Abstract
Innovation is a key source of economic growth. While in his famous statement on the Process of Creative Destruction, selfsame can be set in motion by every entity of the economy, including within large organizations, Schumpeter becomes more explicit in his Theory of Economic Development. He draws attention to “the individuals whose function it is to carry out [new combinations, whom] we call ‘entrepreneurs’”.
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Notes
- 1.
Cited from Schumpeter (2010: 72 f.).
- 2.
For an overview of theoretical and empirical studies on the impact of entrepreneurship on economic growth, see, e.g., Carree and Thurik (2013).
- 3.
Source: Thomson Reuters EIKON database; accessed 31 July 2017.
- 4.
On a broader level, Kaplan and Lerner (2010) also show that from 1999 through 2009, over 60% of US initial public offerings (IPOs) have had VC financing, and that in only two of these eleven years fewer than half of IPOs have been VC-backed, concluding that VC funding very significantly increases the likelihood that a start-up will eventually go public.
- 5.
In a recent comparison from 2009 to 2013 the US National Venture Capital Association (NVCA) reports that an average of less than 1,200 companies received venture capital for the first time annually in the United States, which is roughly 0.2%—or one out of 500—of the 600,000 firms started each year according to the US Small Business Association (Kaplan and Lerner, 2016). Of all US businesses created within the 25-year sample period between 1975 and 2000 listed in the Longitudinal Business Database (LBD), only 0.11% accounted for VC-backed firms; the fraction increases to 0.22% between 1996 and 2000 (Puri and Zarutskie, 2012). In the 2004 Kauffmann Firm Survey, which tracks 4,928 US firms founded in the same year, 110 (2.2%) new businesses attracted financing from angels, and only 26 (0.5%) from venture capitalists (Robb and Robinson, 2014). The 1993 US National Survey of Small Business Finance (NSSBF) data has shown that VC funding accounted for an estimated 1.85% and angel financing 3.59% of small business finance (Berger and Udell, 1998). All these numbers apply to the United States, which is by far the largest VC market in the world.
- 6.
Handling the need for resources using other means than external finance is referred to as “financial bootstrapping” (see, e.g., Winborg and Landström, 2001).
- 7.
New research, however, indicates that the market for venture lending is more active than thought under certain circumstances: e.g., Hochberg et al. (2014) show that, when secondary patent markets are liquid, redeployable (less firm-specific) patents can be used as a collateral for venture debt.
- 8.
For a distinction between private equity and debt markets for new venture financing, see, e.g., Berger and Udell (1998). For a more general comparison of challenges of R&D financing in new and established corporations, see, e.g., Hall and Lerner (2010).
- 9.
Entrepreneurial finance is rapidly evolving and other forms of early-stage support are emerging, too, e.g., so-called accelerators or incubators. They are described as fixed-term, cohort-based programs providing a service structure of mentorship, educational programs, network opportunities and access to funding; the latter through introduction to an investor network or in form of own equity investments ranging from “pizza money” to serious seed investments over 100,000 (see, e.g., Pauwels et al., 2016). As their focus usually is not on funding but on training, Plummer et al. (2016) call them venture development organizations.
- 10.
Quoted from The White House Office of the Press Secretary (2012). The “Jumpstart Our Business Startups Act” (JOBS Act), passed in April 2012, includes under Title III the “Capital Raising Onling While Deterring Fraud and Unethical Non-Disclosure Act” (CROWDFUND Act), which authorizes securities-based crowdfunding to non-accredited investors in the USA. The Securities and Exchange Commission (SEC) adopted final concretizations in October 2015, set to become effective in May 2016.
- 11.
Side benefits such as marketing value and consumer involvement have been argued; see, e.g., Ordanini et al. (2011).
- 12.
Block et al. (2017) discuss as additional factors contributing to the emergence of crowdfinancing: on the supply-side these are capital constraints due to the 2008/2009 financial crisis, increased regulation on traditional stock markets, and a favorable legislation due to increased policy awareness for supporting entrepreneurs. On the demand-side the authors mention an increased importance of network externalities due to the internet and social media (“winner-takes-it-all markets”), and a trend to financial disintermediation.
- 13.
Sellaband.com, incorporated in Bochholt, Germany, and located in Amsterdam, later Munich, operated from 2006–2015 (bankruptcy). Interestingly, Sellaband raised venture capital funding in 2008 (Butcher, 2008; van Buskirk, 2010).
- 14.
The term crowdfunding is often used as a collective basin for all its sub-categories.
- 15.
For academic studies on crowd-lending, see, e.g., Lin et al. (2013); Zhang and Liu (2012); Lin and Viswanathan (2016).
- 16.
Most P2P lending platforms would not even refer to themselves as crowdfunding.
- 17.
Similar, frequently cited descriptions come from, e.g., Belleflamme et al. (2010: 5), who define crowdfunding as “an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights”; and Mollick (2014: 1), who defines crowdfunding as “a novel method for funding a variety of new ventures, allowing individual founders of for-profit, cultural, or social projects to request funding from many individuals, often in return for future products or equity” (the last two words indicating the umbrella term function, which we exclude in our narrower defintion).
- 18.
Note that even though they are called “loans”, they represent a mezzanine instrument, replicating the uncertain future cash flows of a start-up firm (cf. Hornuf and Schwienbacher, 2015b).
- 19.
Innovestment went off the market in November 2017 (Penke, 2017).
- 20.
This exemption from the securities prospectus requirement falls under the Kleinanlegerschutzgesetz (KASG) from July 10, 2015. Before, raising funds without prospectus was possible up to 100,000 Euro when issuing silent partnerships, and unlimited for subordinated loans.
- 21.
To become accredited, non-professional investors need to meet certain wealth and/or experience requirements.
- 22.
See e.g., U.S. Securities and ExchangeCommission/Investor.gov (2016). Under effective rules, start-up companies may now raise a maximum aggregate amount of 5 million US Dollar through crowdinvesting offerings in a 12-month period.
- 23.
To put it with the words of Stephen Fleming, Chief Commercialization Officer at GeorgiaTech, Atlanta: “Once the SEC is done it’ll be a big hit—not like Kickstarter, where you get a mousepad, but when you’ll get real equity.” Quote from personal interview in February, 2013.
- 24.
Harrison and Mason (2000) find four types of complementarities between venture capital and business angels: (1) sequential investing in start-ups at different stages; (2) co-investing in deals at the same time; (3) provision of finance to VC funds by business angels; and (4) deal referring. These types of complementarities may also be considered to exist between crowdfinancing and venture investors. For instance, on platforms like AngelList angel investors operate as syndicate “lead” and invite the crowd to back their curated ventures, see, e.g., Agrawal et al. (2015a); Also, business angels, and to a lesser extent VCs, sometimes place investments in crowdfinancing campaigns. In this work we focus on the first type of interaction, sequential investing.
- 25.
Guerini and Quas (2016) find that funding by government-managed venture capital firms, too, increases the likelihood that companies will receive private venture capital. For mere governmental grants or R&D awards, respectively, Howell (2017) shows that an increased probability of receiving subsequent venture capital is not due to a positive certification effect about firm quality, but because of the usefulness of the grant resources for the development of a venture.
- 26.
For further information on this method see Chapter 4.
- 27.
Note that the scenario in the study by Drover et al. (2017b) was that the to be evaluated start-up has been invested in by one angel investor who is a member of an angel investing group (or not), and not by a group of angels (also referred to as “consortium”). The effect of the latter is tested in this thesis.
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Mödl, M. (2020). New Venture Financing Research. In: Signaling Effects of Crowdfunding on Venture Investors‘ Decision Making. Innovation und Entrepreneurship. Springer Gabler, Wiesbaden. https://doi.org/10.1007/978-3-658-31590-0_2
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