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Self-selection of entrepreneurial firms in thin venture capital markets : Theory and empirical evidence

Author

Listed:
  • Fabio Bertoni

    (EM - EMLyon Business School)

  • Diego d'Adda

    (UNIVPM - Polytechnic University of Marche [Ancona, Italy] / Università Politecnica delle Marche [Ancona, Italia])

  • Luca Grilli

    (POLIMI - Politecnico di Milano [Milan])

Abstract

Research Summary: We develop a two-step selection model between entrepreneurial ventures and venture capital (VC) investors in a thin VC market. The model predicts that in a thin VC market, the availability of VC reduces the propensity of firms to self-select into the market for VC (demand-side selection) but not the probability that firms entering the market for VC will receive financing (supply-side selection). We test these predictions using survey-based data on 190 new technology-based firms in Italy during the late 1990s and early 2000s. The empirical evidence supports the predictions of the model. Managerial Summary: Venture capital (VC) is an important ingredient of an environment that is conducive to the birth and the growth of entrepreneurial ventures, but VC markets are often highly local and thin in terms of participants. We show that the scarcity of VC supply may cause a drop in the demand for VC because entrepreneurs, anticipating that competition for VC money will be tough, will not seek VC in the first place. The more a market is thin, the more the demand-side selection is likely to become more important than the supply-side selection of VC investors. Demand-side selection may involve a significant number of otherwise good targets for VC investment, which will not be in the radar of VC investors. In turn, this may deter new VC investors from entering the local market, thus creating a vicious cycle that raises concerns for both policy makers and VC general partners.

Suggested Citation

  • Fabio Bertoni & Diego d'Adda & Luca Grilli, 2019. "Self-selection of entrepreneurial firms in thin venture capital markets : Theory and empirical evidence," Post-Print hal-02312106, HAL.
    • Handle: RePEc:hal:journl:hal-02312106
    DOI: 10.1002/sej.1280
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    Citations

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    Cited by:

    1. Bakyt Beknazarov & Roza Niyazbekova & Ussen Amirseitov & Aiganym Kokenova & Marzhan Daurbayeva & Madina Aitkazina, 2020. "Development of entrepreneurship and forms of self-employment in the innovative sectors of the economy," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(2), pages 209-228, December.
    2. Enrico Forti & Serena Morricone & Federico Munari, 2021. "Litigation risks and firms innovation dynamics after the IPO," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(2), pages 291-313, June.
    3. Somaya, Deepak & You, Jingya, 2024. "Scalability, venture capital availability, and unicorns: Evidence from the valuation and timing of IPOs," Journal of Business Venturing, Elsevier, vol. 39(1).
    4. Lohwasser, Todor S., 2020. "Meta-analyzing the relative performance of venture capital-backed firms," Discussion Papers of the Institute for Organisational Economics 4/2020, University of Münster, Institute for Organisational Economics.
    5. Vera Rocha & Luca Grilli, 2024. "Early-stage start-up hiring: the interplay between start-ups’ initial resources and innovation orientation," Small Business Economics, Springer, vol. 62(4), pages 1641-1668, April.
    6. Giraudo, Emanuele & Giudici, Giancarlo & Grilli, Luca, 2019. "Entrepreneurship policy and the financing of young innovative companies: Evidence from the Italian Startup Act," Research Policy, Elsevier, vol. 48(9), pages 1-1.
    7. Kyounghun Lee & Frederick Dongchuhl Oh & Donglim Shin & Heejin Yoon, 2023. "Does venture capital investment enhance corporate innovation? Evidence from Korea," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(1-2), pages 236-266, January.

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