NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Changing Financing Market for Innovation & Entrepreneurship

November 8-9, 2013
Antoinette Schoar of MIT; Malcolm Baker and Josh Lerner of Harvard Business School; and David Sraer of Princeton University, Organizers

Thomas Hellmann, University of British Columbia and NBER, and Paul Schure and Dan Vo, University of Victoria

Angels and Venture Capitalists: Complements or Substitutes?

Hellmann, Schure, and Vo examine the relationship between angel investors and venture capitalists. Specifically they analyze how companies dynamically choose between these alternative investor types, and how these choices affect company performance. The authors juxtapose a complements hypothesis (angel financing is a springboard for venture capital) against a substitutes hypothesis (angel financing and venture capital are distinct financing methods that do not mix well). Using a unique detailed dataset of startups in British Columbia, Canada, the authors find companies that obtain angel financing subsequently obtain less venture capital, and vice versa. On average venture capitalists make larger investments, but this alone cannot explain the substitutes patterns. The substitutes effects are stronger for companies funded by less experienced angels. Using variation in tax credits as an exogenous instrument the authors find evidence for both selection and treatment effects. As for performance, companies funded by venture capital experience more successful exits than angel-backed companies. However, there is no strong evidence that mixing angel and venture capital funding would be associated with significantly better or worse performance. Overall the evidence favors the substitutes hypothesis.


Michael Ewens, Carnegie Mellon University; Ramana Nanda, Harvard University; and Matthew Rhodes-Kropf, Harvard University and NBER

Entrepreneurship and the Cost of Experimentation

Ewens, Nanda, and Rhodes-Kropf study how technological change impacts the nature of venture-capital-backed entrepreneurship in the United States through its effect on the falling cost of experimentation for startup firms. Using a theoretical model and rich data, the authors are able to both document and provide a framework for understanding the increased prevalence of investors who "spray and pray": invest a little money in several startups run by teams of young and unproven entrepreneurs with a lower probability of following-on their investments. Consistent with the model, the authors find these patterns to be strongest in industry segments where technological change has caused the cost of starting a business to fall most sharply in recent years.


Thomas Chemmanur, Boston College; and Tyler Hull, Norwegian School of Economics; and Karthik Krishnan, Northeastern University

Do Local and International Venture Capitalists Play Well Together? Venture Capital Investments and the Development of Venture Capital Markets

Chemmanur, Hull, and Krishnan explore the strengths and weaknesses of international and local venture capitalists (VCs) and how the syndicate composition of VC-backed entrepreneurial firms across various countries determines their success. The authors find that entrepreneurial firms backed by syndicates composed of international and local VCs are more successful than those backed by syndicates of purely international or purely local VCs. The authors control for the potential endogenous participation and syndication by international VCs using instrumental variables analyses. They also utilize the incidence of terrorist attacks as an exogenous source of variation in international VC participation in syndicates and find a causal effect of international VC participation on successful outcomes. International VCs face disadvantages in their investments caused by the lack of proximity to the entrepreneurial firm. Using air service agreements between the country of the entrepreneurial firm and that of the international VC as an exogenous change in effective proximity, the authors find that entrepreneurial firms backed by international VCs are more successful when they become effectively closer, that is, as travel becomes easier between the two countries. On the other side, local VCs face disadvantages attributable to their lack of experience in VC investments. Local VCs' lack of experience is mitigated by a greater extent of syndication with international VCs as well as by a greater extent of development of the local venture capital market. Overall, the authors' results indicate that the greater venture capital expertise of international VCs and the superior local knowledge and lower monitoring costs of local VCs are both important in obtaining successful investment outcomes.

Ajay Agrawal, University of Toronto and NBER; Christian Catalini, MIT; and Avi Goldfarb, University of Toronto

Crowdfunding's Role in the Rate and Direction of Innovative Activity

A recent theory conjectures that cross-country variation in economic growth may be largely explained by variation in the local stock of a particular type of human capital that drives innovation: the young, restless, and creative. Agrawal, Catalini, and Goldfarb examine the advent of crowdfunding, which led to a shock in individuals' access to capital to raise funding to develop innovative projects and ventures. Although the shock occurred uniformly across the United States, regions varied in their responses. Using data from a non-equity-based crowdfunding platform, the authors report evidence that the regional response to this new access to capital is correlated with the presence of young (20 to 29 years old), creative (university graduates), and restless (unemployed) human capital. Specifically, locations with more unemployed recent graduates attract funding for more projects. Locations with more recent graduates with degrees in the social sciences and humanities raise funding for more arts-related projects. Locations with more recent graduates in engineering and computer science raise funds for more technology-related projects. Looking at the timing of the launches of fund-raising campaigns, the authors find that they are disproportionately launched during college breaks in locations with top colleges.


Marco Da Rin and Maria Fabiana Penas, Tilburg University

Business Angel Networks

Da Rin and Penas study the investment behavior of business angels that operate within several UK angel networks. They document angel characteristics and company characteristics, and differentiate between networks with a formal role for the management team and those with an informal role. Preliminary results point to formal networks attracting different types of companies, but not angels. Companies financed from formal networks experience different subsequent financing trajectories; in particular, they are more likely to receive venture funding. Also, contracting is tighter when angels from a formal network are financing, irrespective of the presence of a venture capital investor. Formal network investors are also less actively engaged with their companies, and are more responsive to tax incentives.


Sen Chai and Willy Shih, Harvard University

Bridging Science and Technology through Academic-Industry Partnerships

Scientific research and its translation into commercialized technology is a driver of wealth creation and economic growth. Partnerships to foster such translational processes between public research organizations, such as universities and hospitals, and private firms are a policy tool that has attracted increased interest. Yet questions about the efficacy and the efficiency with which funds are used are frequently debated. Chai and Shih examine empirical data from the Danish National Advanced Technology Foundation (DNATF), an agency that funds partnerships between universities and private companies to develop technologies important to Danish industry. They assess the effect of a unique mediated funding scheme that combines project grants with active facilitation and conflict management on innovative performance, namely the quantity, citation count, and collaborative nature of patents and papers by comparing funded and unfunded firms. Because randomization of the sample was not feasible, the authors address endogeneity around selection bias using a sample of qualitatively similar firms based on a funding decision score. This permits observation of the local effect of samples in which the authors drop the best recipients and the worst non-recipients.


Ulf Axelson and Milan Martinovic, London School of Economics

European Venture Capital: Myths and Facts

Axelson and Martinovic examine the determinants of success in venture capital transactions using the largest deal-level dataset to date, with special emphasis on comparing European to U.S. transactions. Using survival analysis, they show that for both regions the probability of exit via initial public offering (IPO) has decreased significantly over the last decade, while the time to IPO has increased; in contrast, the probability of exit via trade sales and the average time to trade sales do not change much over time. Contrary to received wisdom, there is no difference in the likelihood or profitability of IPOs between European and U.S. deals from the same vintage year. However, European trade sales are less likely and less profitable than U.S. trade sales. Venture success has the same determinants in both Europe and the United States, with more experienced entrepreneurs and venture capitalists being associated with higher success. The fact that repeat or "serial" entrepreneurs are less common in Europe and that European venture capitalists (VCs) lag U.S. VCs in terms of experience completely explains any difference in performance between Europe and the United States. Also, contrary to received wisdom, we find no evidence of a stigma of failure for entrepreneurs in Europe.


 
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