the social mission. However, there has been limited empirical examination of the approaches used by social ventures to mobilize critical resources. The authors study two processes of resource mobilization -- optimization and bricolage, and examine the antecedent conditions that influence a venture’s selection of these processes. The instant theory predicts that environmental munificence and organizational prominence have U-shaped associations with the use of bricolage and positive associations with the use of optimization. The authors test their hypotheses on a sample of 202 technology social ventures from 42 countries, and discuss implications for the social entrepreneurship and broader entrepreneurship literatures.
Kimberly A. Eddleston et al., Do You See What I See? Signaling Effects of Gender and Firm Characteristics on Financing Entrepreneurial Ventures, 40 Entrepreneurship: Theory & Prac. 489 (2016).
Abstract (adapted from authors): In this study, the authors examine whether female entrepreneurs are held to a different standard than male entrepreneurs in obtaining financing from banks. To test this idea, the authors draw from the literature on signaling theory to propose that characteristics specific to the firm and the entrepreneur act as a means to communicate (i.e., signal) the inherent quality of the venture and thus impact the amount of capital the entrepreneur is able to obtain. The authors then explore the moderating role of gender based on gender role congruity theory to argue that capital providers reward the business characteristics of male and female entrepreneurs differently to the disadvantage of women.
Lee Flemming & Olav Sorenson, Financing by and for the Masses: An Introduction to the Special Issue on Crowdfunding, 58 Cal. Mgmt. Rev. 5 (2016).
Abstract (from author): This introduction to the special issue on crowdfunding begins by providing some information about the history and nature of the phenomenon. It then summarizes some of the key advantages and disadvantages of crowdfunding for entrepreneurs and for investors, introducing the various articles in the issue that explore these topics in greater depth. It concludes with some speculations regarding the possible future of the industry and its effects on entrepreneurship, innovation, and inequality.
Raquel Fonseca, Pierre-Carl Michaud & Thepthida Sopraseuth, Entrepreneurship, Wealth, Liquidity Constraints, and Start-up Costs, 28 Comp. Lab. L. & Pol'y J. 637 (2006).
Abstract (from authors): Our paper focuses on the effect of liquidity constraints and start-up costs on the relationship between wealth and fraction of entrepreneurs in an economy. We consider a model of heterogeneous agents with occupational choice. Wealth and entry into entrepreneurship are endogenous. Entrepreneurs can borrow capital from banks to set up or expand their business. However, because of limited enforceability of loan contracts, banks are reluctant to grant credit to entrepreneurs with low levels of wealth. Wealth plays the role of collateral and limits default. We introduce additional institutional features, namely start-up costs, to the model. In addition to savings and entrepreneurial choices, used by Cagetti and De Nardi, we allow the individual to consider inactivity. Indeed, old individuals may withdraw from the labor force rather than continue activity. We then get a complete picture of occupational choices in old age, as a less generous old age pension may entice individuals to delay retirement and consider starting their own business. They can also have strong incentives to be inactive (retirement, unemployment, or disability can be here interpreted as being inactive). Start up costs, by shifting the expected entrepreneurial gains, may actually affect these choices. The model predicts that with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth. The originality of our paper is to show that the introduction of start-up costs tends to flatten this relationship. This is highly relevant since we show that start-up costs and liquidity constraints are positively correlated across countries but have different effects on the relationship between entrepreneurship and with wealth.
Luis Armando Garcia, Teaching Private Equity Investment in Higher Education: An Entrepreneurship Approach (2011), available athttp://ssrn.com/abstract=1944809.
Abstract (from author): A determining factor in entrepreneurship is the level of education of the entrepreneur. Universities and institutions of higher learning are called to design courses and support to potential entrepreneurs. European universities taking part in the European Higher Education Area (EHEA) should exploit the potential business network that students have at their reach inside the EU area. Entrepreneurship education warrants an improvement of financial literacy, for studies have shown that in many developed nations consumers are poorly informed about financial products and practices. Venture Capitalists consider universities as sources of truly exceptional innovations and inventions, which can develop into successful companies within a short period of time. The Private Equity Investment industry has acquired enormous popularity as an alternative investment asset class over the past two decades. Its backers claim that its extensive economic benefits come from a model that aligns the interest of both owners and management. Perhaps it has never been easier than right now for companies and start-ups to locate, contact and engage potential sources of Private Equity Investment and/or Venture Capital Funds. Entrepreneurship and financial Literacy should be taught openly in Business Schools around the world. The entrepreneurship industry is ready to join forces with academics and students in order to confront the unharmonious aspects of the current curriculum of entrepreneurship education.
Emilia Garcia-Appendini, Lending to Small Businesses: The Value of Soft Information (2011), available at http://ssrn.com/abstract=1750056.
Abstract (from author): The authors examine whether banks use soft information in their lending decisions. To overcome the problem of soft information measurement, we analyze whether publicly available variables that are correlated with the borrowers' credit quality are more significant in explaining the lending decisions of banks that have no soft information. They find that the power of these variables to predict credit outcomes is lower whenever the bank has access to soft information. The results indicate the importance of soft information in small business lending, and are robust to several measures of soft information availability, and to a potentially endogenous relationship between soft information and credit quality.
Manuel Gonzalez-Diaza & Vanesa Solis-Rodriguez, Why Do Entrepreneurs Use Franchising as a Financial Tool? An Agency Explanation, 27 J. Bus. Venturing 325 (2012).
Abstract (from journal): When and why one type of entrepreneur (franchisor) attracts to its ventures another type of entrepreneur (franchisees) instead of passive investors is a central concern in entrepreneurship literature. Based on the informativeness principle of the principal–agent model, we claim that franchisees are not such an expensive financial tool as has been argued in the literature because their compensation (return) is more efficiently designed: it directly depends on variables which are under franchisees' control. We therefore link agency and financial explanations for franchising. Most of our findings show that, once the agency argument is controlled for, the higher the cost of alternative funds for the franchisor (estimated through different variables), the more the franchisor will rely on expansion through franchising as opposed to company-ownership. The authors interpret this as a clue that franchising is also used as a financial capital source.
Michelle M. Harner, Mitigating Financial Risk For Small Business Entrepreneurs, 6 Ohio St. Entrepren. Bus. L.J. 469 (2011).
Abstract (from author): Financial distress by definition threatens a company's viability. Entrepreneurial and start-up entities are particularly vulnerable to this threat. Yet, much of the discussion following the recent recession focuses almost exclusively on financial institutions and “too-big-to-fail” entities. This essay re-examines lessons gleaned from the recession in the context of smaller, entrepreneurial entities. Specifically, it analyzes how small business entrepreneurs might invoke principles of enterprise risk management to mitigate the long-term impact of financial distress on their business models. It also considers related refinements to extant small business regulations, including the U.S. bankruptcy laws. The essay's primary objective is to help policymakers, entrepreneurs and investors rethink financial distress and recognize opportunities for “successful failures.”
Hans K. Hvide & Jarle Moen, Lean and Hungry or Fat and Content? Entrepreneurs' Wealth and Start-Up Performance, 56(8) Mgm’t. Sci. 1242 (2010).
Abstract (from authors): If entrepreneurs are liquidity constrained and not able to borrow to operate on an efficient scale, economic theory predicts that entrepreneurs with more personal wealth should do better than those with less wealth. We test this hypothesis using a novel data set covering a large panel of start-ups from Norway. Consistent with liquidity constraints, we find a positive relation between founder prior wealth and start-up size. The relationship between prior wealth and start-up performance, as measured by profitability on assets, increases in the first three wealth quartiles. In the top wealth quartile, however, profitability drops sharply in wealth. Our findings are consistent with a luxury good interpretation of entrepreneurship and that higher wealth may induce a less alert or a less dedicated management. We conclude that an abundance of resources might do more harm than good for start-ups.
James John Jurinski, Jon Down & Madhuparna Kolay, Helping Older, Encore Entrepreneurs Anticipate Financial Risks, 70 J. Fin. Serv. Prof. 81 (2016).
Abstract (from authors): Financial advisors are encountering an increasing number of older Americans who are launching new businesses. Some of these encore entrepreneurs have retired from steady jobs, but have longed to run their own businesses. Others may have lost their jobs during the last recession, or as a result of industry downsizing. Even though these entrepreneurs have decades of work experience, they do not have decades of experience owning and running their own businesses. Accordingly, they will have some significant knowledge gaps about the financial realities of running a startup business and how that affects their families' finances. More importantly first-time entrepreneurs are usually overconfident because they are unaware of the financial risks of starting a small business. Coordinating business planning with personal financial planning is often the most difficult part of starting a business out of one's own savings, and surprisingly, finding a qualified advisor to help is also a challenge. Financial advisors can render a real service to such clients by helping them recognize and appreciate the entrepreneurial risks they face, and how this affects their families' finances.
Paul Kedrosky & Daniel Stangler, Financialization and Its Entrepreneurial Consequences, (Ewing Marion Kauffman Foundation Research Paper, 2011),available at http://ssrn.com/abstract=1798605.
Abstract: The U.S. financial sector expanded dramatically over the last hundred years in both relative and absolute terms. This expansion has had a number of causes and consequences, most of which can be lumped broadly under the heading of increased 'financialization' of the economy. This led, in part, to the financial crisis of 2008/2009. In this paper, however, we consider the implications of financialization for the structure of the U.S. economy, in particular for entrepreneurship.
Reddi Kotha & Gerard George, Friends, Family, or Fools: Entrepreneur Experience and It's Implications for Equity Distribution and Resource Mobilization (2012), available at http://ssrn.com/abstract=2004330.
Abstract (from authors): Who helps entrepreneurs raise the resources they need and how much equity does an entrepreneur distribute in return? The authors use a sample of 611 entrepreneurs in the U.S. to examine why some entrepreneurs are more likely than others to distribute ownership selectively to helpers. The authors find that entrepreneurs with specific industry experience and start-up experience are able to provide ownership more selectively and raise more resources from their helpers. The authors refine the categorization of social ties further to make a distinction between professional and familial ties to show that the ownership distribution and types of resource contributions vary by the mix of ties in the entrepreneur’s helper network. These findings have implications for theories of resource assembly, social structure and entrepreneurship, and organization design.
Nataliia Kravchenko et al., Information Externalities and Small Business Lending by Banks: A Comparison of Urban and Rural Counties in the U.S. (2011),available at http://ssrn.com/abstract=1968965.
Abstract (adapted from authors): It is widely recognized that small business is not only an important source of employment but is the genesis of virtually all successful large enterprises. Given their size and characteristic opaqueness, Small and Medium Enterprises (SMEs) tend to be more financially constrained than large firms because of the lack of access to external financing from both banks and capital markets. Though building a relationship provides the loan officer more information about the individual entrepreneur, there are other factors that can influence the success or failure of an enterprise. The authors divide the entrepreneurial information available to bank loan officers into three segments: information about competition in the local banking market, information about success and failures of other SMEs in the local market, and information about how well other banks are performing in the local market. The primary purpose of this paper is to find proxies for this entrepreneurial information and to gauge its impact on bank lending in a geographical area. The authors then test to see how their proxies for this information impact the dollar volume of small business lending. The analysis uses county level data as the geographical area and controls for general economic conditions such as the level of income and the endowments of human capital. The paper confirms the importance of entrepreneurial information in influencing the level of SME lending by banks.
Josh Lerner, Entrepreneurship, Public Policy, and Cities (World Bank, Policy Research Working Paper No. 6880, 2014), available athttp://ssrn.com/abstract=2439701.
Abstract (by author): Since the 2008-09 global financial crises, interest among policy makers in promoting innovative ventures has exploded. The emerging great hubs of entrepreneurial activity, like Bangalore, Dubai, Shanghai, Silicon Valley, Singapore, and Tel Aviv, bear the unmistakable stamp of the public sector. Enlightened government intervention played a key role in each region's emergence. But for each effective government intervention, dozens, even hundreds, disappointed with substantial public spending bearing no fruit.
This paper sheds light on how governments can avoid mistakes in stimulating entrepreneurship. In recent decades, efforts have increased to provide the world's poorest with financing and other assistance to facilitate their entry into entrepreneurship or the growth of their small ventures. These are typically subsistence businesses offering services like snack preparation or clothing repair. Such businesses typically allow business owners and their families to get by, but little else. The public policy literature, along with academic studies of new ventures, often does not distinguish among the types of businesses being studied. The author focuses here exclusively on high-potential new ventures and the policies that enhance them. This choice, not intended to diminish the importance of efforts to boost microenterprises, reflects the complexity of the field: the dynamics and issues involving micro firms are quite different from those of their high-potential counterparts. A substantial literature suggests that promising entrepreneurial firms can have a powerful effect in transforming industries and promoting innovation.
John B. Maier II & David A. Walker, The Role of Investment Capital in Financing Small Business, 2 J. Bus. Venturing 207-214 (1987).
Abstract: Deals with a study which examined venture capital firms that participated in small business financing. Characteristics of the firms; Allocation of resources; Role of venture capital in financing small business.
Othmar Manfred Lehner, Crowdfunding Social Ventures: A Model and Research Agenda (2012), available at http://ssrn.com/abstract=2102525.
Abstract (by author): Crowdfunding (CF) in a social entrepreneurship context is praised in narrations for its multifaceted potential - to access much needed financial resources, to gain legitimacy through crowd participation, and to further tap the crowd as a resource for numerous activities of the venture. From an academic point of view however, little has been written about CF as a whole, and inquiries from the social entrepreneurship sphere are so far mostly concerned with CF donations. In order to overcome the scarcity of the resource ‘crowd’ being asked for gifts, new approaches, including tailored reward systems, more structured bond-like investments and equity based CF are experimented with. Finance literature scarcely addresses these new forms, and no article so far shows concern for the idiosyncrasies of social ventures and the differing rationale of the social entrepreneurs and investors in CF activities. This paper thus sets out to first review existing literature on financing social ventures as well as on crowdfunding. Based upon the findings, the author subsequently draws up an early scheme of CF in order to structure future inquiries and to provide a common ground for discussion. Based upon the two streams, and in reflection to perspectives from traditional finance, a research agenda of eight themes for CF of social ventures is set up. The themes proposed are: investor types and utility-functions; corporate governance and structure in CF ventures; investor relations, risk and disclosure; applications and comparative approaches; network tie formation; legitimacy, institutions and democracy; challenging finance metrics; and legal and regulative hurdles for equity and debt CF.
Colin M. Mason & Richard T. Harrison, Closing the Regional Equity Capital Gap: The Role of Informal Venture Capital, 9 Small Bus. Econ.153-172 (1995).
Chandra Mishra & Ramona Zachary, The Theory of Entrepreneurship, 5 Entrepreneurship Res. J. 251 (2015).
Abstract (from authors): The theory of entrepreneurship, namely the entrepreneurial value creation theory, explains the entrepreneurial experience in its fullest form, from the entrepreneurial intention and the discovery of an entrepreneurial opportunity, to the development of the entrepreneurial competence, and the appropriation of the entrepreneurial reward. The theory of entrepreneurship provides in sufficient detail the interiors of the entrepreneurial process using a two-stage value creation framework. In the first stage of venture formulation, the entrepreneur driven by a desire for entrepreneurial reward (i.e., entrepreneurial intention) leverages the entrepreneurial resources at hand to sense an external opportunity (cue stimulus) and effectuate the entrepreneurial competence that is sufficient to move to the second stage. Several ventures fail at this stage. In the second stage of venture monetization, the entrepreneur may acquire external resources such as venture capital or strategic alliance to effect growth. Investors face an adverse selection problem when entrepreneurial ability and venture quality are difficult to ascertain. Entrepreneurs may use incentive signals to secure a higher valuation offer from the investors. A business model design with embedded dynamic capabilities can reconfigure the entrepreneurial competence to create sustained value and appropriate the entrepreneurial reward.
Ethan Mollick & Alicia Robb, Democratizing Innovation and Capital Access: The Role of Crowdfunding, Cal. Mgmt. Rev. 72 (2016).
Abstract (adapted from authors): This article focuses on how crowdfunding might democratize the commercialization of innovation as well as financing. First, it examines how crowd funders decide what effort to support and asks how do crowd and expert decisions differ? Second, it investigates whether crowdfunding democratizes access to capital by asking whether groups that have historically been underrepresented in capital markets gain additional access to capital markets through crowdfunding. Finally, it investigates whether crowdfunding leads to the growth of new firms in the same way that traditional funding does. Taken together, these questions point to a potentially vast alternative infrastructure for developing, funding, and commercializing innovation.
Charles Murnieks et al., ‘I Like How You Think': Similarity as an Interaction Bias in the Investor–Entrepreneur Dyad, 48 J. Mgmt. Studies 1533 (2011), also available at http://ssrn.com/abstract=1932523.
Abstract (adapted from authors): Investigating the factors that influence venture capital decision-making has a long tradition in the management and entrepreneurship literature. However, few studies have considered the factors that might bias an investment decision in a way that is idiosyncratic to a given investor–entrepreneur dyad. The authors do so in this study. Specifically, the authors build from the literature on the ‘similarity effect’ to investigate the extent to which decision-making process similarity (shared between the investor and the entrepreneur) might bias or otherwise impact the investor's evaluation of a new venture investment opportunity. The findings suggest venture capitalists evaluate more favourably opportunities represented by entrepreneurs who ‘think’ in ways similar to their own. Moreover, in the presence of decision-making process similarity, the impacts of other factors that inform the investment decision actually change in counter-intuitive ways.
Sarah Pearlman, Can Low Returns to Capital Explain Low Formal Credit Use? Evidence from Ecuador, 48 J. Developing Areas 1 (2014).
Abstract (adapted from author): One potential explanation for low formal credit use is that poor entrepreneurs generate returns to capital below borrowing costs and cannot afford the loans. The article tests this using a new, nationally representative data from Ecuador, focusing on entrepreneurs that say credit constraints are a major problem. The author estimates returns to capital and find monthly returns between 3.5% and 21%, well above prevailing interest rates. Despite this, one third of the finance constrained sample expresses no demand for a hypothetical loan. She estimates the determinants of demand for this loan, focusing on the role profitability may play, and finds that measures of profitability are positively and significantly associated with demand, and that perceptions of profitability are among the strongest determinants. Meanwhile, assets, employees, duration, formality and past credit use have no predictive power. This suggests that some micro-entrepreneurs cannot afford prevailing interest rates and rationally eschew formal credit as a result.
Sharon Poczter & Melanie Shapsis, Know Your Worth: Angel Financing of Female Entrepreneurial Ventures (2016), available at http://ssrn.com/abstract=2782266.
Abstract (adapted from authors): This study explores success rates in angel financing based on the gender composition of entrepreneurial teams using unique, hand-collected data from the television program Shark Tank. The authors find that the likelihood of a team receiving an offer from an angel investor is independent of the entrepreneurs’ gender and initial asking valuation. However, consistent with prior work, the authors find that female teams receive lower company valuations and less capital to finance their new ventures relative to their male counterparts and that this differential valuation depends on industry. The authors also discover that female teams receive less funding because they initially ask for significantly lower valuations for their companies, ceteris paribus. These results hold when controlling for important entrepreneur and firm characteristics that may strongly impact the angel financing outcome, such as the size of the entrepreneurial team, company age and prior success of the firm.
Dana Brakman Reiser & Steven A. Dean, Hunting Stag with Fly Paper: A Hybrid Financial Instrument for Social Enterprise, 54 B.C.L. Rev. 1495 (2013).
Abstract (by authors): Social entrepreneurs and socially motivated investors share a belief in the power of social enterprise: ventures that pursue a -double bottom line- of profit and social good. Unfortunately, they also share a deep mutual suspicion. Recognizing that social ventures-just like traditional for-profit and nonprofit enterprises-need capital to flourish, this article offers a financing tool to transform that skepticism into commitment. Unlike the array of new entities that have emerged in recent years-including L3Cs, benefit corporations, and flexible purpose corporations-the hybrid financial instrument this article describes provides a robust and transparent solution to the puzzle that lies at the heart of every social enterprise: how to blend a profit motive with a social mission. Recognizing their shared dilemma as an example of what economists call a stag hunt, FLY Paper strikes that elusive balance by allowing investors and entrepreneurs to signal credibly a reciprocal commitment to the pursuit of a double bottom line.
Alicia Robb & Robert Seamans, The Role of R&D in Entrepreneurial Finance and Performance (2014), available at http://ssrn.com/abstract=2341631.
Abstract (by authors): The authors extend theories of the firm to the entrepreneurial finance setting and argue that R&D-focused start-up firms will have a greater likelihood of financing themselves with equity rather than debt. They argue that mechanisms that reduce information asymmetry, including owner work experience and financier reputation, will increase the probability of funding with more debt. They also argue that startups that correctly align their financing mix to their R&D focus will perform better than firms that are misaligned. The authors study these ideas using a large nationally representative dataset on start-up firms in the United States.
Serena Sandri, Christian Schade, Oliver Musshoff & Martin Odening, Holding On for Too Long? An Experimental Study on Inertia in Entrepreneurs’ and Non-Entrepreneurs’ Disinvestment Choices, 76(1) J. Econ. Behav. & Org. 30 (2010).
Abstract (from Elsevier): Disinvestment, in the sense of project termination and liquidation of assets including the cession of a venture, is an important realm of entrepreneurial decision making. This study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non-entrepreneurs. Our experimental results reject the standard net present value approach as an account of observed behavior. Instead, most individuals seem to understand the value of waiting. Their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real-options reasoning. We also observe a pronounced ‘psychological inertia’, i.e., most individuals hold on to a losing project for even longer than real-options reasoning would predict. The study provides evidence for entrepreneurs and non-entrepreneurs being quite similar in their behavior.
Arnout Seghers et al., The Impact of Human and Social Capital on Entrepreneurs’ Knowledge of Finance Alternatives, 50 J. Small Bus. Mgmt. 63 (2012).
Abstract (adapted from journal): 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, the authors 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.
Yochanan Shachmurove, First-Round Entrepreneurial Investments: Where, When and Why? (PIER Working Paper No. 11-017, 2011), available athttp://ssrn.com/abstract=1873356.
Abstract (from author): This paper examines the where, when and why of first round entrepreneurial investment activity in the United States from the first quarter of 1995 until the second quarter of 2010. The paper analyzes these venture capital investments taking into consideration the role of macroeconomic variables, region, and industry. Additionally, trends in regional and industrial investments are evaluated using statistical and graphical analyses. By studying these findings, one is able to understand the impact of different periods of economic growth on venture capital investments. Lastly, the shock of the dot.com bubble and recent financial crisis are integrated into the findings.
Oleksandr Talavera et al., Social Capital and Access to Bank Financing: The Case of Chinese Entrepreneurs, 48 Emerging Markets Fin. & Trade 55 (2012).
Abstract (from authors): This paper presents the results of a study of the effects of social capital on access to bank financing. Based on a Chinese nationwide survey, our analysis suggests that entrepreneurs who contribute to charities are more likely to be successful in loan applications. In addition, we find that political party membership is an important determinant of state-owned bank financing, whereas time spent on social activities increases the probability of obtaining loans from commercial banks. Therefore, our data provide some evidence for substitutability between various types of social capital. To obtain a loan from a specific type of bank, an entrepreneur should access the relevant social network.
John Reinecke Thorne, Alternative Financing for Entrepreneurial Ventures, 13 Entrepreneurship: Theory & Prac. 7-9 (1989).
Abstract: The article focuses on the alternative financing practice for entrepreneurial ventures. The conventional concept of financing for entrepreneurial ventures is that investments are made in the company stock by the entrepreneurs, their partners and later by investors. Variations of this theme include combinations of debt and equity. Since bank borrowings to start companies almost always include personal guarantees and collateral, borrowing is in effect putting personal funds at risk and is equivalent to investing inequity. In practice, a surprising number of new companies are financed substantially or sometimes entirely from other sources. It is the entrepreneur's ability to find and exploit other sources of funding that often identifies the entrepreneurial character of the individual. The entrepreneur identifies the business opportunity and gathers the resources to develop the business. The methods used in acquiring these scarce resources are important characteristics of entrepreneurs. Some of the techniques used to acquire substantial resources are borrowing from suppliers and service providers, dealing with customers, free or low-cost labor, raising of non-equity funds and so on.
Paul D. Reynolds, Entrepreneurship in Developing Economies: The Bottom Billions and Business Creation, 8 Foundations and Trends in Entrepren. 141 (2012), available at http://ssrn.com/abstract=2137727.
Abstract (by author): Over 100 million of the 1.8 billion mid-life adults living on less than $15 a day are attempting to create new firms. Another 110 million are managing new ventures. This is almost half of the global total of 450 million individuals involved with 350 million start-ups and new ventures. For the poor, business creation provides more social and personal benefits than illegal and dangerous migration, criminal endeavors, or terrorism. Almost all of the business creation by the bottom billions occurs in developing countries, half are in Asia. The ventures initiated by the bottom billion are a significant minority of all firms expecting growth, exports, an impact on their markets, and in high tech sectors. Assessments based on multi-level modeling suggest that young adults, whether they are rich or poor, in countries with access to informal financing and an emphasis on traditional, rather than secular-rational, and self-expressive values are more likely to identify business opportunities and feel confident about their capacity to implement a new firm. Such entrepreneurial readiness is, in turn, associated with more business creation. Compared to the strong associations of informal institutions with business creation, formal institutions have very modest and idiosyncratic relationships. Expansion of access to secondary education and early stage financing may be the most effective routes to more firm creation among the bottom billion.
Jeffry A. Timmons, A Business Plan Is More Than a Financing Device, 14 Harv. Bus. Rev. (Mar.-Apr. 1980).
Brian Uzzi, Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing, 64 Am. Soc. Rev. 481-505 (1999).
Abstract (from author): This article investigates how social embeddedness affects an organization's acquisition and cost of financial capital in middle-market banking--a lucrative but understudied financial sector. Using existing theory and original fieldwork, it develops a framework to explain how embeddedness can influence which firms get capital and at what cost. It then statistically examines those claims using national data on small-business lending. At the level of dyadic ties, it finds that firms that embed their commercial transactions with their lender in social attachments receive lower interest rates on loans. At the network level, firms are more likely to get loans and to receive lower interest rates on loans if their network of bank ties has a mix of embedded ties and arm's-length ties. These network effects arise because embedded ties motivate network partners to share private resources, while arm's-length ties facilitate access to public information on market prices and loan opportunities so that the benefits of different types of ties are optimized within one network. It concludes with a discussion of how the value produced by a network is at a premium when it creates a bridge that links the public information of markets with the private resources of relationships.
Howard E. Van Auken & Richard Carter, Acquisition of Capital by Small Business, 27 J. Small Bus. Mgmt. 1-9 (1989).
Dennis R. Young & Mary Clark Grinsfelder, Social Entrepreneurship and the Financing of Third Sector Organizations, 17 J. Pub. Affairs Ed. 543 (2011).
Abstract (from authors): In this paper, we review the literature on entrepreneurship and the skill sets required by entrepreneurs operating in different sectors of the economy. Case studies from the social enterprise literature are examined in some detail. We search for distinctions between entrepreneurship in the business and public sectors and entrepreneurship in the nonprofit sector and relate this to the variations in financial support found among nonprofit sector organizations. We conclude that third sector social entrepreneurs are likely to require a different mix of skills than business entrepreneurs. In particular, political skills broadly defined, and the ability to secure and maintain charitable support, appear to be common to successful social enterprise ventures. Hence, taking too narrow a view of social entrepreneurship and social enterprise by confining it to the traditional business model of entrepreneurship constrains the potential benefits of developing social entrepreneurship in the third sector. This implies that education of potential social entrepreneurs should be broadly construed, combining business, public and nonprofit based instruction.
Peter A. Zaleski, Start-Ups and External Equity: The Role of Entrepreneurial Experience, 46 Bus. Econ. 43 (2011).
Abstract (from author): Interest in entrepreneur ship has increased dramatically over the last two decades. Because of the role that entrepreneur ship plays in economic development, an understanding of the financing of business start-ups is essential. A long-standing problem for many business start-ups is acquiring external equity during the first year of operations. This paper analyzes the determinants of obtaining external equity. Special consideration is given to the role of entrepreneurial experience. The results suggest that entrepreneurial experience impacts a start-up's ability to obtain external equity.