Equity financing of technology-based firms in Ireland

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Power, Jane Ellen
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University College Cork
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This thesis investigates the financing of technology-based firms in Ireland, with an emphasis on equity, using novel data gathered through fieldwork methods with 153 equity and 141 non-equity financed firms. Equity finance is key in assisting technologically-intensive firms to overcome financial and resource constraints that potentially hinder their development. In Ireland, between 2003 and 2015, venture capital and private equity funds invested €5billion in Irish SMEs and, through syndication, attracted a further €3billion from international investors (IVCA, 2016). Even though it is recognised that equity finance plays a vital role in job creation, export growth and innovation, as it targets innovative, high-growth companies that can be scaled internationally, there is little rigorous demand-side research that examines the determinants and impact of equity. This thesis addresses this gap, making a number of contributions to the literature. We begin with an in-depth profile of Irish technology-based firms. This details general characteristics (i.e. age, size, industry), the entrepreneurs behind these firms and financing patterns over distinct stages in the lifecycle. Additionally, an exclusive profile of equity investment is provided, describing the types of equity investors financing Irish technology-based firms, features of investment (for example, geographic proximity, co-investment, security selection), along with a unique account of entrepreneurs’ perspectives on equity (for example, non-financial benefits, risk sharing, loss of control). Comprehensive data of this kind does not currently exist, and is particularly lacking in the Irish context. Adopting a broad definition of equity, encompassing venture capital, angel and government-sponsored funding, and examining the impact of a multifaceted range of factors, from attributes of the firm’s market/product to innovation, human capital, and financing, the empirical analysis expands on extant demand-side research, which focuses predominantly on venture capital and a narrow set of signals in isolation, to provide new evidence on determinants of equity financing. Results indicate that market rivalry, exports, innovation, R&D, education and experience of the founder and workforce, and the entrepreneur’s financing preferences are significant factors. We also find that family and friends’ investment represent a positive signal, while the opposite is the case for debt. This original evidence may be used to cultivate and enhance access to equity finance, and facilitate entrepreneurs’ investor readiness attempts. Disentangling the determinants of equity, multivariate probit models (with Heckman correction for sample selection) explore whether determinants differ according to source of equity (angel, venture capital, government-sponsored), stage of the lifecycle (seed, early-growth, expansion) and given the relationship between the sources. Results indicate that, for angel financing, commitment (founder, family, friends’ investment) and human capital are particularly noteworthy determinants. Larger firms occupying a market niche, with greater export activity, product differentiation and patents are more likely to obtain venture capital. For government-sponsored equity, it is found that non-equity sources of finance (founder, family/friends’ during the seed and early-growth stages and debt at expansion) along with R&D activity are significant right across the lifecycle. Given the obvious gap in the literature, new evidence is also presented on the extent to which these sources act as complements or substitutes to each other in financing technology-based firms. At early-growth, we find a substitution effect with seed stage funding. Moving to expansion, results were mixed. Between the sources, prior angel funding complements subsequent private equity (i.e. angel and venture capital). Within the sources, however, the relationship appears to be of substitutes. Detailed empirical evidence of this kind does not currently exist and, as such, this thesis offers unique insight into the determinants of and relationship between the sources of equity. Lastly, the novel data collected also allowed us to investigate the ways in which equity financing impacts on funded firms. In terms of performance, we provide new evidence that not only adopts a broad definition to compare the performance of equity with non-equity financed firms, but also new data by source of equity. We find that equity financed firms have a higher number of patents and higher growth (asset and employment) rates. As to impact according to source, venture capital significantly (positively) impacts on patenting. As regards entrepreneurial exit, entrepreneurs within non-equity financed firms are more likely to develop a plan for their own exit. Furthermore, results indicate that entrepreneurs with equity investors are more likely to expect to pursue a financial harvest exit strategy (i.e. IPO or acquisition) and it is the presence of private equity (angel and venture capital) that impacts this choice. By showing how the presence of equity financiers impacts on entrepreneurial exit decision we provide novel evidence in a particularly underdeveloped area.
Lifecycle , Equity financing , Technology-based firms , Determinants of equity , Impact of equity
Power, J. E. 2020. Equity financing of technology-based firms in Ireland. PhD Thesis, University College Cork.