Chapter 10: An Overview of Research on Early Stage Venture Capital: Current Status and Future Directions
Annaleena Parhankangas1 Introduction Entrepreneurship can be seen as an engine of innovation and growth, and a provider of economic and social welfare (Schumpeter, 1934; Birch, 1979; Birley, 1986; Kortum and Lerner, 2000). Entrepreneurs developing revolutionary new products require a substantial amount of capital during the formative stages of their companies’ life cycles. Even though most entrepreneurs prefer internal to external funding, few entrepreneurs have suﬃcient funds to ﬁnance early stage projects themselves. It is also at this stage of development, when collateral-based funding from banks, the second most preferred source of funding by entrepreneurs (Myers, 1984), is often inappropriate or even potentially lifethreatening to the new ﬁrm (Gompers, 1994; Murray, 1999). Therefore, the alternative provision of venture capital has become an attractive source of ﬁnance for potentially important companies operating on the frontier of emerging technologies and markets (Tyebjee and Bruno, 1984; Bygrave and Timmons, 1992; Murray, 1999). However, the management of early stage venture capital investments has proved to be challenging. Early stage investors are obliged to deal with multiple sources of uncertainty spanning the commercial, technical and managerial aspects of the new enterprise (Storey and Tether, 1998). Early stage investments typically involve new products targeted to nonexisting markets developed by management teams with little or no prior history, exposing investors to signiﬁcant information asymmetries (Chan, 1983; Amit et al., 1990; Chan et al., 1990; Sahlman, 1990; Amit et al., 1998). In addition, it will usually take several years to transform an early stage company to a...
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