Essays in entrepreneurship: overcoming financing constraints

Abstract

This collection of essays investigates how institutions like venture capital andpublic policy may facilitate starting and developing businesses. In Chapter 1, I study the impact of venture capitalists’ effort on their portfoliocompanies compared to no involvement. I examine two new empirical measures, one is the management score, the other is the organizational-capital-to-asset ratio. The main finding is that after controlling for observables, venture-funded firms have a higher management score. Moreover, they have higher sales and employment growth, but use less organizational capital. This chapter demonstrates that venture capitalists’ effort improves firms’ productivity by increasing management efficiency. In Chapter 2, I propose a new general equilibrium model that explains observationsof Chapter 1 and additional observations. Venture capitalists can help increase firms’ productivity, yet they face increasing entry costs to enter. I characterize steady state effort choice, entry threshold, and mass of venture capitalists, and show how they are affected by change in upfront investment, interest rate, and entry costs. The key contribution is that public policy to stimulate startups by subsidizing upfront investments or reducing interest cost have limited success if not accompanied by an increasing supply of experts who can improve business ideas. In Chapter 3, I conduct a policy exercise about how much the introduction of aNorwegian-sized lottery sector to the United States would affect startups. The key results are that public cash transfer programs (like lottery) do not increase much the number of new startups, but increase the size of startups, and only modestly increase aggregate productivity and output. The most important factor for entrepreneurs to start new businesses is their ability.