c dossier articles 1-5

Journal of Corporate Finance 50 (2018) 538–555

Contents lists available at ScienceDirect

Journal of Corporate Finance

Review

journal homepage: www.elsevier.com/locate/jcorpfin

Entrepreneurial finance: Unifying themes and future directions☆

Douglas Cumming a,⁎, Alexander Peter Groh b a York University - Schulich School of Business, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada b EMLYON Business School, EMLYON Research Centre for Entrepreneurial Finance, 23 Avenue Guy de Collongue, Ecully, 69132, France

a r t i c l e i n f o

ference on Entrepreneurial Finance, co-organized by th owes thanks to the Social Sciences and Humanities Rese ⁎ Corresponding author.

E-mail addresses: dcumming@schulich.yorku.ca, http

https://doi.org/10.1016/j.jcorpfin.2018.01.011 0929-1199/© 2018 Elsevier B.V. All rights reserved.

a b s t r a c t

Article history: Received 15 January 2018 Accepted 15 January 2018

We overview the papers of this special issue of the Journal of Corporate Finance and explain how they fit within the different segments of the entrepreneurial finance literature, including equity crowdfunding, angel investors, debt, venture capital, and private equity. We point to the growing importance of different sources of capital for entrepreneurs and emerging research trends pertinent to academics, practitioners, and policymakers. We explain common questions and suggest scope in future work for combining segments.

© 2018 Elsevier B.V. All rights reserved.

JEL codes: G20 G23 G24

Keywords: Entrepreneurial finance Equity crowdfunding Angel Investors Venture capital Private equity IPOs

Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538 2. Google scholar trends in entrepreneurial finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539 3. Discussing recent research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540

3.1. Equity crowdfunding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540 3.2. Angel finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551 3.3. Debt for entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 3.4. Venture capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552

3.4.1. Venture capital and the equity gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 3.4.2. Venture capital and IPOs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553

3.5. Reporting quality of private equity backed IPOs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553 4. Future directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554 5. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554

☆ We owe thanks to the Editors, Stuart Gillan and Jeff Netter, an anonymous referee, and the seminar participants at the 2016 MAELYSE Research Federation Con-

e University of Lyon and EMLYON Business School for helpful comments and suggestions. Douglas Cumming arch Council of Canada (435-2012-1725) for financial support.

://ssrn.com/author=75390 (D. Cumming), GROH@em-lyon.com, http://ssrn.com/author=330804 (A.P. Groh).

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1. Introduction

This special issue of the Journal of Corporate Finance comprises papers that each deal with different sources of capital, including equity crowdfunding, angel investors, debt, venture capital, and private equity. While the entrepreneurial finance literature tends to be segmented by different types of finance, the themes and questions addressed across different segments are similar: (1) What factors affect investment rates and possible gaps in capital for entrepreneurs? (2) Is the source of capital ‘value added’ in terms of facilitating advice, monitoring, and/or growth? (3) Are there governance problems, such as misreporting infor- mation? (4) What factors affect investment success including successful exits from illiquid investments?

Although the sources of capital studied differ across the papers, each of these papers addresses at least one of these four re- search questions. Hornuf and Schwienbacher (this issue) examine the determinants of investment in equity crowdfunding. Signori and Vismara (this issue) examine exit success in equity crowdfunding. Capizzi, Bonini, Valletta, and Zocchi (this issue) examine factors that affect business angel investment. Cole and Sokolyk (this issue) examine the role of debt in facilitating entrepreneurial firm growth. Wilson, Wright, and Kaceer (this issue) provide large sample evidence on entrepreneurial capital gaps and the role of venture capital. Jeppsson (this issue) studies the effect of VCs on IPO performance. Goktan and Muslu (this issue) analyze gov- ernance and misreporting among private equity funds and compare listed to non-listed private equity funds. All of these papers are at the forefront of their research areas and have significantly extended what is known about these topics. As well, the papers in this special issue examine large datasets that are very hard to assemble. A notable hurdle in doing work on the financing of private entrepreneurial firms is that data are often not publicly available; hence, there is a disproportionate focus on the analysis of publicly traded firms. The efforts of the authors here break new ground and provide significant new insights into the under- standing of how financial markets operate in the financing of entrepreneurs.

Most of the papers in this special issue of the Journal of Corporate Finance were originally presented at the Entrepreneurial Fi- nance Conference, 8–9 July 2016, organized by Aurelie Sannajust, Peter Wirtz, and Alexander Groh and sponsored by MAELYSE; the management, economics, and finance research federation of the University of Lyon (UdL) and EMLYON Business School, France. The motivation for the conference was twofold. First, there is a growing interest in research on entrepreneurial finance and in the massive differences in the landscape of entrepreneurial finance in different countries. However, there was a lack of high quality academic conferences on entrepreneurial finance topics and, therefore the venue brought together academics from around the world and from different disciplines to showcase, discuss, and obtain feedback on their latest work.

Second, there is a substantial private and public-sector interest in entrepreneurial finance, and many countries have a desire to replicate the success of Silicon Valley (Armour and Cumming, 2006). For example, the European Commission established a European Strategic Investments Fund in June 2016, which was expected to trigger € 315 billion investments in hopes of creating over 1.3 million new jobs in young ventures and SMEs. The decision to implement this fund was based on the goal to mimic the success of the North American capital market for start-ups and SMEs which has proven to help build the currently-most- important multinational corporations. Policy makers acknowledge that investment shortfalls (in Europe) are caused by both sup- ply and demand factors and that some European Union countries might not be sufficiently competitive. However, these countries also cut public spending, and this requires action at the European level to increase the supply of risk capital in Europe. As such, the conference brought together academics, practitioners, and policymakers to learn and gain insights from one another.

The first conference among a strongly growing entrepreneurial finance scholars network was initiated in 2016 in Lyon. Its suc- cess and wide appreciation yielded a second entrepreneurial finance conference in 2017 in Ghent, Belgium. A third conference will be hosted in Milan, Italy, in 2018, and there is hope additional initiatives and locations will follow.

This introduction proceeds as follows. We begin with Section 2, describing Google Scholar trends on research in different areas of entrepreneurial finance. The papers in this special issue, as well as related work, are discussed in Section 3. Section 4 presents suggestions for future research. Concluding remarks follow in Section 5.

2. Google scholar trends in entrepreneurial finance

Fig. 1 presents Google Scholar trends for different search terms in entrepreneurial finance for the number of documents that also refer to specific journals. A notable feature of Fig. 1 is that entrepreneurial finance is an interdisciplinary field that covers work in finance and entrepreneurship (including entrepreneurship and management journals). The data in Fig. 1 does not reveal that entrepreneurial finance topics are more likely to appear in specific journals; but, instead, papers that refer to specific topics also refer to specific journals, with the three most common being the Journal of Finance, the Journal of Financial Economics, and Management Science. These references, in part, reflect the age of the journal, with more hits to older journals. Also, as documented by Cumming and Johan (2017), these references also reflect a notable pattern in entrepreneurial finance research: management and entrepreneurship journals tend to also reference work in finance, while work in finance journals tends not to reference work in management or entrepreneurship journals. Cumming and Johan (2017) discuss some of the unfortunate consequences of this type of research segmentation, which includes but is not limited to nontrivial mistakes in prior research that might have been avoided with a broader reading and understanding of the related literature.1

Fig. 2 presents trends in the interest in different topics in entrepreneurial finance by year. The trends clearly show that IPOs and venture capital have been the most popular research areas from 2000 to 2016, but interest in these topics has dropped

1 For a blog post on this point and a discussion of the problems in the literature with the relevant references, see https://corpgov.law.harvard.edu/2013/04/11/ measuring-the-effectiveness-of-public-policy-towards-venture-capital/.

Fig. 1. Google scholar hits by topic and journal This figure presents the number of Google Scholar hits for the years 2000–2016 for “Entrepreneurial Finance,” “Venture Capital,” “Private Equity,” Entrepreneur Debt (not in quotes to capture papers about entrepreneurs and debt), “Trade Credit,” Angel Investor (not in quotes to capture papers about angel investors), Crowdfunding, and IPOs. JF = Journal of Finance; JFE = Journal of Financial Economics; MS = Management Science; RFS = Review of Financial Studies; JBV = Journal of Business Venturing; ResPol = Research Policy; SMJ = Strategic Management Journal; AMJ = Academy of Management Journal; ASQ = Administrative Science Quarterly; JBF = Journal of Banking and Finance; JFQA = Journal of Financial and Quantitative Analysis; ETP = Entrepreneurship The- ory and Practice; JMS = Journal of Management Studies; JCF = Journal of Corporate Finance; JIBS = Journal of International Business Studies; SEJ = Strategic Entre- preneurship Journal (started in 2007). A paper in the data appears more than once for each journal that referenced the paper. Source: Cumming and Johan (2017).

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from 2013 to 2016. By contrast, interest in crowdfunding was essentially non-existent until 2010 and has grown at a remarkable pace since that time. As such, in the next section, we begin our discussion of the papers in this special issue by introducing the research issues in equity crowdfunding.

3. Discussing recent research

In this section, we introduce the papers in the special issue and place them in the context of the related literature in equity crowdfunding (Subsection 3.1), angel finance (Subsection 3.2), debt for entrepreneurs (Subsection 3.3), venture capital (Subsection 3.4), and private equity (Subsection 3.5). Papers in the special issue and closely related papers are also summarized in Table 1 with the panels organized in the same order as the subsections herein.

3.1. Equity crowdfunding

Derived from crowdsourcing and microfinance, the term crowdfunding emerged with the development of internet-based funding. The internet presence of crowdfunding has seen it spread to countries all over the world. Belleflamme et al. (2014) de- scribe crowdfunding as an entrepreneur's means of collecting capital from an external source represented by a large community. Bradford (2012) identifies five subcategories of crowdfunding models, based on the return provided for the capital provider: (1) donations-based, (2) reward-based, (3) pre-purchase, (4) lending-based, and (5) equity-based crowdfunding. Subcategories 2 and 3 are closely related, and the pre-purchase model is often replaced in terminology by the reward-based model. In its debt-based form, crowdfunding is sometimes referred to as peer-to-peer lending. In terms of equity-based crowdfunding, multiple supplementary names have emerged: investment-based or securities-based crowdfunding or crowdinvesting. Crowdfunding has become an important source of funding for young ventures with return-based equity crowdfunding probably being the most in- teresting, albeit challenging, category for academic research.

Fig. 2. Google scholar hits by topic and year This figure presents the number of Google Scholar hits for the years 2000–2016 for “Entrepreneurial Finance,” “Venture Capital,” “Private Equity,” Entrepreneur Debt (not in quotes to capture papers about entrepreneurs and debt), “Trade Credit,” Angel Investor (not in quotes to cap- ture papers about angel investors), Crowdfunding, and IPOs. Source: Cumming and Johan (2017).

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Empirical papers on crowdfunding are still scarce, because of the lack of data and the relative newness of the financing rela- tionship. Vulkan et al. (2016) describe the size, the growth, and the geographic distribution of the market. Hervé et al. (2017) analyze gender effects and aspects of risk aversion of crowd investors. Ahlers et al. (2015) determine factors that affect crowdfunding success. Vismara (2016) finds that the likelihood of completing a funding campaign is higher if founders have larg- er social networks, and Vismara (2017) points to the importance of the funding momentum in the beginning of a new campaign: Early allocations affect the likelihood of reaching the target funding amount. Johan et al. (2017) examine distance in equity crowdfunding. However, none of the papers addresses the question of how the allocation of newly issued shares affects invest- ments by the crowd. There are two currently used mechanisms: first come, first served and auctions. The founders' choice of the mechanism, which might also be related to the choice of a crowdfunding platform, is expected to influence the funding dy- namics of a campaign. In a first come, first served environment, one would hypothesize that investors have no incentive to with- hold their bids, because the bids would not have an effect on the price but would induce the risk of not being served. In an auction, however, investors would prefer to wait until the expiration period not to disclose additional demand, which would drive up the price. Both market mechanisms would, therefore, yield different funding dynamics during the campaign. Hornuf and Schwienbacher (this issue) analyze the impact of the allocation mechanism on the funding dynamics of crowdfunding cam- paigns. They confirm that when allocations happen on a first come, first served basis, equity crowdfunding dynamics are L shaped. There is a relatively weak end-of-campaign effect. In auction processes, the funding momentum is U shaped. After strong investor interest at the beginning of successful auctions, the authors document a downturn first, but then a sharp increase in investor sup- port at their end. Under a second-price auction mechanism, it might be worthwhile for investors to place their bid only at the end of a campaign. The reason is that bids could be considered to reveal private information about the target's value and, thus, attract additional capital. This would increase the price. In addition, an auction does not break up prematurely when investors have sub- scribed for all available securities. If bids are sealed, the second-price auction has, therefore, the desired property of a more effi- cient resource allocation (Vickrey, 1961). However, Hornuf and Schwienbacher (this issue) find that only a smaller proportion of young ventures receive funding under the second-price auction mechanism. This could be due to the more complex rules of the auction or due to investors' selection abilities. They might, indeed, be able to pick only the ventures with better prospects. The authors leave this question open for future research.

Is the crowd, indeed, able to separate the wheat from the chaff? This is the research question of Signori and Vismara (this issue). They track 212 young UK ventures through April 2017 that successfully raised equity capital in a crowdfunding campaign from 2011 to 2015 and determine if they received additional financing in seasoned equity offerings, if they were acquired by in- cumbents, if they were still active without requiring supplementary financing, or if they ceased operations. Among the seasoned offerings, the authors further distinguish between follow-on crowdfunding campaigns or private offerings from business angels or venture capitalists. Signori and Vismara (this issue) find that only 38, or 17.0%, of their sample companies failed. This is a low failure rate compared to the 56% reported by a UK business angels' network. Among their sample, 74, or 34.9%, of the ventures raised additional capital in seasoned offerings. Thereof, 54 went through another crowdfunding campaign, while 20 received cap- ital privately. Only 3 ventures, or 1.4%, were acquired in an M&A transaction. All others were still active and operating. The paper also reports that investors' participation in the initial round is an important indicator or determinant of the ventures' success. If

Table 1 Overview of studies on entrepreneurial finance. This table summarizes select papers that focus on adjacent topics for the papers selected for this special issue. The authors, data sources, countries, time periods, var- iables, and main findings are summarized. The main findings are largely paraphrased and/or copied from the abstracts of the papers to best and succinctly represent the authors' contributions but are not meant to exhaustively represent all of the findings from the papers.

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

Panel A. Equity crowdfunding Ahlers et al. (2015).

Australian Small-Scale Offerings Board (AASOB)

Australia October 2006 to October 2011

Number of Investors, Funding Amount, Speed of Funding

Human Capital (# Board % Board MBA), Social Capital (% Non-Executive Board), Intellectual Capital and Contract Terms (Patent, Equity Share, Equity Offering, Financial Projections, Disclaimers Financial Forecasts), Additional Controls (# Staff, Award, Government Grant, Intended Number of Rounds, Most Likely Exit-Others, Most Likely Exit-Trade Sale, Target Funding, Years in Business, Years to Planned Exit)

This paper presents a first-ever empirical examination of the effectiveness of signals that entrepreneurs use to induce (small) investors to commit financial resources in an equity crowdfunding context. We examine the impact of venture quality (human capital, social (alliance) capital, and intellectual capital) and uncertainty on fundraising success. Our data highlight that retaining equity and providing more detailed information about risks can be interpreted as effective signals and can, therefore, strongly impact the probability of funding success. Social capital and intellectual capital, by contrast, have little or no impact on funding success. We discuss the implications for successful policy design.

Vismara (2017)

Crowdcube UK 2014 Number of Investors, Funding Amount, Success (%)

Early Investors, Public Profile of Investors, Social Capital, Target Capital, Equity Offered, Voting Rights Threshold, Tax Incentives, IPO Exit, Dividends, Duration

Finance studies on information cascades, usually in an initial public offering setting, typically differentiate between institutional and retail investors, as this is the only information available to potential backers. Information available through equity crowdfunding platforms includes details on individual investors, as they may disclose information about themselves by linking their profile to social networks or websites. Using a sample of 132 equity offerings on Crowdcube in 2014, we show that information cascades among individual investors play a crucial role in crowdfunding campaigns. Investors with a public profile increase the appeal of the offer among early investors, who in turn attract late investors.

Johan et al. (2017)

Australian Small Scale Offerings Board (AASOB)

Australia 2006 to June 2012

Distance Variables for Human Capital, Social Capital, Intellectual Capital and Contract Terms, and Other controls used in

This paper presents the first evidence of the influence of geographic distance among retail, accredited, and overseas

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Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

Ahlers et al., (2015) investors and venture location in an equity crowdfunding context. By analyzing investment decisions, we show that geographic distance is negatively correlated with investment probability for all home country investors. Our comparison of home country and overseas investors reveals that overseas investors are not sensitive to distance. However, when comparing only home country investors (subdivided into retail and accredited), we document that both investor types are similarly sensitive to the distance of possible ventures.

Signori and Vismara (this issue)

Crowdcube, Crunchbase, and Companies House

UK 2011–2015 Exits (IPOs, acquisitions, failure)

Dispersed ownership, speed of target capital, qualified investors, firm-specific and time controls

Based on data from the UK's largest crowdfunding platform, Crowdcube, the authors show that 18% of these firms failed, while 35% pursued one or more seasoned equity offerings in the form of either private equity injection (9%) or follow-on crowdfunding offerings (25%), while three firms were acquired. Among the determinants of the post-campaign scenarios, they find that the degree of investor participation in the initial offering plays a relevant role. In particular, firms with more dispersed ownership are less likely to issue further equity, while those that reach the target capital more quickly are more likely to launch a follow-on offering. Further, none of the companies initially backed by qualified investors subsequently failed.

Hornuf and Schwienbac- her (this issue)

Four equity crowdfunding portals (Companisto, United Equity, Seedmatch, and Innovestment) comprising 89 funding campaigns, which were run by 81 startups

Germany November 6, 2011–August 28, 2014.

The number of investments made by crowd investors on day t in a particular campaign i.

Information disclosure variables, Peer effect variables, End-of-campaign variables, Collective attention variables, Control variables

Equity crowdfunding is a new form of entrepreneurial finance, in which investors do not receive perks or engage in pre-purchase of the product but rather participate in the future cash flows of a firm. In this paper, we analyze what determines individual investment decisions in this new financial market. One important factor that may influence the behavior of investors is the way the portal allocates securities.

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Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

We use unique data from four German equity crowdfunding portals to examine how the allocation mechanism affects funding dynamics. In contrast with the crowdfunding campaigns on Kickstarter, on which the typical pattern of project support is U shaped, we find that equity crowdfunding dynamics are L-shaped under a first come, first served mechanism and U-shaped under a second-price auction. The evidence also shows that investors base their decisions on information provided by the entrepreneur in the form of updates as well as by the investment behavior and comments of other crowd investors.

Panel B. Angel finance Cumming and Zhang (2014)

Pitchbook Over 5000 angel investments from 96 countries

1977 to 2012 Angel versus VC and PE Investment, Exit Outcomes

Legal Conditions, Cultural Conditions, Market Conditions, as well as Investor, Entrepreneur and Deal-Specific Characteristics

The theory and evidence indicate that disintermediated individual angel investments are more affected by legal, economic, and Hofstede's cultural conditions than intermediated VC and PE investments. The data further indicate that investee firms funded by angels are less likely to successfully exit. These findings are robust to propensity score matching methods, as well as clustering standard errors and excluding U.S. observations, among other approaches.

Lerner et al. (2015)

Self-Collected 295 angel investments from 13 angel groups in 21 countries

February – October 2014

Dummy variable: venture received funding from angel group

Venture is above the funding cut-off

When comparing entrepreneurial applicants in angel networks just above and below the funding cutoff, angel investors have a positive impact on the growth, performance, and survival of firms as well as their follow-on fundraising.

Capizzi et al., this issue

Italian federation of business angel associations (IBAN, www.iban.it)

810 angel or angel-group backed investments in 619 companies by 330 unique business angels in Italy

2008 to 2014 % Wealth Invested, Investment Participation

BAN Membership, Co-Investors, Monitoring, Age, Education, Wealth, Experience, Entrepreneur, Manager, Net Asset Value, Seed, Foreign, Industry Market/Book, Capital Intensity, Industry and Year Fixed Effects

Membership in a business angel network (BAN) affects the investment decisions of the members. Using a novel dataset containing qualitative and quantitative information on 810 angel or angel-group backed investments in 619 companies by 330 unique

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Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

business angels from 2008 to 2014, we show that BAN membership generates valuable information, networking, monitoring, and risk reduction effects, which ultimately affect the amount of personal capital committed by each angel investor and their equity stake in the targeted company. These results extend our knowledge of the investment behavior and characteristics of business angels, a relatively opaque funding source that is rapidly gaining prominence in support of new ventures and the development of the global economy.

Panel C. Private debt finance for entrepreneurial firms Cosh et al. (2009)

Centre for Business Research at the University of Cambridge

UK 1996–1997 Application for External Finance, Rejection or Acceptance of Application, Type of External Finance, Percentage of External Finance Obtained

Firm financial characteristics, age and profile of board and management, competitors and industry

This paper investigates factors that affect rejection rates in applications for outside finance among different types of investors (banks, venture capital funds, leasing firms, factoring firms, trade customers and suppliers, partners and working shareholders, private individuals, and other sources), taking into account the non-randomness in a firm's decision to seek outside finance. The data support the traditional pecking order theory. Further, the data indicate that firms seeking capital are typically able to secure their requisite financing from at least one of the different available sources. However, external finance is often not available in the form that a firm would like.

Robb and Robinson (2014)

Kauffman Firm Surveys US 2004–2007 Capital Structure Firm specific characteristics

Contrary to many accounts of startup activity [although very consistent with Cosh et al., 2009 for the UK], the firms in our data rely heavily on external debt sources, such as bank financing and, less extensively, on friends- and family-based funding sources.

Cole et al. (2016)

Report of Condition and Income (informally known as the “Call Report”), PWC MoneyTree Report,

US 1995–2011 Growth in firms, establishments, payroll, employment

VC, bank finance, market conditions, state level institutional conditions, demographic variables

We directly compare, for the first time, banks versus VCs for stimulating entrepreneurship and growth. We examine state

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Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

Statistics of U.S. Businesses (SUSB) dataset constructed by the U.S. Census Bureau, U.S. Bureau of Economic Analysis (BEA), Patent Technology Monitoring Team (PTMT) reports

level data to account for externalities across firms and control for endogeneity. We find the effect of VC to be both economically and statistically significant in stimulating small firm growth. We do find a significant effect of banks in stimulating small firm growth.

Tykvova (2017)

Dow Jones Venture Source, Standard & Poor's (S&P) Capital IQ, Bureau van Dijk Orbis, National Venture Capital Association (NVCA), Thomson ONE, and various Web sites and reports.

US 1995–2008 Choice of VC or Venture Lending, Exit Performance

Firm specific characteristics, demographic and market Conditions

Early-stage VC investors that own high-quality value companies tend to signal their quality, and they frequently turn to uninformed venture lending (VL) investors. Early-stage VC investors prefer VC, if the proportion of high-quality companies in the population is high, if their companies have a high upside potential, if they can benefit from the value that late-stage VC investors add, or if uncertainty is high. Empirical evidence is consistent with these predictions.

Cole and Sokolyk (this issue)

Kauffman Firm Surveys. This annual survey follows 4928 privately held firms that were established in 2004.

US 2004–2012 Use of Debt, Survival, Revenues

Debt Finance,, Owner and Firm Characteristics

Start-up firms with better performance prospects are more likely to use debt and, in particular, business debt. Compared to all-equity firms, firms using debt at the initial year of operations are significantly more likely to survive and achieve higher levels of revenue three years after the firm's startup. However, results hold for business debt only. Debt obtained in the name of the firm is associated with longer survival times and higher revenues, while debt obtained in the name of the firm's owner has no effect on survival time and is associated with lower revenues.

Panel D. Venture capital and capital gaps Leleux and Surlemont (2003)

European Venture Capi- tal Association

Europe 1990–1996 VC Funds Government VC Programs, legal system controls

Large public [government] participation is correlated with smaller VC industries, but analyses do not support the view that public venture capitalists are acting to seed the industry or that are they crowd out private funds. On the contrary, public involvement seems to cause greater amounts of

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Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

money to be invested in the industry as a whole. We argue that the effects of public intervention, whatever the motives, are real and probably result from demonstrating/sanctioning the social merit of venture capital and from signaling an enduring commitment to it.

Cumming and MacIntosh (2006)

Macdonald & Associates, Ltd., for the Canadian Venture Capital Association [subsequently acquired by Thomson SDC]

Canada 1977–2001 Number of VC deals, Dollar value of VC deals

Presence of government legislation for tax subsidized funds, market conditions, provincial and federal incorporation data

The data indicate government funds have crowded out private VC investment, even so much so as to lead to a reduction in the aggregate pool of venture capital in Canada, frustrating one of the key governmental goals under- lying the government pro- grams; namely, the expansion of the aggregate pool of capital.

Howell (2017) US Department of Energy's (DOE) Small Business Innovation Research (SBIR) program.

US 1998–2013 Cite-Weighted Patents, Venture Capital Investment

SBIR Awards, various control variables

This paper conducts the first large-sample, quasi-experimental evaluation of R&D subsidies using data on ranked applicants from the US Department of Energy's SBIR grant program. An early-stage award approximately doubles the probability that a firm receives subsequent venture capital and has large, positive impacts on patenting and revenue. These effects are stronger for more financially constrained firms. Certification, where the award contains information about firm quality, likely does not explain the grant effect. Instead, the grants are useful because they fund technology prototyping.

Wilson et al. (this issue)

Net Lending Growth and Real Interest rate – Bank of England; GDP growth and GDP deflator – Federal Reserve Bank of St. Louise; HTKI company, HTKI industry – indicators generated using the Eurostat categorization of companies on the basis of two-digit NACE codes; Output Area Classification – Office of National Statistics, matched by postcode; credit reference agencies ICC Credit and

UK 2005–2014, over 12 million company-years; 2852 VC backed companies and 4048 deals.

VC financing, VC amounts/total assets

Firm-specific and industry-specific characteristics; the size of investment and investments rounds. We construct variables from ‘event’ filing and director and shareholder records that capture expertise and resource-combinations to differentiate target VC investees from other companies.

We provide estimates for the potential size of the equity gap for all ventures and for the subpopulation of the corporate sector facing later-stage financing issues, the second equity gap. This ‘second’ equity gap relates to a second so-called ‘valley of death’ in financing the growth phase, particularly pertinent for knowledge-intensive (KI) firms. Enterprises that are successful in acquiring equity investors are able to overcome informational

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Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

Creditsafe, asymmetries by demonstrating, communicating, and signaling desirable attributes to outside investors. Using propensity scoring methods and multivariate models determining investment demand, we screen the corporate population for potential VC investments and estimate the size of the equity gap in total and by subpopulation (i.e., we identify the high technolo- gy and knowledge inten- sive companies that potentially face the second equity gap as a subset of our total equity gap esti- mates).

Panel E. Venture capital and IPOs Lee and Wahal (2004)

Jay Ritter US 1980–2000 IPO Underpricing VC-backing, market conditions, firm-specific controls

Controlling for endogeneity in the receipt of venture funding, we find that venture capital backed IPOs experience larger first-day returns than comparable non-venture backed IPOs. Between 1980 and 2000, the average return difference ranged from 6.20 to 9.51%. This return difference is particularly pronounced in the “bubble” period of 1999–2000. As a potential explanation for these results, we explore a variant of the grandstanding hypothesis, in which the publicity associated with high first-day returns brings future commitments of capital to venture capitalists. Capital flow regressions show that commitments of capital are positively related to first-day returns.

Nahata et al. (2014)

Securities Data Corporation's VentureXpert database provided by Thomson Financial

US 1991–2001 (Investments) and to 2005 (Exits)

Exit outcome (IPO, M&A), Productivity (sales/book value of assets)

VC reputation, market conditions, firm-specific variables

Companies backed by more reputable VCs by initial public offering (IPO) capitalization share (based on cumulative market capitalization of IPOs backed by the VC), are more likely to exit successfully, access public markets faster, and have higher asset productivity at IPOs. Further tests suggest VCs' IPO capitalization share effectively captures both VC screening and monitoring expertise.

548 D. Cumming, A.P. Groh / Journal of Corporate Finance 50 (2018) 538–555

Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

Cumming (2008)

Self-Collected Europe 1995–2002 (Investments) and to 2005 (Exits)

Exit outcome (IPO, M&A, Liquidation)

VC contracts, market conditions, legal conditions, firm-specific variables

Consistent with control-based theories of financial contracting, the data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. The findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of contract choice.

Jeppsson (this issue)

Securities Data Company's (SDC) New Issues Database

US 2003–2016, 311 VC Backed IPOs

VC Investment in IPO, IPO offer price revision, underpricing, completion of an IPO, long-run performance

Issuer and issue characteristics, VC characteristics, investment bank characteristics, market conditions

This study finds support for the certification role by venture capitalists. Insider participation in the S-1 filing is associated with smaller offer price revisions, shorter duration to the IPO, positively associated with the offering being completed, and better long-run aftermarket performance. Furthermore, the results indicate that insider participation is mediated through offer price revisions, which, in turn, are associated with IPO underpricing. Overall, the results are robust in both two-stage least squares (2SLS) models and simultaneous eq. (SE) models. This paper provides a first step in understanding the complex role of venture capitalists in the initial public offering process and contrasts past research considering IPOs as exit events.

Panel F. Private equity and reporting Cumming and Walz (2010)

Center for Private Equity Research (CEPRES, Germany)

5038 Venture Capital and Private Equity Backed Companies in 39 Countries

1971–2003 Severity of Misreporting of Unexited Venture Capital and Private Equity Returns

Country Level Legal and Accounting Standards, Various Venture Capital and Private Equity Governance Proxies

Unexited venture capital and private equity returns are severely over-reported. The severity of over-reporting is more pronounced in countries with worse legal and accounting standards, worse contractual governance, and among first-time fund managers that have pronounced incentives to over-report for fundraising reasons.

Johan and Zhang (2014)

Pitchbook 5068 PE funds from 44 countries

2000–2012 The difference between reported returns to institutional

Type of institutional investor, legal conditions, market conditions, firm-specific

We show that endowments are systematically associated with less pronounced

(continued on next page)

549D. Cumming, A.P. Groh / Journal of Corporate Finance 50 (2018) 538–555

Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

investors and subsequently realized returns

variables differences between unrealized returns and subsequently realized returns. Moreover, endowments receive more frequent reports from their PE funds, implying more stringent governance. We find that higher reporting frequencies from PE funds are correlated with a lower tendency for the limited partners to receive overstated performance reports. These findings persist after controlling for stock market conditions, legal environments and origins, fund and GP characteristics, PE fund types, as well as cultural dimensions.

Jenkinson et al. (2016)

Burgiss US, 645 funds 1988–2014 Future discounted cash flows (DCFs)

Private equity valuations, control variables

Reported NAVs converge on the future DCF early in the life of the fund. This result is particularly interesting to investors for whom unbiased asset valuations are important in keeping portfolios optimally allocated. In addition, findings indicate that although NAVs generally are more conservative in the first half of the sample period, NAVs for venture capital funds tend to overstate economic value after 1999. Findings from additional tests suggest that the overstatement is attributable to the effects of the financial crisis, and that VC fund managers fail to update NAV estimates in post-crisis years to reflect the effects of the crisis on future cash flows.

Goktan and Muslu (this issue)

Securities Data Company (SDC) Venture Xpert database, Compustat North America and Compustat Global databases.

Worldwide 1990–2009 Abnormal Accruals, Timeliness of Loss Recognition, 1-year buy-and-hold abnormal returns

Firm specific variables, transaction specific variables, market conditions, industry conditions, legal conditions

Private equity firms that are listed on stock exchanges commit to extensive public disclosures. By contrast, unlisted private equity firms communicate privately with partner investors. We examine the reporting quality of portfolio companies that are backed by listed and unlisted private equity firms worldwide. We find that portfolio companies that are backed by listed private equity firms report lower abnormal accruals, recognize losses faster, and experience higher post-IPO stock returns. These

550 D. Cumming, A.P. Groh / Journal of Corporate Finance 50 (2018) 538–555

Table 1 (continued)

Author(s) Data source(s) Country samples

Time period Dependent variables Main explanatory variables

Main findings

findings are stronger for smaller and European portfolio companies and those that receive direct private equity invest- ments. Overall, our find- ings suggest that the public reporting model of listed private equity firms leads to greater capital market benefits than the private reporting model of unlist- ed private equity firms.

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the ownership of the young venture is widely dispersed, then a successful outcome (i.e., a seasoned equity offering or an M&A) is less likely. This could be related to inferior monitoring abilities of a larger crowd (Brennan and Franks, 1997) but also to weaker selection skills. The authors also demonstrate that “qualified” or “sophisticated” investors eventually have better selection and/or monitoring skills. These investors also tend to invest in securities that deliver voting rights compared to the “retail” investors (Cumming et al., 2017). Finally, a stronger initial funding dynamic e.g., as discussed in Hornuf and Schwienbacher (this issue) yields a higher propensity of launching a subsequent crowdfunding round. Signori and Vismara (this issue) are the first to mon- itor crowdfunded ventures after a successful campaign, which allows deriving important results on their long-term success and the sustainability of their business models. However, the future development of a large fraction of their sample is yet unknown. We realize that 97, or 46%, of their sample ventures were still active and operating at the end of the sampling period. Therefore, we don't know yet if these are successful businesses or eventual failures. Some of them will need to be re-classified in the close future, and this will affect the long run crowdfunding success rates.

3.2. Angel finance

Business angels are high net worth individuals who usually invest their own private wealth, mostly between USD 10,000 and USD 250,000, in ventures that are, typically, local, unlisted, and without a family connection to the business angels. They play major roles for young ventures, besides supplying capital as they also provide strategic input, monitoring, and control (however, less formal than institutional investors), as well as adjoining their professional network. They often take positions on the board of directors and become consultants to the ventures. Business angels may be former entrepreneurs or may at least have had a career in management contributing their contacts and know-how related to entrepreneurship and management (Aernoudt, 1999; Berger and Udell, 1998; Bonnet and Wirtz, 2011, 2012; Capizzi, 2015; Ibrahim, 2008; Leavitt, 2005; Politis, 2008; Prowse, 1998; Wallmeroth et al., 2018; Wetzel, 1983, 1987). Angel investors, however, are found to be a highly heterogeneous community and also pursue varied processes when investing in start-ups (Freear et al., 1994; Lerner, 1998). Often, they co-invest with ven- ture capitalists (Bonnet et al., 2013).

Wetzel (1983, 1987) already pointed to the fact that the informal venture capital market is very opaque with numerous puz- zles. He also highlights that, based on the data at the time, the informal capital market was twice the size of the formal venture capital market. Prowse (1998) notes that business angels' activities are significant, adding that, though this market is not trans- parent, it is found to be heterogeneous and localized.

Business angels often associate in networks, and these networks have recently attracted strong academic interest. Kerr et al. (2014) assess informal venture capital financing and identify five benefits of angels being network members: (1) Since they com- bine individual investments, deals generally accumulate larger investment amounts. (2) As a result of this accumulation, angels are able to diversify and spread their investment risks over more investments. (3) The resulting economies of scale produce lower due diligence and legal costs. (4) As it is easier for entrepreneurs to find business angels' networks than individual business angels, more attractive deal-flow can be produced. Lastly, (5) these networks are more likely to include more experienced angel investors.

Capizzi, Bonini, Valletta, and Zocchi (this issue) compare the investment choices of Italian business angels who are members of angel networks to those who are unaffiliated, acting as single and independent investors. In particular, they investigate whether and how being a member of a semi-formal organization affects the share of the angel's personal wealth invested or the amount of the equity stake taken. They gather a unique data set of 810 investments in 619 ventures by 330 business angels from 2008 to 2014 and show that belonging to an angel network has a significant effect on the investment characteristics of business angels. Network affiliated business angels allocate larger fractions of their wealth to young ventures, and they diversify more at the same time. The authors also find that being a member of an angel network provides valuable information and superior network- ing opportunities.

The paper is among the first to analyze the role of networks and associations for the activity and investment characteristics of business angels. It points to the advantages of such networks for the transaction costs of angels, for their deal flow generation, and

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for their portfolio diversification. However, it does not answer the question of why other business angels still act without a net- work affiliation.

There are only a few papers that have considered international differences in angel investing in multiple countries. For exam- ple, Lerner et al. (2015) provide important regression discontinuity evidence that angel investment enhances differences in growth, consistent with their earlier work from the U.S. (Kerr et al., 2014). Notably, however, there appears to be issues of smaller samples that are not completely comparable with those in specific countries, such as Italy, in Capizzi, Bonini, Valletta, and Zocchi (this issue), which makes use of more extensive, industry-wide data from a single country. The results presented in Capizzi et al. indicate that evidence from angel groups will not be representative from the broader population of angel investors. Cumming and Zhang (2014) provide a larger sample from 96 countries and note an apparent pronounced impact of Hofstede cultural traits on angel investment. It is difficult to assess whether or not these Pitchbook data are perfectly representative; they do offer the ad- vantage of being one of the largest (if not the largest, at least at this stage) angel investment databases in the world. Other work that expands the data sources across countries on angel investment has the potential to add significant value to our under- standing of early-stage finance around the world.

3.3. Debt for entrepreneurs

An overwhelming number of academic papers focuses on entrepreneurial finance as equity finance. It seems obvious that many disruptive, capital-intensive technologies and business models are not bankable at the given uncertainties and lack of col- lateral. However, not all start-ups build on disruptive innovations, and important contributions point to the importance of debt financing for entrepreneurial firms (Holtz-Eakin et al., 1994; Berger and Udell, 1998; Beck and Demirguc-Kunt, 2006). Entrepre- neurs have a strong incentive to retain a high-equity ownership stake and to borrow to meet a venture's required capital. Robb and Robinson (2014) find that US start-ups rely heavily on external debt and that higher levels of debt are associated with faster revenue and employment growth, consistent with prior UK evidence (Cosh et al., 2009). Cosh et al. (2009) note that entrepre- neurs often obtain the capital that they need, but not in the form that they like. Cole et al. (2016) find that venture capital appears to help more than debt finance, at least based on aggregate state-level data in the US. Tykvova (2017) shows that venture lending tends to go to different types of entrepreneurs than venture capital.

Cole and Sokolyk (this issue) extend prior papers and focus on the two kinds of debt which exist for start-ups: debt originated by the venture (business debt) and debt originated by the entrepreneur (personal debt). They hypothesize that high-quality start- ups are more likely to use business debt and less likely to use personal debt than other start-ups. This hypothesis is based on the fact that business debt is fundamentally different from personal debt, with respect to screening and monitoring. Furthermore, business debt usually originates from an informed lender, while personal debt is obtained from an arm's-length lender (Rajan, 1992). Loan officers base their approval of a business loan-application on the performance prospects of the firm and on its cred- itworthiness. If the loan is approved, the lender typically monitors the firm during the term of the loan. In contrast, when eval- uating a personal loan, a lender assesses the creditworthiness of the entrepreneur and not the venture. Consequently, the cost of underwriting a business loan is greater than the cost of underwriting a personal loan. A borrower might also find a business loan application more costly than a personal loan application, in terms of document preparation and time spent. Therefore, entrepre- neurs might favor personal loans, even if they put their personal wealth and assets at risk. The authors find that the distinction between personal debt and business debt is important. Better quality start-ups are more likely to obtain business debt, and such debt is associated with higher survival and revenue growth rates. Unfortunately, their data do not allow a control for the banks' selection or monitoring capabilities. At the same time, only the best entrepreneurs might solicit bank financing. Hence, self- selection might also explain part of the results. Nevertheless, the paper provides additional evidence on the importance of tradi- tional bank lending in the entrepreneurial finance landscape.

3.4. Venture capital

3.4.1. Venture capital and the equity gap The equity gap is the difference between the amount of equity that would be invested in a complete market and the actual

amount invested. There is substantial interest in practice, as to whether or not an equity gap exists for entrepreneurs, and there is considerable theoretical debate about the equity gap or, more generally, a funding gap (Stiglitz and Weiss, 1981; De Meza and Webb, 1987; Le Grand, 1991; Holmström and Tirole, 1998). However, contributions empirically assessing the funding gap's existence and magnitude are lacking. This is surprising, since the question of whether or not firms, especially small and young ventures, are able to secure sufficient funding for viable projects remains of particular importance for every country to se- cure its future innovation capacity, prosperity, and employment. Therefore, policymakers and academic researchers have increas- ingly begun to discuss whether or not an equity gap indeed exists and whether or not the government can or should step in to bridge it. There are several types of direct public support for young and small ventures, including debt and equity guarantee schemes, grants, direct investments, tax reliefs, incubators, investments via venture capital funds, or funds of funds. These schemes are not limited to certain countries. They are widespread across the world to such an extent that the public activity may even crowd out private investment where programs are designed improperly, such as in Canada (Cumming and MacIntosh, 2006). Other countries have had a better experience with public support programs, such as Europe (Leleux and Surlemont, 2003) and the US (Howell, 2017).

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European policymakers are currently concerned that an equity gap limits Europe's competitiveness and innovation capacity. The notion is based on the observation that, given comparable economic development levels and cultural similarity, access to cap- ital for young ventures seems to be much easier in the US than in Europe. Various measures of the liquidity of the entrepreneurial finance market and investment activity (e.g. estimated venture capital or business angels' investments over GDP) reveal that Europe is at a strong disadvantage compared to the US. At the same time, this capital market segment in the US proves to incu- bate current and future world technology leaders. It is, therefore, a viable issue to address the existence of an equity or funding gap in Europe. McCahery et al. (2015) estimate a funding gap for France, Germany, The Netherlands, Poland, and Romania and conclude that in 2013 the gap ranged between 4.8% (in Germany) and 20.3% (in The Netherlands) of the countries' GDPs. They estimate the supply in the entrepreneurial finance market via SME loan and equity investment aggregates. The more challenging task remains the estimate of demand for early stage capital. The authors refer to the number of SMEs in the respective countries and the results of a survey on the access to finance of enterprises carried out by the European Central Bank in 2013.

Wilson, Wright, and Kaceer (this issue) estimate the equity gap from the start-up to the growth phase of young ventures in the UK from 2004 to 2014. They comprise a data set of 12.2 million company-year observations and match this with all known UK VC transactions, thus detecting 1847 VC backed “knowledge-intensive” manufacturing or service ventures. These com- panies can be considered a distinct subsample of the population of UK corporations. Using this sample and a propensity score matching procedure, Wilson, Wright, and Kaceer (this issue) are then able to identify the young ventures that did not receive ven- ture capital but resemble the VC backed companies in the sample. This provides an estimate for the potential demand for equity funding and can be extrapolated to the population of investable companies, by sector. Their annual equity gap estimates range between £12 billion to £32 billion and present an unmet demand among the relevant company population at the given time.

Wilson et al. acknowledge that these estimates do not provide direct evidence that the non-VC-backed companies are indeed in search of external financing nor that they are particularly attractive for VC investors. Nevertheless, the paper provides an intu- itive and rigorous quantitative assessment of an equity gap for the UK and, therefore, makes an important contribution.

Further research could examine the sources of capital gaps in other countries. For example, Bao et al. (2016) provide Chinese evidence that political connections are critical for accessing equity markets. International evidence on differences in access to capital and equity gaps has the potential to highlight the role of policy in facilitating entrepreneurship and economic development.

3.4.2. Venture capital and IPOs The IPO is an important exit event of venture capital investments (Cumming, 2008; Cumming and Johan, 2013; Ozmel et al.,

2013). IPOs have strong reputation effects for venture capitalists (Gompers, 1996; Lee and Wahal, 2004; Nahata et al., 2014; Johan, 2010), and there is evidence that experienced funds are able to time them (Lerner, 1994), subject to their contractual rights to control exit (Cumming, 2008). However, venture capitalists rarely sell all of their shares at the time of the IPO (Barry et al., 1990; Gompers and Lerner, 1998). IPO subscribers would assume that the venture capitalists sell because they believe that the issue is overpriced. Therefore, the issuing price needs to be low enough to allow a positive return to the subscribers. If this is not the case, the IPO market could be considered a market for lemons (Akerlof, 1970) and collapse. Venture capitalists have a strong incentive to maintain their reputation and to retain access to the IPO market.

So why should venture capitalists sell their shares in an IPO if the issue is not overpriced? This question is the motivation of the paper by Jeppsson (this issue). He follows the suggestion of Barry et al. (1990), assuming that retention of ownership in an IPO signals value and an ongoing commitment to monitoring. Megginson and Weiss (1991) even argue that maintaining owner- ship in the company certifies the issue price. Therefore, Jeppsson (this issue) analyzes a rationale which contrasts the extant ven- ture capital literature: Preexisting venture capital investors' can subscribe for shares in the public offer. In particular, he examines the certification role of venture capitalists as insiders buying in the IPO and the association with price revision, underpricing, the probability of completing the offer, and the aftermarket performance. He finds that venture capitalists are more likely to make subscription pre-commitments when they hold higher pre-IPO ownership stakes, when the fund is older, when the dilution effect is larger, and when more capital has been invested prior to the IPO. The insiders' participation is negatively associated with underpricing, although this effect is mediated in pricing revisions, and their participation increases the likelihood of completing the offering.

However, despite the positive consequences of retaining ownership in public firms, it remains to be discussed that it is neither the economic nor the directed task of venture capital funds to maintain exposure in public stock markets and to monitor quoted companies. This activity could distract resources, which are required for selecting, backing, and monitoring start-ups. Furthermore, longer holding periods could negatively impact the internal rates of return of particular transactions, even if additional capital gains were possible after the IPO. This would penalize the venture capital industry as a whole from the capital supplying institu- tions' perspective.

3.5. Reporting quality of private equity backed IPOs

Unquoted equity markets are in-transparent market segments. Not only academic researchers criticize the (un-) availability of data; politicians and the general public also have an interest in better understanding and being informed about the activities of venture capital and private equity investors and the consequences of their investments. In the first publicly distributed paper on the topic (dating back to early 2004), Cumming and Walz (2010) show that private equity fund managers tend to overvalue their unexited investments, and one reason they do so is to attract future funds from institutional investors, as they know funds

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that overvalue more have raised more money. Cumming and Walz show that reporting is better in countries with better legal standards. Similar evidence is found in Johan and Zhang (2014) with more detailed information (arguably the most detailed in- formation possible, which is from Pitchbook) about specific types of institutional investors. Johan and Zhang (2014) note that even different institutional investors in the same PE fund receive different valuation reports at the same time. Endowments tend to receive better information than other types of institutional investors. Jenkinson et al. (2016) provide evidence that private equity valuations are inaccurate predictors of future cash flows. Ironically, Cumming and Johan (2017) document that research on reporting in private equity valuations tends not to completely report other competing work on the topic and offers some expla- nation for why this is the case.

In the more regulated public equity market, investors and investees are obliged to follow certain reporting standards. These standards increase transparency for investors. Crain and Law (2017) reveal that implementing fair value accounting principles also improves the quality and transparency of reports of venture capital and private equity funds to their investors. Morsfield and Tan (2006) show that venture capital funds raise the quality of financial statements of the companies they bring public. Goktan and Muslu (this issue) add to their finding by taking advantage of the circumstance that, increasingly, venture capital and private equity funds become listed entities. Once listed, they must disclose information about their activity and portfolio com- panies according to the prevailing listing standards. They could demand the same standards from their investees right after taking a stake. As a result, listed venture capital and private equity firms could establish higher-quality reporting infrastructures for their portfolio companies long before they take them public. Goktan and Muslu (this issue) collect a sample of listed and non-listed venture capital and private equity firms and the portfolio companies that they brought public. They find that the investees that went public indeed provide higher-quality financial information, if they were formerly backed by a listed fund. These investees also experience less stock return reversals after their IPO. In addition, if a venture capital or private equity fund becomes listed itself, abnormal accruals of its portfolio companies drop significantly. Overall, the authors document a positive effect of the public reporting model of listed venture capital and private equity firms. They suggest that the implementation of tight reporting stan- dards for alternative asset managers is warranted, given the fact that they can do better if they want, or if they have to.

4. Future directions

As mentioned above, research in entrepreneurial finance in this special issue of the Journal of Corporate Finance has followed important themes, including the determinants of investment patterns and capital gaps, the value-added by investors, governance and reporting problems, and factors of investment success. These themes can be applied to different types of sources of capital.

Future work in entrepreneurial finance could focus more closely on the intersection of different sources of capital. Cumming and Vismara (2017) document an unfortunate degree of segmentation of research in entrepreneurial finance, as data on the topic are typically derived from the source of capital. Some exceptions include Cosh et al. (2009), Robb and Robinson (2014), Cole et al. (2016), Tykvova (2017), and Cumming et al. (2018). More work along these lines is certainly warranted to better un- derstand what happens to entrepreneurs who do not secure the capital that they desire, which sources of finance are optimal and in what combinations, and how policymakers should consider strategies that optimize support programs for entrepreneurial fi- nance that account for an array of sources. These research outcomes will likely be better realized by reflection on entrepreneurial finance as an interdisciplinary subject with insights from a wide range of journals and disciplines.

5. Conclusions

This introduction highlights select papers in this special issue of the Journal of Corporate Finance and how these papers contrib- ute to related literature on the topic. While our literature review is not exhaustive in this short introductory article, we identify some gaps and offer some suggestions for future research.

The excellent papers collected for this special issue break significant new ground by introducing and examining extensive data that improves our understanding of important questions in entrepreneurial finance research, practice, and policy. Most of the pa- pers were presented at the MAELYSE Research Federation entrepreneurial finance conference in Lyon, France, in July 2016. We believe the presentations and collegial discussions at the conference and the referee process at the Journal of Corporate Finance helped strengthen the papers and certainly enable us to reflect more completely on the interesting developments in entrepre- neurial finance research. We hope you enjoy reading the cutting-edge papers in this special issue.

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