Better investment decisions for venture capitalists

May 25 2022
Research

In order to better substantiate investment decisions for start-ups, you need to take a closer look at previous sources of financing. This brings investors and entrepreneurs closer together and helps innovative entrepreneurs to get financing and growth faster. This is what Job Andreoli has concluded, who has been awarded a PhD today by Nyenrode Business Universiteit for his research "Entrepreneurial Finance: towards determinants for early-stage investments".

Andreoli hopes that investors and entrepreneurs can find each other more easily. "The natural distance must be reduced, so that they can make better investments and entrepreneurs can have more opportunities to develop promising initiatives. Capital is not only in money, but also in investors’ involvement through their knowledge, network, and experience."

Search for common ground

In the scientific literature on venture capital for start-ups, a lot of attention is paid to the fact that entrepreneurs and investors each have their own goals and priorities and still know too little about each other. This is particularly problematic for start-ups because they are riskier: their proposition is still under development and they still have limited market validation. At the same time, it is precisely these start-up companies that are of great social importance, due to their proven contribution to economic growth and innovation. Therefore, the financing of their business requires special attention, and it is important to look for a common basis for investor and entrepreneur.

Smarter and better investment selection

At the moment, investors mainly look to the entrepreneur and the company to value an investment.  Regarding the entrepreneur, he looks at elements such as resume, experience, and background; and in relation to the company, it is about competition, the business plan, the industry, and market size. The lack of empirical data limits the possibilities now to assess the investment on these two elements.

Development from private to public

Andreoli states that a third category should be added, namely prior funding sources. Forms for early phase financing have been developing enormously in recent years. "In addition to traditional forms of private financing such as Business Angels and Venture Capital, new forms of financing for start-ups are increasingly emerging. Think of crowdfunding and ICOs (Initial Coin Offering/Blockchain based funding) which can be used at an early stage.

It is striking that, unlike traditional forms of financing, these forms of financing are not private but public. They are part of Entrepreneurial Finance, but not private. And that creates a different signal value for the next investor. The investor no longer comes to the entrepreneur, but the entrepreneur shares his or her idea on a platform to recruit investment. This information can help in deciding whether to invest capital and thus increase return on investment for investors and society."

Promoting growth and inspiration

With his research, the PhD candidate wants to contribute to investing in promising and innovative initiatives and thus promoting economic growth. "The investment market is growing and is crucial for global economic development. Certainly the creation of new jobs takes place mainly through new initiatives and innovation, as well as employee inspiration and participation, much more than from and in the established corporate world."

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