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Part Entrepreneurship (Finance)

Q: Overlap of path dependence theory with three related theories

Learning theory : proposes that organizational capacities develop from repeated trials Transaction cost theory : concerns how a complex transaction between two or more exchange partners should be governed to be as efficient as possible Imprinting theory : founders incorporate historically important elements to their organizations at origin, which become routinized and influence the organization's structure and behaviour long after its foundation

33 important questions on Part Entrepreneurship (Finance)

What are the findings of Coleman & Robb (2012) about capital structure and new technology firms?

New technology-based firms demonstrate different financing patterns than firms that are not technology-based.
Technology-based entrepreneurs are both willing and able to raise substantial amounts of capital from external sources. They also need more external sources of equity in order to launch and grow their firms.

Modigliani & Miller --> capital structure theory

Firms will select the mix of debt and equity

Maximizes the value of the firm
Minimizes its WACC, both of which simultaneously
This does not necessarily hold for new, privately held firms, because it is based on the assumptions that there are no transaction costs of any kind and the investors and managers have the same information about the firm

Firms have access to full range of debt and equity alternatives

Myers and Majluf --> Pecking order theory of finance

Information advantage: according to this theory, insiders have information about the firm that outsiders do not necessarily have. Because of this informational asymmetry, outside share purchasers will tend to under-price a firm's shares. In light of that insiders prefer to use internal equity in the form of retained earnings or debt before they issue external equity

Berger and Udell --> Life cycle theory of finance

Which contends that firms use different types of financing for different stages of growth
Mode (hoedanigheid) of finance varies with growth stages
In the beginning stages, the firms are more opaque (=ondoorzichtig, onduidelijk)
Heavy reliance on insider finance first (personal funds, re-invest profits)
As the firm moves through its life cycle, however, it becomes less opaque and has access to a broader array of funding resources

What is the resource orchestration approach?

Focuses on the achievement of competitive advantage rather than growth as such. Entrepreneurial firms facing resource constraints in some areas can achieve a competitive advantage by developing complementary resources in others. This emphasizes the need for resources to be viewed as bundles, and that different configurations of such may lead to competitive advantage.

What is the funding gap?

The difference between the amount required for an investment and the sum of the financing already committed

What is venture capital (durfkapitaal)

Is about investing in companies that have a high risk of financing. Often this is about financing start-ups or small businesses that are believed to have long-term growth potential. You have two types of venture capital.

Formal venture capital: professionally managed organizations that exist to earn a high return on funds by investing in new and growing companies
Informal venture capital: informal venture capital-equity investments and non-collateral forms of lending made by private individuals (termed business angels) using their own money, directly in unquoted companies in which they have no family connection

Path dependencies can be divided into 3 stages:

Contingency (=onvoorspelbaarheid): somewhat random, chosen from broad sets of possible opportunities. Individuals make decisions based on their historic experiences, skills and preferences
Critical juncture (=kritiek kruispunt): a triggering decision or event sets off a self-reinforcing process that is hard to abandon.
Locked-in to a single state: the dominant decision pattern has become fixed and deterministic

Overlap of path dependence theory with three related theories

Learning theory: proposes that organizational capacities develop from repeated trials
Transaction cost theory: concerns how a complex transaction between two or more exchange partners should be governed to be as efficient as possible
Imprinting theory: founders incorporate historically important elements to their organizations at origin, which become routinized and influence the organization's structure and behaviour long after its foundation

What is resource orchestration?

The roles of managerial actions in the process of structuring a firm's resource portfolio, bundling the resources to build relevant capabilities and leveraging these capabilities to eventually realize a competitive advantage

Spin-offs face challenges in addressing specific critical junctures (kruispunten) between these phases:

Opportunity recognition: this requires the spin-off to acquire the opportunity identification competency to synthesize the technology derived from scientific enquiry with an understanding of the markets to which it might apply
Entrepreneurial commitment: this requires the venture to acquire an entrepreneurial champion committed to the development of the venture
Credibility: the entrepreneur lacks the commercial piece of the environment, which makes it harder to gain credibility or legitimacy
Sustainable returns: requires the spin-off to develop entrepreneurial competencies that enable the venture to reconfigure deficiencies from earlier phases into resource strengths, competencies and social capital

What is orchestration breadth?

The scope of the firm and hence the strategies it pursues

What about the depth of organization level?

In larger, established organizations the orchestration of managerial resources had been considered in terms of the relationship between top, middle and lower management

Conceptualize the speed of early growth of science-based firms as the time it takes for the assembly (or combined development) of the three types of critical resources:

A functionally diverse management team
Early fundraising
Development of technology

It is affected by assisted and unassisted paths, which lead to different speeds of development

What is organizational readiness for change?

The extent to which organization members have the attitudes, experience, perceptions and confidence to move forward with a change

Findings of the article about angel investors:

All three types of readiness are necessary to move the entrepreneurial new venture into the angel group decision-making process

What are the two primary causes of agency problems?

Conflicts in alignment and verification of goals
Conflicts in risk-sharing --> moral hazard and adverse selection

Moral hazard: the agent does not put forth the effort originally agreed upon in the contract
Adverse selection: principal can not completely observe and verify the skills or abilities when the agent is hired or whilst in his/her employment

What are the conclusions about VC's and BA's?

VCs are more rule-based and more concerned with reducing these risks in the pre-investment process as a means of signaling competence to their fund providers
BAs tend to place greater emphasis on ex-post investment involvement as a risk reduction method

Entrepreneur as trust-builder: What are the three factors in trustworthiness?

Ability: reputation, credentials, environmental cues
Benevolence: procedural justice, distributive justice
integrity: honesty, consistency in word & deed

Aspect of time: interaction frequency and relationship duration

Entrepreneur as trust-builder: conclusion

If entrepreneurs wish to increase the trust various stakeholders place in them, it is proposed that entrepreneurs should interact frequently with the stakeholders --> from this frequent interaction, the stakeholders perceive the entrepreneur as able and motivated to operate on their behalf in a risky situation

What is meant by trust (BA)?

The extent to which a person is confident in and willing to act on the basis of the words, actions, and decisions of another

The fuzzy front end of innovation comprises five main stages:

Research: corporate research
Invention: BA's, technology labs, small business innovation research
Early-stage technology development
Product development: venture capital, corporate funds equity, commercial debt
Commercialization

The business angel-entrepreneur relationship comprises three distinct stages:

Pre-investment
Contract negotiation
Post-investment

Information asymmetry between business angels and entrepreneurs

Agency risk: refers to the possibility that entrepreneurs behave opportunistically at the expense of business angels' interests
Market risk: the degree of uncertainty associated with gaining a competitive advantage, and depends on market size, competition, market accessibility and exit conditions
Execution risk: the uncertainty regarding the execution or implementation of the business model and business strategy, and depends on the challenges stemming from the execution of the product, service or business model

What is dilutive funding?

Capital exchange for shares: selling ownership of your company

What are non-dilutive fundings?

Loans, grants, subsidies, governmental loans, licensing, lease, vouchers, tax credit

Narratives: what are ongoing journeys?

Narrates projects as longer-term endeavours powered by creative initial ideas a bold visions, inviting audiences to join the journey (Vertelt projecten als inspanningen op de langere termijn, aangedreven door creatieve eerste ideeën en gedurfde visies, waarbij het publiek wordt uitgenodigd om deel te nemen aan de reis)

Narratives: what are results in progress

Narrates projects more narrowly as a progression of accomplishments, engaging the audience instrumentally to support next steps (Vertelt projecten nauwer als een opeenvolging van prestaties, waarbij het publiek instrumenteel wordt betrokken om de volgende stappen te ondersteunen)

What are crowdfunding campaigns?

A new practice of marketing and raising financial support for new projects of different kinds --> from a large group of individuals (crowd)

What are the drivers of narrative choice?

The tangibility of project outcomes
The sophistication of technology projects
Social orientation of projects

What are rhetorical appeals used for?

Are used to explain how language affects and audience --> bundles of rhetorical and substantive signals may have joint effects on financial resource contributions

What are the three types of rhetorical appeals?

Pathos (attention): stimulate the receiver's emotions and thereby attract the receiver's attention
Logos (elaboration): that convey information about a focal economic activity used to reduce activity-related information asymmetry
Ethos (attribution): that conveys information about the firm seeking resources, aiming to reduce firm-related information asymmetry

Information opacity (ondoorzichtigheid) how do you spot an opportunity?

Crowdfunding

Better platforms, more reach
Trust the wisdom of the crowds, invest or withhold?

P2P lending

Access of lenders to market

In states where individuals have higher distrust in banks, there is higher participation in funding P2P loans and the amounts committed to P2P loans are greater

Access of entrepreneurs to financing

Banking substitute: borrowers view P2P platforms as substitutes for banks

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Entrepreneurship & Finance

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