Early indicators of fundraising success by venture capital firms

with Timothy E. Trombley

Journal of Corporate Finance 65, full paper available here.

Abstract: In this paper, we show how a venture capital firm’s fundraising is affected by its investment choices. We investigate three leading indicators that are calculated from the types of investments the venture capital firms make: style drift investments, follow-on investments, and investments in which the venture capital firm is not the lead investor in the portfolio company. We find that these investment characteristics are associated with lower fundraising. Characteristics and the reaction of fundraising to characteristics are both moderately stable through time. We also find some evidence that information about investment characteristics is more important for fundraising during bad states of the world and that ex-ante characteristics are related to eventual exit outcomes and financial performance.

The impact of business accelerators and incubators in the UK

BEIS Research Paper Number 2019/009

with Jonathan Bone, Juanita Gonzalez-Uribe and Christopher Haley

  • The fast-developing ecosystem of accelerators and incubators has positive effects on startups and the wider economy.
  • Most startups (over 60%) consider the contribution of the incubator or accelerator they attended to have been significant or even vital to their success.
  • Of startups surveyed, 75% perceived direct funding as very useful, followed by office space (59%) and lab space or technical equipment (58%).
  • Our research revealed the large diversity of accelerator and incubator programmes in the UK, both in terms of support offered to startups and their impact.
  • Impact of such programmes is mainly generated by the direct funding offered through these programmes and help with the formation of entrepreneurial teams, although many other channels exist.
  • Our findings suggest levers for public policy to support startups in the UK through accelerators and incubators. However, there is no size that fits all because programmes often target specific types of startups.

The report is available from the Department for Business, Energy & Industrial Strategy.

The Pecking Order of Innovation Finance

with Andrea Mina; available at SSRN.

Abstract: This paper examines the relationship between firms’ innovation activities and the hierarchy of financing behaviours. We analyse the role of innovation inputs (R&D), intermediate outputs (patents) and outcomes (product and process innovations) as sources of information asymmetry in financing decisions. Our focus on mainly unlisted companies allows us to study the effects of information asymmetries in the context where they are most severe, that is, among small and medium sized firms. We identify the effect of innovation, alongside the size of the firm, its age and its human capital, on the order of directly observed external capital allocations. Our results show that innovation is negatively associated with the standard pecking order of increasing agency costs, and that the more uncertain the innovation signal, the stronger its effect on the pecking order.

Inflating away your pension

As a result of their negotitations on the future of UK university pensions, which I have written about previously, the University and College Union (UCU) and employers represented by Universities UK (UUK) announced an agreement on 12 March 2018. The main points of the agreement are:

  • Change the accrual rate from 1/75 to 1/85 per year of service
  • Increase employee contributions from 8% to 8.7%
  • Cap the increases of accrued pensions at CPI up to 2.5% p.a.

While the effect of the first two changes on the value of future pensions is relatively straightforward to analyse, the effect of the inflation cap is not obvious. In the first attempt to model the effect of this proposal that I am aware of, Richard Wilkinson finds a substantial real-terms loss to pensions if inflation history exactly repeats the last 40 years. The figure below shows the annual inflation rate since 1976, the year after the University Superannuation Scheme (USS) was founded, and the proposed inflation cap at 2.5%. Continue reading

Early Indicators of Fundraising Success by Venture Capital Firms

with Timothy E. Trombley

This working paper is available at SSRN.

Abstract: We show how a venture capital firm’s fundraising is affected by its investment choices. We investigate three leading indicators that are calculated from the type of investments the venture capital firms make: style drift investments, follow-on investments, and investments in which the venture capital firm is not the lead investor in the portfolio company. We find that these investments are associated with lower fundraising. Investment type and fundraising reaction to investment type are both moderately stable through time. We also find evidence that information about investment types is more important for fundraising during bad states of the world.