The study extends the literature on venture capital by examining whether entrepreneur’s choice for an external investor and certain firm characteristics have an impact on venture success or not. The focus is set on the differences in value creation by venture capitalists and business angels for ventures of the high- and low-technology sector. The assessment of a data set including 252 Series A financing rounds by venture capitalist firms, business angels and collaborative investments of both investors conducted between 2005 and 2012 unveils value enhancing aspects for all three financing solutions. Overall, start-ups initially financed by venture capitalist firms perform best with regard to general venture success (exit and survival rates), whereas start-ups collaboratively supported by venture capitalists and business angels have the highest chances to exit successfully through a trade sale. It becomes further apparent that ventures located in one of the high-technology industries ‘internet’, ‘pharmaceuticals’ and ‘high-tech’, ventures that are longer established in the market and ventures whose Series A financing round was executed more recently indicate an enhanced likelihood of success.
Table of Contents
1 Introduction
1.1 Purpose
1.2 Structure of the study
2 The venture capital market
2.1 The entrepreneurial perspective
2.2 Business angels
2.3 Venture capitalists
2.4 Corporate venture capitalists
2.5 High- and low-technology ventures
2.6 The principal-agent problem - Venture capital contracting
3 Literature review and Hypotheses development
3.1 Value creation of business angels
3.2 Value creation of venture capitalists
3.3 Complementarities
4 Data and Methodology
4.1 Data selection
4.2 Scientific approach
4.3 Determinants of success and failure
5 Empirical results
5.1 Sample summary
5.2 Odds ratios
5.3 Logit regression
5.3.1 Binary logit regression
5.3.2 Multinomial logit regression
5.4 Hypotheses testing
6 Discussion
7 Conclusion, limitations and implications
7.1 Conclusion
7.2 Limitations
7.3 Implications
Research Objectives and Core Themes
This study aims to investigate the influence of an entrepreneur's choice of external investor—specifically business angels, venture capitalists, or a combination of both—on the ultimate success of a start-up. By utilizing a quantitative assessment of 252 Series A financing rounds, the research seeks to answer whether specific investor types and firm characteristics significantly affect venture outcomes, particularly regarding value creation in high- versus low-technology sectors.
- The impact of investor type (Business Angel vs. Venture Capitalist) on venture success probability.
- Differences in value creation potential across high-technology and low-technology industry sectors.
- The synergies and outcomes of collaborative investment strategies between Business Angels and Venture Capitalists.
- The role of firm-level characteristics like age and industry affiliation in determining venture survival and exit likelihood.
Excerpt from the Book
2.6 The principal-agent problem - Venture capital contracting
A major concern on both sides of the investor/entrepreneur relationship during the investment process is the principal-agent problem. The principal-agent problem arises when two individuals operate in an uncertain environment in which both prefer risk-sharing. The benefit for both parties depends on the effort exerted by the agent (entrepreneur), but the principal (VC or BA) cannot constantly observe and control the agent’s efforts (Grossman & Hart, 1983). Kaplan and Stromberg (2001) identify three ways for solving the problem: Allocation of cash flow and control rights structured by financial contracts, a thorough due diligence ex ante the investment and screening and monitoring along all financing stages of the venture.
VCs attempt to exclude risk by setting up contracts in which specific control rights are determined, including the allocation of cash flow rights, board rights, voting rights and liquidation rights contingent on observable measures of financial and non-financial performance. In case of underperformance by the entrepreneur, venture control incrementally shifts over to the VC. As soon as the venture performance improves, the entrepreneur regains control rights, although cash flow rights retain with the VC (Kaplan & Stromberg, 2000). Those control mechanisms protect the VC from being held up by the entrepreneur. The entrepreneur has the advantage of information since he knows first how well the venture is performing. By implementing those rights of control shifts, the VC ensures indirect control over the venture performance.
Summary of Chapters
1 Introduction: Provides the research motivation, defines the scope regarding informal and formal venture capital, and poses the central research question regarding investor choice and venture success.
2 The venture capital market: Details the key participants (entrepreneurs, business angels, venture capitalists, corporate venture capitalists), explores the principal-agent problem, and differentiates between high- and low-technology venture characteristics.
3 Literature review and Hypotheses development: Critically evaluates existing scholarly literature regarding value creation by business angels and venture capitalists, leading to the formulation of testable hypotheses for both high- and low-tech sectors.
4 Data and Methodology: Outlines the data selection process, explains the scientific approach (logit regression and odds ratios), and defines the metrics used to measure venture success.
5 Empirical results: Presents the findings from the sample analysis, providing descriptive statistics, odds ratio calculations, and the results of binary and multinomial logit regressions.
6 Discussion: Interprets the empirical results within the context of current literature, discussing the success of various investor groups and factors influencing venture outcomes.
7 Conclusion, limitations and implications: Summarizes key findings, acknowledges study limitations, and provides practical recommendations for entrepreneurs and future research avenues.
Keywords
Venture Capital, Business Angels, Start-Up Financing, Value Creation, Entrepreneurial Success, High-Technology, Low-Technology, Principal-Agent Problem, Series A Financing, Trade Sale, Exit Strategy, Logit Regression, Investment Strategy, Synergies, Innovation.
Frequently Asked Questions
What is the primary focus of this master thesis?
The thesis investigates the impact of an entrepreneur's choice of external investor (Business Angels, Venture Capitalists, or both) on the probability of venture success, specifically looking at differences in value creation.
Which investor groups are analyzed in this study?
The study examines three specific investor types: Business Angels (BAs), Venture Capitalist firms (VCs), and collaborative investments (VCs and BAs co-investing).
What is the core research question?
The research aims to determine: "Does an entrepreneur’s choice of investor type affect venture success?"
What scientific methods were employed?
The author utilized descriptive statistics to calculate odds ratios and performed both binary and multinomial logit regressions to analyze the impact of various variables on venture success.
What does the empirical part of the work cover?
The empirical section covers the summary of the 252-deal sample, the calculation of odds ratios for various investor and industry subgroups, and regression analysis identifying significant predictors of success.
Which keywords best characterize the research?
Key terms include Venture Capital, Business Angels, Start-Up Financing, Value Creation, Entrepreneurial Success, High-Technology, Low-Technology, and Series A Financing.
How does the study define "venture success"?
Success is defined by a dummy variable representing two positive outcomes: 'acquisition' (liquidity event via trade sale) and 'non-exited survival' (company remains active).
What role does the industry sector play in venture success?
The study finds that ventures in the high-tech, internet, and pharmaceutical industries have statistically significant higher probabilities of success compared to other sectors.
What is the significance of the "principal-agent problem" in this research?
It is highlighted as a central conflict in venture capital contracting where investors (principals) and entrepreneurs (agents) face asymmetric information and differing incentives, requiring contractual solutions.
How does the author view the role of co-investment between VCs and BAs?
The author suggests that co-investment generates positive synergies, allowing investors to combine VC expertise and resources with the networks and industry-specific experience of Business Angels.
- Citar trabajo
- Daniel Schmidt (Autor), 2013, Entrepreneur's Choice between Venture Capitalist and Business Angel for Start-Up Financing, Múnich, GRIN Verlag, https://www.grin.com/document/230839
