Based on research from Pierluigi Martino, PhD, Greg Bell, PhD, Abdul A. Rasheed, PhD, and Cristiano Bellavitis, PhD.
From venture capital and angel investors to crowdfunding and initial coin offerings.
New sources of entrepreneurial finance not only offer entrepreneurial firms new opportunities to access capital, but also present new governance challenges as they bring a variety of new investment goals, investment approaches, and business models of entrepreneurial financing.
This study examines the governance implications of traditional sources of entrepreneurial finance along with recent innovations in entrepreneurial finance include crowdfunding and ICOs. These new sources of entrepreneurial finance not only offer entrepreneurial firms new opportunities to access capital, but also present new governance challenges as they bring a variety of new investment goals, investment approaches, and business models of entrepreneurial financing.
Key Points
- Entrepreneurial finance includes a wide array of sources of capital, such as venture capital (VC),angel investors, equity, and debt finance, along with new forms of financing through crowdfunding and initial coin offerings (ICOs).
- New ventures often receive financing from multiple sources. Yet, investors differ in terms oft heir objectives, risk-bearing capacity, and time horizons, as well as in their motivation and ability to monitor the firms in which they invest.
- There are a host of governance challenges associated with each source of entrepreneurial finance and the mechanisms that are employed to mitigate these challenges
What the Research Shows
- The fintech revolution, enabled by new digital technologies, has led to the development of new financial alternatives for seeding entrepreneurship. The most prominent examples of such innovative forms of entrepreneurial finance are crowdfunding and initial coin offerings (ICOs).
- However, both crowdfunding and ICOs are characterized by asymmetric information, which entails potentially substantial agency costs for investors due to the adverse selection and moral hazard problems.
- Crowdfunding and ICO markets also suffer from a low degree of regulation compared to other sources of entrepreneurial finance.
- The minimal regulation binding crowdfunding and ICO assets and the fact that these assets are traded on portals that are also not bound by regulation expose investors to market manipulation.
- The development of capital market-based governance mechanisms, such as active secondary markets for the shares, could help in reducing moral hazard problems in both crowdfunding and ICO markets.
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Based upon the following peer-reviewed manuscript: Martino, P., Bell, G., Rasheed, A. A., & Bellavitis, C. (2022). Entrepreneurial Finance and Governance. In Oxford Research Encyclopedia of Business and Management.