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Article
Publication date: 21 December 2020

Garrison Hongyu Song and Ajeet Jain

This paper aims to explore the allocation of the exit value of a start-up company in market equilibrium between an angel investor and an entrepreneur in the very

Abstract

Purpose

This paper aims to explore the allocation of the exit value of a start-up company in market equilibrium between an angel investor and an entrepreneur in the very early-stage financing market.

Design/methodology/approach

The theoretical model is established based on the two-sided random search theory and the model’s ability to match the empirical data is evaluated via simulation.

Findings

The model indicates that the allocation of the final investment outcome is not proportional to the initial investments by the angel investor and the entrepreneur. The simulation results show that the continued investment by the entrepreneur and the private benefit acquired by the angel investor have a more profoundly negative influence on the angel investor’s share of the exit value of the start-up company. Moreover, the market search structure represented by the matching probability of an angel investor to an entrepreneur has a more significant impact on the angel investor’s share than the other model parameters.

Originality/value

The importance of market search friction in the very early-stage financing market is emphasized. The concepts of continued investments and private benefits are introduced and quantified for the first time under the framework of angel investment. The impacts of such model parameters as the matching probability of an angel investor to an entrepreneur, the success rate of a start-up company, the bargaining power of an angel investor and the discount rate on the allocation of the exit value of the start-up company are investigated as well.

Details

Studies in Economics and Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 5 August 2019

Yixi Ning, Gubo Xu and Ziwu Long

This study aims to examine the venture capital (VC) industry in China. It has demonstrated a history of high growth with significant variations over time. The authors have…

Abstract

Purpose

This study aims to examine the venture capital (VC) industry in China. It has demonstrated a history of high growth with significant variations over time. The authors have examined the trends and determinants of VC investments in China over a 20-year period from 1995 to 2014. They find that the aggregate amount of VC investments, the total number of venture deals and the average amount of venture investments per deal in China are all significantly impacted by macroeconomic conditions (i.e. GDP, export, money supply), technology innovations and financial market indicators (i.e. initial public offerings (IPOs), interest rate, price-to-earnings ratio, etc.). They also find that the 2007 China A-Share stock market crash and the subsequent global financial crisis have motivated VCists in China to adjust their investment strategies and risk levels by allocating more capital to later-stage investments and securing more deals with later-round financings. However, after the 2008 global financial crisis, the China’s venture industry has recovered faster compared to the US counterpart response.

Design/methodology/approach

The authors first perform trend analysis of VC investments at an aggregate level, by stages of development, and across industry from 1995 to 2014.To test H1 and H2, the authors use multiple regression models with lagged explanatory variables. To test H3, the authors use univariate tests to compare the measures of VC investments at an aggregate level, stage funds ratios, stage deals ratios and financing series ratios during both a five-year and seven-year time windows around the 2007 A-Share stock market crash and the subsequent financial crisis.

Findings

The development of the VC industry in China has demonstrated a history of high growth with significant variation over time. The authors find that the aggregate amount of VC investments, the total number of venture deals and the average amount of venture investments per deal in China are all significantly impacted by macroeconomic conditions (i.e. GDP, export, money supply), technology innovations and financial market indicators (i.e. IPOs, interest rate, price-to-earnings ratio, etc.). The authors also find that the 2007 China A-Share stock market crash and the subsequent global financial crisis have motivated VCists in China to adjust their investment strategies and risk by allocating more capital to later-stage investments and securing more deals with later-round financings. However, the China VC industry has recovered faster compared to the USA just after the 2008 global financial crisis.

Research limitations/implications

There are also limitations in the study. The VC data in China in the earlier 1990s might not be very reliable due to the quality of statistics. Therefore, the trend analysis and discussions mainly focus on the time after 2000. Also, the authors cannot find VC financing sequence data for the analysis. Second, there is no doubt that the policy impact from Chinese transforming economic system and government policies on its VC industry is substantial (Su and Wang, 2013). However, they cannot find an appropriate variable to be included in the empirical models to consider this effect. Further study on this area would provide meaningful information. Third, although the authors have done comparison study between the VC industry in China in this study and the VC industry in the US documented in Ning et al. (2015) and discussed some interesting findings, more in-depth research in this area will be very useful.

Practical implications

The findings have meaningful implications for VCists and start-up companies seeking equity financings in China. VCists should closely monitor macroeconomic and market conditions to make appropriate adjustments to their risk and investment strategies. Entrepreneurs seeking equity financings for their business could also monitor the identified macroeconomic and market indicators, which can help them with their timing and to negotiate a better equity financing deal. VC financing is more likely to succeed when key macroeconomic and market indicators become favorable.

Originality/value

This paper contributes to the literature by testing the supply and demand theory on the VC market proposed by Poterba (1989) and Gompers and Lerner (1998) from the macroeconomic perspective using 20 years’ VC data from China. The authors also examine how the 2007 A-Share stock market crash and the subsequent financial crisis affected VCists to adjust their risk levels and investment strategies. It provides useful information for international academia and policymakers to understand the quick rise of China VC industry. The authors also find that the macroeconomic drivers of VC industry are somewhat different under different economic systems.

Details

Chinese Management Studies, vol. 13 no. 3
Type: Research Article
ISSN: 1750-614X

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Book part
Publication date: 27 September 2019

Mauricio Ballesteros-Ruiz and Felix Florencio Cardenas-del Castillo

The chapter provides a practical guide to identify and define different funding sources for entrepreneurial and innovation endeavors, including a methodology to describe…

Abstract

The chapter provides a practical guide to identify and define different funding sources for entrepreneurial and innovation endeavors, including a methodology to describe return on investment expectations from funding sources. Also, the authors provide recommended key performance indicators and valuation methods when pitching to potential investors.

Details

Innovation and Entrepreneurship: A New Mindset for Emerging Markets
Type: Book
ISBN: 978-1-78973-701-1

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Book part
Publication date: 25 January 2021

Desalegn Abraha and Akmal S. Hyder

In this chapter, six cases are presented, four from Poland and two from Hungary. The Polish cases are Partec Rockwool, PLM, Bulten Tools, and Vattenfall, while Svedala and…

Abstract

In this chapter, six cases are presented, four from Poland and two from Hungary. The Polish cases are Partec Rockwool, PLM, Bulten Tools, and Vattenfall, while Svedala and Getinge belong to Hungary.

The cases have been described in different phases following the conceptual framework, developed in chapter six. All cases we present in three phases except Svedala where there are two phases. In the later case, neither the alliance nor the partners could be traced. Among the cases, level of performance varied. Getinge is the only case where the partners continued with the same alliance and the ownership structure remained unchanged. In Partec, the foreign partner acquired the local shares to establish a wholly owned subsidiary, and in Bulten Tool, the foreign partner became the major owner to have control over the company. Partec Rockwool and Vattenfall had been sold to other companies after amicable settlement between the partners.

Details

Transformation of Strategic Alliances in Emerging Markets, Volume II
Type: Book
ISBN: 978-1-80043-748-7

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Article
Publication date: 10 November 2014

Sujit Kalidas, Andrew Kelly and Alastair Marsden

This paper aims to explore the challenges the Venture Capital (VC) funds industry in New Zealand (NZ) faces when sourcing new capital. In NZ, there is a significant gap…

Abstract

Purpose

This paper aims to explore the challenges the Venture Capital (VC) funds industry in New Zealand (NZ) faces when sourcing new capital. In NZ, there is a significant gap currently for companies seeking VC funding of between $2 and $10 million to commercialise new products and ideas. Also, the estimated financing needs of the next generation of early stage NZ enterprises are around $2 billion of investment over the next 10 years (NZVIF, 2011).

Design/methodology/approach

A qualitative research design is applied, given the exploratory nature of this research. In this study, 15 face-to-face semi-structured interviews with VC fund managers, investors and intermediaries were undertaken.

Findings

The findings suggest that the lack of observable proven historical returns from NZ domiciled VC funds is a significant impediment to raising new equity capital. Fund managers and intermediaries also note that there is a lack of domestic entities in NZ that have the capacity and current appetite to invest in VC. In part, this may indicate that VC investors are unwilling to invest further capital in NZ VC funds until the current funds realise their existing investments.

Originality/value

Overall our findings support recent initiatives by the NZ VC funds industry to track and monitor the performance of NZ VC funds.

Details

Pacific Accounting Review, vol. 26 no. 3
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 1 December 1995

Kevin McNally

The availability of external equity finance is a key factor in thedevelopment of technology‐based firms (TBFs). However, although a widevariety of sources are potentially…

Abstract

The availability of external equity finance is a key factor in the development of technology‐based firms (TBFs). However, although a wide variety of sources are potentially available, many firms encounter difficulties in securing funding. The venture capital community, particularly in the UK, has done little to finance early stage TBFs and has failed to cater adequately for the specific value‐added requirements of these firms. Non‐financial companies have the potential to become an important alternative source of equity finance for TBFs through the process of corporate venture capital (CVC) investment. Based on a telephone survey of 48 UK TBFs that have raised CVC, examines the role of CVC in the context of TBF equity financing. Shows that CVC finance has represented a significant proportion of the total external equity raised by the survey firms and has been particularly important during the early stages of firm development. In addition, CVC often provides investee firms with value‐added benefits, primarily in the form of technical‐ and marketing‐related nurturing and credibility in the marketplace. Concludes with implications for TBFs, large companies, venture capital fund managers and policy makers.

Details

International Journal of Entrepreneurial Behavior & Research, vol. 1 no. 3
Type: Research Article
ISSN: 1355-2554

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Book part
Publication date: 25 January 2021

Desalegn Abraha and Akmal S. Hyder

In this chapter, we have presented four case studies of the firms which are operating in the medium complete adapting countries. The four cases are Arvidsson Textile Share…

Abstract

In this chapter, we have presented four case studies of the firms which are operating in the medium complete adapting countries. The four cases are Arvidsson Textile Share Company in Estonia, Partec Rockwool in Lithuania, Accel Share Company in Lithuania and Ragn-Sells in Estonia. The case studies are prepared following the structure of the theoretical framework applied in this book. We have found out that the performance of Arvidsson Textile Share Company is successful as it matches the expectations if the partners and it has remained to be more or less the same since its establishment. The performance of Partec Rockwool was also successful from the very beginning until it was replaced by the fully owned firm. Accel Share Company's operations in Lithuania was successful from the very beginning as it found the right people with the right competence in the local market. In the case of Ragn-Sells in Estonia, the alliance was successful but not up to the full expectation.

Details

Transformation of Strategic Alliances in Emerging Markets, Volume II
Type: Book
ISBN: 978-1-80043-748-7

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Article
Publication date: 29 June 2020

Satya Narayan Panda and Arun Kumar Gopalaswamy

Staged financing is a prominent feature of the venture capital investment process. With staged financing, venture capitalists (VCs) may choose to either make an investment…

Abstract

Purpose

Staged financing is a prominent feature of the venture capital investment process. With staged financing, venture capitalists (VCs) may choose to either make an investment or delay it at each round. The purpose of this paper is to investigate the influence of market uncertainty, project-specific uncertainty and agency problems on these decisions.

Design/methodology/approach

The study uses data from Indian firms that received venture capital funding between 2000 and 2017. The duration between funding rounds is analysed using survival analysis. An accelerated failure time model is used to estimate the influence of market uncertainty, project-specific uncertainty and agency problems on the length of time between funding rounds.

Findings

VCs delay investment when there are high levels of uncertainty in the market; if market uncertainty increases by 1%, delay in funding increases by more than 6% (almost a month) on average. There is no statistically significant relationship found between the funding duration and project-specific uncertainty. Agency problems motivate VCs to invest sooner. An increase in agency problems results in a reduction of 55% (almost five months) in the length of time before the next funding round.

Practical implications

This study has useful business policy implications. It provides VCs with real option value drivers such as market uncertainty, agency problems, which influence the timing of decisions in staged investment processes. It will help to make the choice between investing and delaying at each round of financing more robust. Further, it is useful for VCs to differentiate between market uncertainty and agency problems against the backdrop of their different implications for staging decisions.

Originality/value

Few studies have examined staging decisions from a real options perspective in the context of a developed economy and very few from a developing economy perspective. This study increases understanding of staging decisions in the Indian context.

Details

Management Research Review, vol. 43 no. 12
Type: Research Article
ISSN: 2040-8269

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Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

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Book part
Publication date: 15 June 2015

Robert Baldock, David North and Farid Ullah

This chapter presents research to assess the impact of the recent financial crisis on technology-based small firms (TBSFs) in the United Kingdom based on findings from an…

Abstract

This chapter presents research to assess the impact of the recent financial crisis on technology-based small firms (TBSFs) in the United Kingdom based on findings from an extended telephone survey with the owner-managers of 49 young and 51 more mature TBSFs, undertaken in 2010. Even before the onset of the global financial crisis in 2007, it was generally acknowledged that TBSFs faced greater obstacles in accessing finance than conventional SMEs. This is because banks have difficulty assessing the viability of new technology-based business ventures due to information asymmetries, whilst risk capital providers may have difficulty providing appropriate or sufficient funds on terms acceptable to entrepreneurs. Given the recent difficulties that SMEs, in general, have faced in obtaining external finance, we would expect TBSFs to have been particularly adversely affected by the financial crisis. Our evidence showed that TBSFs exhibited a strong demand for external finance between 2007 and 2010, related to their growth ambitions and achievements. They sought finance mainly from banks but also with younger TBSFs seeking business angel finance and more mature TBSFs seeking venture capital finance. However, our evidence indicates that both debt and equity finance became harder to access for TBSFs, particularly for early-stage and more R&D-intensive firms. Where funding was offered, it was often on unacceptable terms with regards to the levels of collateral or equity required. The chapter provides evidence of a growing funding gap and concludes that the ability of TBSFs to contribute to economic recovery is hampered by ongoing problems in obtaining external finance.

Details

New Technology-Based Firms in the New Millennium
Type: Book
ISBN: 978-1-78560-032-6

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