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Handbook of Research on Venture Capital

Edited by Hans Landström

This Handbook provides an excellent overview of our knowledge on the various facets of managerial venture capital research. The book opens with a thorough survey of venture capital as a research field; conceptual, theoretical and geographic aspects are explored, and its pioneers revisited. The focus then shifts to the specific environs of venture capital.
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Chapter 10: An Overview of Research on Early Stage Venture Capital: Current Status and Future Directions

Annaleena Parhankangas


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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