Venture capital (VC) and business angel (BA) financing have traditionally been advocated as important sources of financing for young innovative firms that find it difficult to access bank or debt finance. However, the market and landscape for entrepreneurial finance has changed over the last years. Several new players have emerged, and there has been an increasing presence of other players that have traditionally not had a major role in the market. These players are very heterogeneous and include players as diverse as family offices, the crowd, and venture debt funds. Some of these new players value not only financial goals but are also interested in non-financial goals. These non-financial goals comprise social goals in case of social venture funds, strategic and technological goals in case of corporate venture capital (CVC) firms, political goals in case of government-sponsored funds, and product-oriented and community-building goals in case of reward-based crowdfunding.
The new players have not only brought a variety of new investment goals but have also introduced new investment approaches, valuation methods or measures, and business models of entrepreneurial financing. As, for example, non-financial goals have become more important, new valuation models or measures have been developed taking into account non-financial goals in the selection of investment targets. Consider, for example, the social return on investment (SROI) measure, which aims to determine the (social) impact of social ventures. For many of the new players, value creation is not only limited to provide financing to promising firms but also includes the provision of value added services, such as management and technological support, and more generally the provision of advice, as well as network access. These active, hands-on investment approaches are not only limited to VC firms and BAs, who were always following this approach, but are also used by some of the new players such as incubators and accelerators, university-managed funds, and sometimes even backers of reward-based crowdfunding campaigns.
Next to the emergence of the new players, the whole environment of entrepreneurial finance has changed. The median pre-money valuation of young companies is rising into new historical heights, especially in later-stage financing. This can be seen by an ever increasing club of unicorns (private companies valued >1bn US $). This has created rumors of a tech-bubble, as many of these companies are unprofitable or do not have created a sustainable revenue-model for their business. High valuations can also put pressure to founders, as they need to deliver on these expectations. The question is what drives these high valuations and what are the risks associated with them. Many start-ups (especially in the USA) have significant cash-burn rates or are unprofitable. Often, this leads their founders to search for new capital very shortly after their last round of financing. As some exit channels are very difficult to reach (e.g., IPO), the current investors can find themselves in a “lock-in” situation of either providing their start-ups additional capital or risking a bankruptcy.
Overall, the emergence of the new players and their variety of investment goals and investment approaches has made entrepreneurial financing a complex and difficult process. Table 1 provides an overview of the new players and compares them along the four dimensions (1) debt or equity, (2) investment goal, (3) investment approach, and (4) investment target.
Accelerators (and incubators) are organizations that aim to help start-ups with mentorship, advice, network access, and shared resources to grow and become successful (Hallen et al. 2016). Sometimes they also offer physical space and financial resources, which often comes in the form of equity. There exist different types of accelerators and incubators, depending on the services offered, the industry focus, and the owner, which could be a private company or a governmental institution.
Angel networks are networks of BAs who invest together in early-stage high growth ventures (see e.g., Croce et al. (2016) for a recent review). They provide equity and offer management support and network access. As a group, they can provide higher amounts of financing than individual BA investors.
Crowdfunding is an umbrella term used to describe diverse forms of fundraising, typically via the Internet, whereby groups of people pool money to support a particular goal (Ahlers et al. 2015; Moritz and Block 2014)There are four main types of crowdfunding, namely reward-based, donation-based, lending-based, and investment-based (equity) crowdfunding. First, in reward-based crowdfunding project, proponents look for finance from a crowd of backers. The most typical reward to backers is the delivery of a (sometime customized) product or service, which makes this type of crowdfunding somehow similar to financial bootstrapping (i.e., crowdfunders are financed by advance payments that most backers give in exchange for the subsequent delivery of a product or service). Backers may also be offered “ego-boosting” rewards, such as a name plaque, or “community-belonging” rewards, such as the invitations in social events (e.g., the launch party of the project) or the offering of symbolic objects that display support for a project. Project proponents are either individuals or companies. The average amount of finance in a successful campaign is rather limited (in Kickstarter or Indiegogo, the most successful reward-based crowdfunding platforms, around 30 to 40,000 US $), and on average, one project out of three is successful. Previous studies clearly show that the ability of project proponents to mobilize their social capital, within (Colombo et al. 2015) and outside (Mollick, 2013) the crowdfunding platform, plays a key role for the success of a campaign. Second, proponents in donation-based crowdfunding are individuals or non-governmental organizations raising money for a cause. They typically aim to raise as much as possible and the size of the campaign varies from few hundred euros to millions. Motivation to donate includes charitable giving and social image. Third, lending-based crowdfunding is by far the type of crowdfunding with the largest total raised amount.Footnote 2 It takes a variety of different forms, ranging from peer-to-peer lending (see e.g. Lin et al. 2013) to invoice crowdfunding. Motivations for the crowd to invest are mainly financial as lenders receive fixed interest rates for their loans. Lastly, central to entrepreneurial finance is the fourth type of crowdfunding, equity-based crowdfunding. Equity crowdfunding is a form of financing in which entrepreneurs make an open call to sell a specified amount of equity or bond-like shares in a company on the Internet. The open call and investments take place on an online platform that provides the means for the transactions. The average size of campaigns in the UK platforms Crowdcube and Seedrs is about 250 thousand pounds (Vismara 2016). The motivation to invest is to realize a financial return. Vismara (2016) finds indeed that offering rewards to investors does not increase the probability of success of equity crowdfunding campaigns. Relatedly, in a survey of investors in this type of crowdfunding, Cholakova and Clarysse (2015) find that non-financial motives play no significant role in their investment decisions.
Corporate venture capital (CVC) refers to investments by large, established firms into start-ups or growth firms. Instead of acquiring ventures and integrating them into their own organization, large incumbents like Intel, Google, or Johnson & Johnson take a minority stake in innovative young firms, which remain independent, and help them further develop their promising technologies and markets. CVC investors provide equity and next to financial returns are also interested in strategic goals such as access to new technology and/or new markets or customer segments. CVC investors tend to be more patient investors than independent VC investors (IVC), and often syndicate with these latter, even if the impact of syndicated deals on the performance of investee companies (as measured e.g., by time to IPO or increase in total factor productivity, see Colombo and Murtinu 2016) seem to be less positive than those of stand-alone deals. CVC investors have been shown to invest either in later or earlier stage ventures, with their inclination to early stage deals depending on the institutional characteristics of the entrepreneurial finance ecosystem in different countries. In particular, Katila et al. (2008) show that in the USA, new ventures prefer to postpone the formation of CVC ties to later stages, so as to better protect their technology. Accordingly, CVC investors often invest in later rounds in companies backed by independent VC investors. Conversely, in their replication study, Colombo and Shafi (2016) highlight that the pattern of CVC investments in the European Union is different: the likelihood of the formation of early stage CVC ties is much higher, as a result of the institutional peculiarities of the European VC market in Europe. CVC has been around since many years (Alvarez-Garrido and Dushnitsky 2016). This form of financing is highly volatile, ranging from 6 to 23% of the European VC market in the years from 2007 to 2015 (see European Venture Capital Association (EVCA) Annual Reports). Some organizations invest in VC due to an increasing fear of being disrupted by innovative start-ups. However, CVCs are less autonomous relative to limited partnership VCs, and this lack of autono-my has led to programs being scaled back and canceled among some organizations at different points in time when strategic objectives or staff change. Further, there are compensation differentials across CVCs and limited partnership VCs, which can exacerbate the instability of CVCs.
Families owning large firms increasingly install family offices as intermediaries to manage their wealth (Zellweger and Kammerlander 2015). Thus, instead of owning the firm directly, the family bundles its ownership shares into a family office and only has an indirect ownership share in the firm. This way, conflicts within the group of family owners can be reduced, a professional wealth management is introduced, and flexibility is increased both for the firm and the family. Such family offices increasingly also invest in growth ventures and have evolved into an important player in the market for entrepreneurial finance. The EVCA estimates their share in the market for the financing of growth ventures to be about 1–5% over the years from 2007 to 2015. Family offices usually provide equity, have primarily financial goals, and are considered long-term investors.
Many governments have set up programs that seek to foster VC financing, through the establishment of Governmental Venture Capital (GVC) funds, with the aim to alleviate the financial gap problem as well as at the same time to pursue investments that will yield social payoffs and positive externalities to the society. Governments may have various intentions and objectives when setting up these funds. To the extent that these governmental objectives differ, there is heterogeneity in the types of firms that the GVCs invest, in the effort that they devote to their investee firms, and, ultimately, in the efficacy of their investments (Colombo et al. 2016). The success of a GVC program also depends on the institutional environment in which it operates, which is typically poor in less developed areas. This result is in line with the idea that there need to be a good match between “smart money” and “smart places”. This affects primarily the performance of GVCs aimed at regional development and localized job creation rather than those that support the development of young high-tech industries. The effectiveness of GVC programs depends largely on their design and aims. With regard to direct public intervention, there is heterogeneity in the type of allocation of governmental funds to GVCs. Allocation types can be classified into three categories: direct public funds, hybrid private-public funds, and funds-of-funds. Direct public funds include investments through government-supported VC-like schemes, often with the aim of facilitating the development of a VC industry within a region or industry. Due to problems related to a lack of skills or crowding-out issues, some of these programs have been modified to include co-investments with private investors. Scholarly evidence indicates that this is a sound decision. For example, Bertoni and Tykvova (2015) document a very positive innovation impact of GVC investments in European pharma and biotech start-ups, but only when the GVC investor enters a syndicate led by a private investor. When GVC investors invest on a stand-alone basis, this positive effect vanishes. Lastly, government support can take the form of funds-of-funds, which invest in other investment funds rather than investing directly into companies, with the European Investment Fund being a notable example.
IP-based investment funds invest into intellectual property (IP), mostly patents (Gredel et al. 2012). This way, innovative firms or investors can monetarize their IP and use the funds generated to grow their venture. Thus, IP-based investment funds neither provide equity nor debt, but acquire intellectual assets of a company.
IP-backed debt funding allows firms to exploit the economic value of their IP to obtain loans from banks or other financial institutions (Fischer and Ringler 2014). IP rights can indeed be exploited as a source of capital collateralized by the stream of revenues deriving from licensing or royalty agreements, which typically involve portfolios of copyrights or patents. Although these instruments involve high structuring costs, they can be an important component in the funding processes of innovative start-ups.
Mini-bonds are public bonds issued in special SME bond segments (Mietzner et al. 2017). They were used as a financing instrument by SMEs or “Mittelstand”-firms in the aftermath of the financial crisis where banks were either unwilling or unable to provide debt financing. Mini-bonds reflect also the desire by firms to decrease their dependence on bank financing.
Social venture capital funds provide seed-funding to for-profit social enterprise. The funding can come in both debt and equity, and the goal is to achieve a reasonable financial return while also delivering social impact. The latter is what it distinguishes from traditional venture capital financing focusing on simple financial return.
University-managed or university-based funds have recently been launched, mainly to support ideas from university faculty, staff, and alumni. As far as early-stage technology developed in labs is not close to the market, universities need to fund research internally. These funds are important for getting the technology ready to hand it over to a development partner from the private sector.
Venture debt lenders or funds are specialized financial institutions at the intersection of venture capital and traditional debt. They provide loans to start-ups, but unlike traditional bank, financing do not require securities or positive cash flows from start-ups. De Rassenfosse and Fischer (2016) estimate the size of the US venture debt market at about $3 billion per year. Internationally, there is little relation between institutional factors such as legal conditions and venture debt returns (Cumming and Fleming 2013; Cumming et al. 2016). However, returns to venture debt funds are closely related to firm-specific proxies for borrower risk (Cumming and Fleming 2013). Also, returns are significantly affected by market conditions such as the VIX index, and whether or not the debt issue is a primary or secondary issuance (Cumming et al. 2016).