Dzidziso Samuel Kamuriwo

Venture Capital Contracting in Theory and Practice: Implications for Entrepreneurship Research

This article provides a comprehensive theoretical and empirical literature review of venture capital contracts. This outlines the differences between theoretical and practical uses of contract designs; that is, (1) how does the choice of securities give rise to different adverse selection problems in terms of attracting different types of entrepreneurial companies; how does the choice of securities in conjunction with cash flow and control rights provisions affect (2) the effort levels by the entrepreneur and the investor; and (3) ultimately affect entrepreneurial outcomes. This article highlights the major discrepancies between theory and practice and points out potential avenues for further research.

Entrepreneurial finance: new frontiers of research and practice

Abstract The proliferation of new sources of entrepreneurial finance potentially makes it easier for ventures to raise capital and grow. To date, entrepreneurial finance literature has developed a rich tradition of research on venture capital and angel finance. However, the emergence of “new” sources of finance, such as crowdfunding and the limited attention paid to “traditional” debt financing and financial bootstrapping, offers opportunities to explore, from different points of view and theoretical perspectives, the challenges that ventures face. The objective of this Special Issue is to explore these new and traditional sources of finance and suggest how these phenomena can extend entrepreneurial finance literature and guide new theory building. This paper outlines the new sources of entrepreneurial finance, and in comparing them with more traditional sources, we propose theoretical and empirical challenges that these new and traditional sources present to entrepreneurship scholars. We also provide a brief summary of papers in the Special Issue and outline promising avenues for future research.

Network Positions and the Probability of Being Acquired: An Empirical Analysis in the Biopharmaceutical Industry

This paper examines the relationship between the firms direct ties, its inter-firm network prominence and its likelihood of being acquired. The authors argue that firms direct ties and prominence enhance the firms visibility and signal its quality – and thus foster the firms likelihood of being acquired. However, higher levels of direct ties and prominence, by providing access to resources and the firms status, respectively, increase the firms ability to remain independent and thus reduce its likelihood of being acquired. Thus, the authors posit the overall relation as an inverted U-shaped. Furthermore, they show that, for firms that undergo an initial public offering, the aforementioned relation becomes much weaker. The hypotheses are empirically tested in the biopharmaceutical industry and important theoretical and managerial implications are discussed.

Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting

A venture capitalist (VC) needs to trade off benefits and costs when attempting to mitigate agency problems in their investor‐investee relationship. We argue that signals of ventures complement the VCs capacity to screen and conduct a due diligence during the preinvestment phase, but its attractiveness may diminish in institutional settings supporting greater transparency. Similarly, whereas a VC may opt for contractual covenants to curb potential opportunism by ventures in the postinvestment phase, this may only be effective in settings supportive of shareholder rights enforcement. Using an international sample of VC contracts, our study finds broad support for these conjectures. It delineates theoretical and practical implications for how investors can best deploy their capital in different institutional settings while nurturing their relationships with entrepreneurs.

Mitigating agency risk between investors and ventures’ managers

The general management literature has long focused on the agency risks involved in the relationship between general managers and shareholders. Shareholders can deploy contractual and noncontractual mechanisms to reduce these inefficiencies. This study examines—based on a broad international sample of investment contracts—how the use of contractual and noncontractual mechanisms is related to the degree of risks associated with the venture’s development stage as well as how these practices differ across countries. Hypotheses are tested using a proprietary data set of 265 hand-collected investment contracts associated with ventures in the United States, Israel, and nine European countries. Findings suggest that the use of mitigating contractual and noncontractual mechanisms is related to the degree of agency risks and that these practices vary across countries. This study draws implications for how investors can best deploy their capital in different institutional settings while nurturing their relationships with managers and entrepreneurs.

Sparrow Therapeutics Exit Strategy

The case focuses on Ken Powers, cofounder and chief executive officer of Sparrow Therapeutics, whose young biotechnology company has reached a critical stage where he has to decide whether or not to sell. The companys three main sets of investors have different priorities: (1) a quick cash sale now, (2) delay sale for about a year if returns are greater, and (3) delay sale for 2 years, build company value, and retain autonomy. What choice would be best for the company, for its investors—and for Ken himself? And when would be the best time to implement the exit strategy?

Note to instructors: Sparrow therapeutics exit strategy

The case focuses on Ken Powers, co-founder and CEO of Sparrow Therapeutics, whose young biotechnology company has reached a critical stage where he has to decide whether or not to sell. The company’s three main sets of investors have different priorities: (1) a quick cash sale now (2) delay sale for about a year if returns are greater and (3) delay sale for two years, build company value and retain autonomy. What choice would be best for the company, for its investors and – and for Ken himself? And when would be the best time to implement the exit strategy?