Abstract
Restricted access to finance is often cited as one of the most prominent problems of innovative startups throughout their life cycle. Many entrepreneurial ventures, including big data startups, require external capital to realize their exponential growth and eventually achieve a successful exit in the form of an initial public offering (IPO) or an acquisition. Therefore, startup founders have to be fully aware of their funding options and potential added value that different types of investors may bring to the table. Funding decisions always include a number of strategic considerations, as investors do not only provide monetary funding. Quite to the contrary, startup investors fulfill various additional roles, including strategic advisors, network connectors, facilitators of human capital, and internal conflict resolution. Nonetheless, despite startup financing is definitely not a zero-sum game, agency problems and diverging incentives cloud the relationship between startup investors and entrepreneurs (Fried and Ganor, New York University Law Review 81:967–1025; 2006). This chapter provides an overview of different types of investors that provide financing for innovative (tech) startups, including their particular incentives in the startup investment process and the financial considerations. It follows the startup life cycle from its seed phase till exit.
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Notes
- 1.
Usually, a limited partnership (LP) is established with these institutional investors using a limited partnership agreement (LPA) that determines the investment strategy of a particular VC fund. The VC is the general partner that manages the fund, while the institutional investors become the limited partners that do not engage in managing the fund but are protected from liability claims. A VC fund is often established for a predetermined period (of about 10 years), after which the LP will be terminated and the returns are paid to the investors. Since institutional investors diversify their portfolios by investing in multiple VC funds (and other debt and equity instruments in financial markets), they usually prefer a focused investment strategy. However, the VC (i.e., the general partner) may wish to diversify its investment strategy to diminish the risk sensitivity of the VC fund to a specific industry. Hence, whereas we will see that the main agency problems arise between VCs and entrepreneurs in this chapter, it is important to realize that VCs also have their diverging incentives that they have to deal with at the level of the fund.
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Lafarre, A., Schoonbrood, I. (2023). Entrepreneurial Finance. In: Liebregts, W., van den Heuvel, WJ., van den Born, A. (eds) Data Science for Entrepreneurship. Classroom Companion: Business. Springer, Cham. https://doi.org/10.1007/978-3-031-19554-9_15
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