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2020 | Book

Contemporary Developments in Entrepreneurial Finance

An Academic and Policy Lens on the Status-Quo, Challenges and Trends

Editors: Alexandra Moritz, Joern H. Block, Stephan Golla, Arndt Werner

Publisher: Springer International Publishing

Book Series : FGF Studies in Small Business and Entrepreneurship


About this book

More extensive regulations, new technologies, and new means of communication have significantly changed the financing landscape for startups and small to medium-sized companies (SMEs). This volume provides a contemporary research-based overview of the latest trends in entrepreneurial finance and outlines expected future developments. Starting with the status quo in market regulations and the financing structure of SMEs, it addresses a broad range of new financing alternatives for innovative startups (e.g. business angel financing, venture capital and corporate venture capital), as well as recent social phenomena (e.g. crowdfunding and initial coin offerings (ICOs)). Incorporating qualitative, quantitative and mixed analytical methods, the book contributes to a better understanding of the financing world by reflecting both the researcher’s and the practitioner’s perspective.

Table of Contents


Status Quo in SME Financing and Financial Market Regulation

European SME Financing: An Empirical Taxonomy
This study investigates financing patterns of European SMEs by looking at a large number of different financing instruments and their complementary and substitutive effects, using the SAFE dataset collected in 2015. We develop an empirical taxonomy of SME financing patterns in Europe to analyse SME financing, applying cluster analyses. Our cluster analysis identifies seven distinct SME financing types based on the financing instruments used: mixed-financed SMEs with focus on other loans, mixed-financed SMEs with focus on retained earnings or sale of assets, state-subsidised SMEs, debt-financed SMEs, trade-financed SMEs, asset-based financed SMEs and internally financed SMEs. Moreover, the SME financing types can not only be profiled according to their firm-, product-, industry- and country-specific characteristics but also to macroeconomic variables. Our findings can support policy makers in assessing the impact of changes in policy measures for SME financing.
Christian Masiak, Alexandra Moritz, Frank Lang
The European Capital Markets Union and its Impact on Future SME Financing
Small- and medium-sized enterprises (SMEs) are facing enormous changes in the European financial sector. A growing number of international businesses are being confronted with a shift in financing towards international sourcing opportunities. Thus, to make international capital markets more attractive to European SMEs, the European Commission is currently implementing 33 new measures (the European Capital Markets Union). The goal of these measures is to incentivise more capital market-based forms of financing. However, the question of whether these new measures will also lead to an effective improvement in new venture and growth financing has not been answered. Our article intends to fill this gap in the research literature by applying a mixed-method approach focussing on experts (interviews) and SME firms (survey). We find that the Capital Markets Union will by no means make regional banking systems superfluous with regard to future SME financing. We conclude that banks and capital markets can only contribute significantly to stabilising the European financial system by complementing each other.
Arndt Werner, Michael Torben Menk, Florian Neitzert
Innovation and Investment Finance in Comparison
This article compares the financing of innovation and investment in small- and medium-sized enterprises (SME). The central finding of the study is that the financing of these two types of projects differs substantially. Innovations are for the most part covered by internal funds. Other sources of funding play a subordinate role. For investments, on the other hand, both internal funds and bank loans play an important role. The study provides evidence that points to the existence of special restrictions for the external financing of innovations. For example, the share of bank loans only increases comparatively little as innovation expenditure goes up. In addition, the share of bank loans decreases as the share of R&D expenditure on innovation spending increases. This is in line with the consideration that special features of innovation projects, such as uncertainty about the success and asymmetric information between the firm and the potential outside investor combined with a lack of new assets to collateralise bank loans, counteract external financing. Financing restrictions are likely to lead to the innovation potential lying idle due to market imperfections. Working against it thus represents a permanent task of economic policy.
Volker Zimmermann
Trends in Financing Programmes for the Development of Micro, Small and Medium Enterprises (MSMEs) in Nigeria: A Qualitative Meta-synthesis
Financing programmes for micro, small and medium enterprises (MSMEs) in Nigeria assume different forms with different conditions tied to disbursement. The purpose of this research is to discuss the trends in financing programmes for the development of MSMEs in Nigeria using qualitative meta-synthesis. This method provides a rich analytical tool for understanding any subject of inquiry without in-depth evidence-based findings. This analytical technique integrates findings from previous studies on trends in financing programmes for MSMEs in Nigeria. To forestall biases in the selection of articles, the authors conducted a search on Google Scholar and similar databases for academic publications on the financing programmes in Nigeria. From over 100 publications generated by the databases, a sample of 38 relevant publications was selected. Other publications that did not specifically focus on Nigeria were used in the literature review to gain more insights into the discourse. The sampled publications with heterogeneous findings were systematically reviewed and synthesised as integrated findings explaining the trends in financing programmes for MSMEs in Nigeria. The findings reveal that the financing instruments available for MSMEs in Nigeria with different degrees of challenges include personal savings, loans from commercial and microfinance banks, co-operatives and other development financial institutions, business angel financing, intervention funding of venture capitalists, several government-led microenterprise funds, pension fund assets, sovereign fund wealth and Islamic financing. While crowdfunding or crowd equity funding is popular in developed economies, it is an emerging financing option in Nigeria. The chapter concludes with research implications, empirical limitations and suggestion for further research.
Lukman Raimi, Ifeatu Uzodinma

Entrepreneurial Finance from Established Risk Capital Providers

Research on Venture Capitalists’ and Business Angels’ Investment Criteria: A Systematic Literature Review
This systematic literature review of 54 articles investigates quantitative and qualitative studies published between 1974 and 2017 in terms of differences in investment criteria between venture capitalists (VCs) and business angels (BAs). Research has shown a persistent interest in examining VCs’ and BAs’ investment criteria; however, inconsistent findings demonstrate the need for a review of the aggregate extant knowledge. We clarify what is known about the controversial debate on VCs’ and BAs’ investment criteria and shed light on key issues that can lead to a better understanding of why VCs and BAs focus on certain investment criteria. To achieve these objectives, we develop a conceptual framework grounded on agency theory for investment criteria that VCs and BAs use for funding decisions. Our review reveals that VCs in the first instance focus on the business and financial traction, whereas BAs initially employ investment criteria related to the management team. These differences between VCs’ and BAs’ investment decision policies support the agency view. In addition, we propose a detailed path for future research and provide entrepreneurs with practical implications.
Christian Granz, Marisa Henn, Eva Lutz
Measuring Venture Capital Sentiment in Europe
Sentiment indices are widely used tools that are often used to predict market developments. However, only a few indices exist for venture capital (VC) markets, mostly specializing in certain regions or types of investors. This paper introduces a VC market sentiment index that is based on a survey of 379 European VC investors who are almost all decision-makers within their firms, such as partners or CEOs. Hence, it is possible to compare the expected VC market development across different European regions, as well as across industry focuses and investment stage focuses. Additionally, the introduced index allows for a separation between the perception of the market and the perception of the participants’ own funds and portfolios. This study aims to set the starting point for a sentiment index of the European VC market that will be repeated on a regular basis. The results of this index, or a modified version of it, will be published by the European Investment Fund’s Research & Market Analysis.
While overall European VC market sentiment is found to be very positive, investors consistently perceive their own businesses as more positive than the market. Later-stage investors perceive the market slightly more positively than seed/startup investors. Investors that focus on cleantech investments regard the market as worse than investors focusing on information and communications technology and Life Science but still relatively positive. VC investors that are located in the UK and Ireland show only a slightly positive sentiment. Their assessment of the market, especially compared to that of other European regions, is barely positive. On the other hand, they assess their own funds and portfolios comparatively positively.
Walter Diegel, Alexandra Moritz, Joern H. Block, Antonia Botsari, Frank Lang, Helmut Krämer-Eis
The Private Value of Patents for Government-supported Start-Ups: The Case of the European Investment Fund
The creation of value through innovation is among the defining traits of new technology-driven ventures. In this context, patents are an important signalling device to attract external financing. In this paper we contribute to the literature by investigating the value of innovations for start-ups supported by the European Investment Fund (EIF), through its venture capital (VC) instruments, in the years 1996–2014. The value of innovations is measured through patent applications and renewals. We employ an established econometric model to estimate the euro value of innovations based on patent renewal decisions. We find that start-ups in the life sciences hold, on average, the most valuable innovations. At the same time, we find compelling evidence that selection bias, causing less promising inventions to be excluded a priori from patenting, is pervasive across industries and/or regions of Europe. Implications for policy and research are discussed.
Simone Signore
In Which Regions Do Governmental, Independent, and Corporate Venture Capital Firms Invest? An Empirical Investigation across 402 German Regions
We analyze the distribution of venture capital (VC) investments across German regions and explore the geographical determinants of these investments. So far, little is known about the regional determinants of governmental (GVC), independent (IVC), and corporate (CVC) VC firms and about whether these types of VC firms invest in different regions. Combining a dataset of 402 German districts, our regressions show that regions with a higher supply of human capital and knowledge creators attract a significantly higher number of GVC investments. Moreover, we find a significant difference in economically weaker regions but do not find a metropolitan bias. Hence, GVC firms do not invest more frequently in rural regions per se and do not prevent regional disparities more often than other types of VC firms. The implications of these findings for high-tech firms and regional policy are discussed.
Christian Masiak, Christian Fisch, Joern H. Block
Playing with the Devil? Organizational Voids within Corporate Venture Capital Dyads
When acting as an intermediary, corporate venture capital (CVC) units must balance two different institutional settings: the rigid corporate world and the advancing startup ecosystem. As a result, CVC units are faced with multiple voids that influence their organizational orientation toward one environment. This study employs text analysis on a unique sample of 22 CVC dyads to introduce a novel empirical way of measuring isomorphic variation over time. Following a mixed-method approach, the quantitative results are used to shed light on potential drivers of isomorphism, compiled by semi-structured interviews. The findings demonstrate that the degree of isomorphism is not only determined by decisions made during the initial phase of a CVC unit but also from mimetic processes that occur within the life span of such investment vehicles. The study thereby contributes to the ongoing academic discussion by elucidating potential drivers of isomorphism and provides researchers with a novel way to measure isomorphic tendencies based on organizational text excerpts.
Patrick Röhm, Andreas Kuckertz

New Trends in Entrepreneurial Finance

Social Finance in Europe: The Transition from Grants to Follow-Up Financing for Social Enterprises
A large number of social enterprises (SEs) use grants as early-stage financing to establish their ventures. However, we know little about the requirements for SEs to receive grants and their follow-up financing opportunities. Based on an interview study with 13 European SEs, we show that SEs need to go through a resource-intensive application process to be able to receive a grant. To finally receive a grant, we find that nonfinancial aspects (e.g., involved people’s passion) and financial sustainability are the most important factors for convincing possible grant providers to finance an SE’s venture. Furthermore, based on signaling theory, we demonstrate that obtaining a grant increases the likelihood of finding follow-up investors. We suggest that further quantitative research should test our conceptual model, which is built on four propositions we formulate.
Mirko Hirschmann, Alexandra Moritz
Democratising Entrepreneurial Finance: The Impact of Crowdfunding and Initial Coin Offerings (ICOs)
Our article sheds light on two recent phenomena in the area of entrepreneurial financing, namely, crowdfunding and Initial Coin Offerings (ICOs). We investigate the main characteristics of the two alternative forms of entrepreneurial financing, their differences and coherences, reasons leading to their occurrence, their market relevance and legal aspects. Furthermore, we provide both an overview of the different motivations backers of the two phenomena have to support campaigns as well as the success factors for the campaigns. Due to their newness, both types are not devoid of risks and limitations which are also discussed. We state that crowdfunding and ICOs have many aspects in common and that a combination of both concepts may be optimal in their future development to overcome the current inefficiencies of crowdfunding or the shortcomings of ICOs. In summary, entrepreneurial financing is positively influenced by the two phenomena leading to a democratisation of financial possibilities for both entrepreneurs and backers.
Erik Ackermann, Carolin Bock, Robin Bürger
Is Crowdfunding Suitable for Financing German Public Research Organization (PRO) Projects?
So far, public research organizations (PROs) and universities in Germany are not benefiting from the manifold opportunities of crowdsourcing platforms and crowdfunding in particular. Crowdfunding may not only provide complementary financial resources for scientific projects, but it can also enhance the spectrum of science communication and facilitate the knowledge and technology transfer process. Consequently, scientists can use crowdfunding activities to stimulate the transfer of their knowledge to business and/or society to stimulate innovation. Nevertheless, it is a challenging task to apply the full spectrum of crowdsourcing instruments in PROs and universities. The crowdfunding literature rarely covers the untapped potential and challenges associated with crowdfunding for scientific institutions. In this conceptual paper, we provide approaches how PROs and universities can successfully acquire alternative financing, in particular from crowdfunding, and use it strategically. The aim is to provide solutions to pitfalls that may prevent researchers from exploiting crowdfunding in their “funding journey.” We introduce a model called “scientific cooperative crowdfunding” as a field for further research to explore how PROs and universities can use crowdfunding in a more comprehensive way during different stages of the knowledge and technology transfer process.
Valerie Daldrup, Oliver Krahl, Robin Bürger
Contemporary Developments in Entrepreneurial Finance
Alexandra Moritz
Joern H. Block
Stephan Golla
Arndt Werner
Copyright Year
Springer International Publishing
Electronic ISBN
Print ISBN

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