PhD Andy Heughebaert

209 Pages·2013·1.23 MB·English

Entrepreneurial financing decisions,
venture capital ownership and
bargaining power.

Andy Heughebaert
2013

Supervisor: Prof. Dr. Ir. Sophie Manigart

Submitted to the Faculty of Economics and Business Administration (Ghent University,
Belgium) in fulfillment of the requirements for the Degree of Doctor in Applied Economic
Sciences.

Research funded by the Flemish Policy Research Center for Entrepreneurship and
International Business (STOIO), the EU VII Framework Programme (VICO, Contract
217485) and Belspo (Project TA/00/41 Toegang tot financiering voor kmo's: jonge,
groeigeoriënteerde ondernemingen en bedrijfsoverdrachten (SMEPEFI)).
Doctoral Jury
Prof. Dr. M. De Clercq (Ghent University, Dean-President)
Prof. Dr. P. Van Kenhove (Ghent University, Academic Secretary)
Prof. Dr. Ir. S. Manigart (Ghent University and Vlerick Business School, Supervisor)
Prof. Dr. F. Bertoni (EM Lyon Business School, France)
Prof. Dr. A. Schwienbacher (Université Lille Nord de France and Skema Business School
Lille, France)
Prof. Dr. T. Vanacker (Ghent University)
Prof. Dr. H. Vander Bauwhede (Ghent University)

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Acknowledgements
As I’m writing down this acknowledgement section, I realize that this PhD dissertation has
come to an end. Finally I must admit, as the last year required a significant, additional effort
to bring this dissertation to a good end! However, it is also often argued that the duration of
deferral determines the level of satisfaction. Well for this reason, I consider myself also lucky
at this moment that I feel probably more satisfied and also more grateful that I finally
achieved the degree of Doctor in the Applied Economics. In fact, this title still sounds a little
bit odd to me and if I remember well the speeches of the Dean during former PhD defenses
claiming that this is “the highest degree possible that can be obtained at the university” it feels
even more odd to me!
Anyway, in this acknowledgement section, I would like to thank all the people who assisted
and supported me during my PhD research. The fact that I really enjoyed doing research as I
did over the past five years always kept me motivated and I fully realize that all of you were
an important contributor to this particular joy at work.
First of all, I would like to express my gratitude to Prof. dr. ir. Sophie Manigart. Sophie, I
really enjoyed working with you as my supervisor and I want to thank you truly for your
support, your feedback, your motivation and for stimulating me to participate at several
national and international conferences. Besides that, I should probably thank you most for the
chance you gave me to start this PhD and for the freedom you offered me to pursue my own
interests. For all those reasons, I’m truly grateful to you.
Secondly, I would like to thank the other members of my doctoral guidance committee: Prof.
dr. Armin Schwienbacher and Prof. dr. Tom Vanacker. Armin and Tom, thank you very much
for the time and energy you spent in reading my work and providing valuable comments.
Without these comments and suggestions, this work would never be what it is today. Tom,
when I first met you, we were colleague students sitting in the same class room. You ended up
as a member of my commission. This can only be explained in two different ways: or my
career has moved up rather slowly so far or you are an outstanding researcher. Luckily, it is
the second reason. Please keep up in the future with your excellent work as it will benefit the
work of my colleague-PhD students in the same way as it did for this dissertation. Further, I
also would like to thank Prof. dr. Heidi Vander Bauwhede and Prof. dr. Fabio Bertoni for
accepting the invitation to become part of my exam committee. Heidi and Fabio, I want to
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thank you both for your feedback in the final stage of this PhD dissertation. Ignace, as a head
of the department I would also like to thank you for the chance you gave to me to work in
such a great workplace.
I would also like to thank my colleagues who I worked with and my friends who have been
there for me over the years. In random order, I would like to thank Charlotte, Arnout, Katrien,
Kelly, Caroline, Bilitis, Debby, Sofie De Prijcker, Sofie De Schoenmaker, Sophie Hozée,
Lies, Veroniek, Michiel, Virginie, Stefaan, David, Evy and Jolien. Thank you for your
support and for being there! Ine, Annemie and Pieterjan a special word of thanks goes to you.
Ine, you were a colleague before the summer school in Madrid, you turned into a close friend
during that week in Madrid. Thank you for this friendship. Annemie, thank you for all the
times you’ve made me laugh and all the time I was privileged to spent with you. Although we
are different in so many ways, you are a true soul mate. Pieterjan, you introduced me to a
passion that we both share, the bike. I must admit that ‘our’ Merckx is now covered by dust
but I promise as from now on, I will give it again the full attention it deserves. Thank you also
for your support when I needed this the most, I owe you a lot! Finally, last but not least,
Sonia, I want to truly thank you for taking care of all the administration but also for the small
talks we had with each other during which I could forget for a while all asterisks (or rather
their absence), opposite signs and related difficulties with my research.
This research would not have been possible without the financial support of the Flemish
Policy Research Center for Entrepreneurship and International Business (STOIO) and the
Hercules Fund. I also acknowledge the financial support of the EU VII Framework
Programme (VICO, Contract 217485).
Finally, and most importantly, I would like to thank my family. Mom and dad, thank you for
supporting me. You always showed interest in what I was doing although I never could give
you a clear answer on the question of what I was exactly studying. During this PhD, you both
went to some hard times. However, I have never seen and probably never will see again two
people struggling back to a more or less normal life in such a courageous way as you together
did. Although you are surely proud that I obtained this degree, it is still a relatively small
achievement relative to what you achieved together. Thank you for being such great parents.
Els and Joeri, I would also like to thank you for the support. Though you are both working in
a totally different professional environment and moreover fully occupied by the kids, you
were always there for me, so thank you both! Lucas and Laure, I end this section addressing a
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few words to you. Once you’re old enough to comprehend what I have written down in this
section and further in this book, please remember that this degree is the result of dedication
and perseverance rather than being gifted with extraordinary talents. So, I hope this work may
inspire you to continue to work hard at school!

Andy Heughebaert
April, 2013

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Table of contents

List of Tables ............................................................................................................................. ix
List of Figures ............................................................................................................................ x
Executive Summary .................................................................................................................. xi
Samenvatting (in Dutch) ......................................................................................................... xiii
Chapter 1 Introduction ............................................................................................................... 1
1.1 Entrepreneurial companies ............................................................................................... 1
1.2 Entrepreneurial companies’ finance decisions ................................................................. 2
1.3 Adverse selection and moral hazard problems ................................................................. 3
1.4 The structure of VC finance ............................................................................................. 5
1.5 The unique characteristics of VC finance ........................................................................ 8
1.6 The impact of VC on entrepreneurial finance decisions. ............................................... 10
1.7 The datasets that are used in this dissertation ................................................................ 11
1.7.1 The dataset used in the first and second study ........................................................ 11
1.7.2 The dataset used in the third study .......................................................................... 15
1.8 Overview of the dissertation studies .............................................................................. 17
Study 1: The role of venture capital in company financial decision making ................... 17
Study 2: Institutional Frameworks, Venture Capital and the Financing of European
Entrepreneurial Companies .............................................................................................. 20
Study 3: Firm Valuation in Venture Capital Financing Rounds: the Role of Investor
Bargaining Power ............................................................................................................. 23
1.9 References ...................................................................................................................... 29
Chapter 2 The role of venture capital in company financial decision making ......................... 35
Abstract ................................................................................................................................ 35
2.1 Introduction .................................................................................................................... 35
2.2 Theoretical framework and hypotheses .......................................................................... 39
2.2.1. The effect of VC on finance decisions. .................................................................. 40
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2.2.2. The effect of VC on finance decisions from equity providers ............................... 43
2.2.3. The effect of VC on finance decisions from debt providers .................................. 44
2.3 Method ........................................................................................................................... 45
2.3.1. Data Sources and sample ........................................................................................ 45
2.3.2. Dependent Variables .............................................................................................. 50
2.3.3. Independent Variables ............................................................................................ 52
2.3.4. Control Variables ................................................................................................... 52
2.3.5. Econometric Approach ........................................................................................... 53
2.4. Results ........................................................................................................................... 54
2.4.1. Descriptive statistics ............................................................................................... 54
2.4.2. Controlling for self-selection in the VC-entrepreneur relationship........................ 57
2.4.3. The effect of VC ownership on entrepreneurial finance decisions ........................ 59
2.4.4. The impact of additional VC finance on entrepreneurial finance decisions .......... 64
2.4.5. Robustness tests ...................................................................................................... 69
2.5 Discussion and conclusion ............................................................................................. 70
2.6 References ..................................................................................................................... 72
Chapter 3 Institutional Frameworks, Venture Capital and the Financing of European
Entrepreneurial Companies ...................................................................................................... 78
Abstract ................................................................................................................................ 78
3.1 Introduction .................................................................................................................... 78
3.2 Theoretical Background ................................................................................................. 82
3.3 Hypotheses .................................................................................................................... 84
3.3.1 National Legal Systems and the Financing of Entrepreneurial Companies ........... 84
3.3.2 Venture Capital and the Relationship between National Legal Systems and the
Financing of Entrepreneurial Companies ......................................................................... 86
3.4 Method ........................................................................................................................... 89
3.4.1 Sample and Data Sources ........................................................................................ 89
3.4.2 Dependent Variables ............................................................................................... 93
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3.4.3 Independent Variables ............................................................................................. 94
3.4.4 Control Variables .................................................................................................... 95
3.4.5 Econometric Approach ............................................................................................ 97
3.5 Results ............................................................................................................................ 98
3.5.1 Descriptive Statistics and Correlations ................................................................... 98
3.5.2 Controlling for Selection Issues. ........................................................................... 103
3.5.3 Hypothesis Tests. .................................................................................................. 104
3.5.4 Robustness Checks. ............................................................................................... 112
3.6 Discussion and Conclusions ......................................................................................... 113
3.7 Appendix ...................................................................................................................... 115
3.8 References .................................................................................................................... 116
Chapter 4 Firm Valuation in Venture Capital Financing Rounds: the Role of Investor
Bargaining Power ................................................................................................................... 122
Abstract .............................................................................................................................. 122
4.1 Introduction .................................................................................................................. 122
4.2 Bargaining Power in Venture Capital Investments ...................................................... 124
4.2.1 Bargaining Power in the VC Investment Process ................................................. 124
4.2.2 VC Firm Types and Valuation ............................................................................. 126
4.3 Data and Sample Description ....................................................................................... 130
4.3.1 The Research Context .......................................................................................... 130
4.3.2 Sample ................................................................................................................... 132
4.3.3 Variables ............................................................................................................... 134
4.4 Analyses and Results .................................................................................................... 138
4.4.1 Bivariate Analyses ................................................................................................. 138
4.4.2 Variables Used in the Multivariate Analyses ........................................................ 143
4.4.3 Results of the Multivariate Regressions ................................................................ 148
4.4.4 Potential Impact of VC Selection .......................................................................... 153
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4.4.5 Robustness Checks ................................................................................................ 160
4.4.6 Alternative Explanations ....................................................................................... 161
4.5 Discussion and Conclusions ......................................................................................... 162
4.6 References .................................................................................................................... 167
Chapter 5 Conclusions ........................................................................................................... 171
5.1 Introduction .................................................................................................................. 171
5.2 Main findings ............................................................................................................... 172
5.3 Contributions and practical implications ...................................................................... 175
5.3.1 Contributions to theory .......................................................................................... 175
5.3.2 Contributions to the literature ............................................................................... 177
5.3.3 Practical implications ............................................................................................ 180
5.4 Limitations and avenues for further research ............................................................... 185
5.5 References .................................................................................................................... 189

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List of Tables

CHAPTER 1
Table 1.1 : Overview of the three dissertation studies

CHAPTER 2
Table 2.1 : Description of the sample
Table 2.2 : Descriptive statistics
Table 2.3 : Selection model estimating the probability of attracting VC funding
Table 2.4 : The effect of VC ownership on entrepreneurial finance decisions
Table 2.5 : The impact of repeated VC finance on finance decisions

CHAPTER 3
Table 3.1 : Description of the sample
Table 3.2 : Descriptive Statistics and Correlations
Table 3.3 : Regression models: Main effects
Table 3.4 : Regression models including VC interaction
Table 3.5 : Selection model estimating the probability of attracting VC funding

CHAPTER 4
Table 4.1 : Sample Description
Table 4.2 : Summary Statistics
Table 4.3 : Correlation Matrix
Table 4.4 : Multivariate OLS Regression Model Explaining Premoney Valuations
Table 4.5 : Multivariate OLS Regression Controlling for Potential Selection Bias
Table 4.6 : Probit Regression Modeling on Successful VC investments

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