Essays on Entrepreneurial Finance

This Ph.D. thesis examines various dimensions of entrepreneurial finance, delving into three interconnected dimensions: the pivotal role of families in venture capital, the burgeoning phenomenon of micro VCs, and the nuanced influence of economic preferences on venture capital decision-making. By exploring these interconnected topics, this research contributes to our understanding of the multifaceted nature of financing entrepreneurial ventures. Entrepreneurial finance is a dynamic field that encompasses the study of financial strategies and decision-making processes within the context of startups and early-stage companies. This thesis seeks to shed light on three distinct yet interconnected aspects of entrepreneurial finance. The first paper delves into the role of families in venture capital. The research reveals that families significantly contribute to VC investments, supporting 7.1% of all startups in my dataset. The findings reveal that family VCs are more likely than their non-family counterparts to pursue a local strategy, investing in geographically proximate startups and syndicating with local investors. The family VCs’ propensity to pursue the local strategy is heightened when the VC is eponymously named and when the family is actively involved in the decision-making process within the fund. Contrary to conventional notions of 'home bias,' the study shows that family VCs’ local focus is underpinned by a calculated strategy rooted in their superior knowledge of local entrepreneurial ecosystems. The second paper explores the emerging phenomenon of "Micro Venture Capital." This study uncovers significant differences between micro VCs and traditional VCs. Micro VCs tend to invest in riskier startups, particularly early-stage ventures led by inexperienced founders. However, they exhibit lower tendencies to syndicate investments, stage funding rounds, or replace the initial founders. These differences in strategies reflect organizational disparities and result in relatively poorer performance for startups backed by micro VCs. Additionally, the research highlights distinctions between the financial approaches of micro VCs and angel investors, indicating that micro VCs face challenges in creating value through screening and monitoring activities due to resource constraints and less sophisticated limited partners. The third paper "Time Tells: Unraveling the Temporal and Risk Dynamics of Venture Capitalists The Role of Economic Preferences in Venture Capital Decision-Making." investigates how venture capitalists' economic preferences shape their investment decisions. Through a large-scale incentivized survey of European venture capitalists, the research provides novel insights into the relationship between economic preferences and investment choices. The findings demonstrate that more patient venture capitalists tend to invest in firms at earlier stages of development, while risk-averse venture capitalists lean towards more mature firms. Moreover, these economic preferences lead to different paths to success, with risk-averse investors more likely to exit through trade sales and patient investors more prone to exit through initial public offerings (IPOs). Notably, IPOs are most likely when investors exhibit both patience and a willingness to take risks. By investigating the role of families, micro VCs, and economic preferences in venture capital decision-making, this thesis provides a comprehensive understanding of the complex dynamics and factors that shape entrepreneurial finance. The findings contribute to the existing body of knowledge in the field and offer valuable insights for policymakers, practitioners, and researchers seeking to enhance the understanding and effectiveness of entrepreneurial financing strategies. "