Financing Biomedical Ventures - Myths and Realities

Angel funding is an important source of capital for startup ventures (J. Sohl 2019), providing a similar level of capital as institutional venture capital (OECD 2011). But angel funding is challenging to study due to the informal nature of the activity. A common paradigm for new venture funding argues that new ventures initially fund their activities with angel investment and then, as they show success, make progress to commercialization and de-risk core venture propositions, ventures transition to more professional institutional (venture capital) funding. A belief in this paradigm can strongly influence early venture creation activities, and assumptions about the later availability of capital from institutional venture capital underpin many startup business plans. However, the literature exploring this phenomenon is very sparse, and the question of the relationship of angel to venture funding transition has rarely been studied. By analyzing a large and robust dataset, this thesis advances the understanding of the actual behavior of investors and the impact this early behavior, and the funding choices involved, have on company outcomes. This thesis also explores a novel form of venture investing and places it into a broader context of new venture funding that may help explain some of the key observations discussed. These fundamentally empirical studies examine the nature/reality of important entrepreneurial phenomena of interactions between angel and venture funding in novel ways, pose questions, and identify a set results that point to a potential market failure. Attempts are made to understand these results and place them into the contexts of both research theory and a broader understanding of entrepreneurial behavior; there certainly remain a set of unanswered questions and potential fruitful directions for future research.

Signaling and Self-regulation in Venture Capital

Giovanni Liotta

This thesis proposes three studies that provide novel empirical evidence on how different types of VCs' characteristics signal the quality of an entrepreneurial venture and influence investment strategies of funds subject to self-regulation. In the first study we aim at contributing to the ongoing debate on the different effects of reputation and status on organizational outcomes. We explore the signaling value that these two organizational attributes exert on external parties judging the quality of entrepreneurial ventures under uncertainty. Moreover, we examine whether signaling mechanisms are valuable only if the external parties are affected by high information asymmetry with the valued venture. We test our hypotheses using a sample of 1,339 U.S. clean technology ventures that received the first round of Venture Capital (VC) between the years 1990 and 2012. We look at their ability to gather supplemental financial resources for survival and growth by completing an Initial Public Offering (IPO) or an acquisition by an incumbent firm. The findings indicate that VCs' reputation - an economic attribute based on past performance - can signal a venture's quality externally, while VCs' status - a social-standing attribute - does not have signaling value. The results also show that quality signals are more relevant for public investors at IPOs than for managers of acquiring companies. The second study looks at how inter-organizational ties with reputable VCs affect valuations received by entrepreneurial ventures that go public. I propose that the signaling effect of reputable VC ties is lower when there is misalignment of strategic interests between the venture and the VCs. I consider the amount of shares sold by insiders in the initial public offering (IPO) and investors' enforcement of demand registration rights as elements indicating misalignment of interests with the venture. The hypotheses are tested on using a sample of 86 IPOs in the main U.S. stock exchanges completed by entrepreneurial ventures operating in the Clean Technology sector. The results suggest that affiliation with reputable VCs elicits a positive response by public investors. However, public markets react less favorably to ties with reputable VCs when they sell large amount of their shares in the IPO or resort to demand registration rights to force the public offering of their shares. The third study investigates organizations' use of self-regulation as form of symbolic response to normative pressure that does not necessarily entail compliance in practices. I argue that, when self-regulatory initiatives are not supported by an explicit regulatory environment, opportunistic organizations might reduce their efforts to align with the normative ideals through compliant actions and behaviors. The "walking of the talk", which is the implementation of actions that are aligned with the symbolic response, might also be discouraged by alternative means to obtain organizational legitimacy, such as through an organization's status. The hypotheses are tested on a sample of Venture Capital (VC) funds whose limited or general partners voluntarily decided to join the United Nations' Principles of Responsible Investment (UNPRI, 2006) initiative between 2006 and 2014. The results from a difference-in-differences estimation show that VC funds' likelihood to invest in clean technology companies is lower after funds' stakeholders (i.e. general or limited partners) join the UNPRI initiative. I also find that the likelihood to invest in clean technologies after self-regulation is negatively moderated by the VC fund's status.

EPFL2016

Essays on the Role of Policy and Venture Financing in Clean Technology Innovation

Matthias David van den Heuvel

This thesis aims to provide novel analyses and data that improve the understanding of the financing of investments in clean technologies. In particular, this thesis explores the role that private and public actors play in supporting young innovative firms. The first chapter of this thesis exploits original data on about 1000 startups that have participated in Venture Kick, the leading Swiss venture competition. We study the circumstances under which venture competitions' certification and cash prize impact startups' future survival and funding prospects. On the one hand, we observe that the certification only has a significant effect on startups whose quality can be more objectively assessed by experts (e.g., hard sciences startups). On the other hand, we find that the competition's cash prize only extends the runway of startups with low running costs (e.g., internet & mobile). These results highlight industry-specific heterogeneity in the effect of early-stage startup support, which bears implications for the design of entrepreneurial programs.The second chapter takes a step back and looks into the role of two prominent actors involved in financing new clean technologies: venture capital (VC) and governments. This essay examines the reasons behind the failure of the VC boom in clean energy startups in the early 2010s. We find that lackluster demand for clean energy products and a lower potential for outsized returns make clean energy firms less attractive to VC than startups in ICT or biotech. Conversely, characteristics such as high-capital intensity or long development timeframe seem to be less important. These findings suggest that the most effective way for governments to improve the attractiveness of early-stage clean energy investments is to implement demand-side policies rather than to provide direct financial support. With demand-side policies in place, governments could then try to plug the remaining funding gaps themselves by targeting startups with limited potential for outsized returns.In the second half of this thesis, the focus shifts onto governments' environmental policies and how they affect private investments in clean technologies. In the third chapter, we develop novel news-based indices of US environmental policy using text-mining techniques. We show that our general environmental policy index and sub-topic indices (e.g., renewables or climate negotiation) meaningfully capture the evolution of environmental policy in the United States. Using these indices, we find that greater salience of environmental policy is associated with increased VC investments in clean technologies and reduced stock returns for high-emissions firms. In the fourth and last chapter, we study the impact of policy uncertainty on private investment decisions. To do so, we construct a novel index of environmental policy uncertainty (EnvPU). This index reveals that uncertainty is pervasive in the history of environmental policy and is often synchronized with election cycles. We find that increases in our EnvPU index are associated with lower VC investments in cleantech startups and higher volatility in green firms' stocks. The findings from Chapters 3 and 4 suggest that, while the increased salience of environmental policy can boost investments, policymakers should ensure that their actions do not exacerbate policy uncertainty and hinder investments towards a low-carbon economy.

EPFL2022

Creating Exploratory Innovations by Learning from Entrepreneurial Ventures

Anu Wadhwa

Corporate venture capital (CVC), direct minority equity investments made by established companies in privately held start-ups, has become an important strategic tool for many large companies. In particular, firms often pursue CVC investing as a way to learn about novel technologies. Although CVC investments are inherently exploratory and have been found to enhance investing firm’s innovation, research has yet to establish whether CVC investing leads to the development of exploratory innovations (i.e., innovations that embody knowledge that differs from knowledge used by the firm in prior innovation efforts). In this paper, we explore the conditions under which CVC investments lead to the creation of exploratory knowledge by corporate investors. Building on insights from the recombinatory search and interorganizational learning literatures, we argue that three characteristics of an investing firm’s portfolio of start-ups will enhance its creation of exploratory knowledge. Using longitudinal data on a panel of 40 telecommunications equipment manufacturers, we find that investing firms produce more exploratory knowledge when their portfolios include start-ups that are moderately diverse, mature, and possess codified technological knowledge.