Fostering digital entrepreneurship from startup to scaleup: The role of venture capital funds and angel groups
Introduction
This study examines the role of venture capital (VC) funds and angel groups in explaining digital new ventures growth, with particular reference to two different stages: startup and scaleup. Recently, an increasing attention from both scholars and leading political institution is focusing on digital new ventures growth (European Commission, 2015). Digital new ventures relevance for research is evolving from just being a suitable empirical setting to a distinct and emergent filed in need of theorizing (Nambisan, 2017; Steininger, 2019). Literature using digital as empirical setting (and, as sub-component of the wider hi-tech sector) with the intent to capture innovative initiatives – considered to have a major impact on economic growth (Colombo and Grilli, 2005) – is being flanked by studies that are willing to move forward and push research into an original research field: Digital Entrepreneurship.
Digital Entrepreneurship includes those studies exploring and (possibly) theorizing on entrepreneurial processes, outcomes and agency transformed by digitization, or by rephrasing it as digital transformation of entrepreneurial processes, outcomes and agency (Nambisan, 2017). Digital technologies such as artificial intelligence, crowdfunding platforms, digital 3D printing, social media platforms, big data, cloud and mobile are originating a wide spectrum of opportunities leading to new ways of pursuing entrepreneurship (von Briel et al., 2018). Digital technologies enabled the creation of new entrepreneurial outcomes such as digital artifact (e.g. mobile apps) or digital platform as store of digital artifact (e.g. Apple store and Google store), and they are inherently different from other entrepreneurial outcomes in terms of speed of production and diffusion (Parker et al., 2016). Digitization of the entrepreneurial outcomes allows to introduce to the market “beta-version” to test and improve the value offered, thus emphasizing the experimental nature of entrepreneurial process, which for instance explains the success of the lean startup approaches (Ghezzi and Cavallo, 2018; Ries, 2011).
The entrepreneurial process is changing also with reference to the number agents involved, which can interact and exchange knowledge through enabling digital technologies. Entrepreneurial agency, which had historically been considered a matter of individual-opportunity nexus (Shane and Eckhardt, 2003), is now embracing a broader perspective, to reach a systemic or eco-systemic view (Cavallo et al., 2018b; Malecki, 2018).
In this regard, scholars in venture financing can be considered as precursors of such broader perspective, as they emphasized the relevance of external players as venture capital (VC) funds or angels which provided new ventures with funding. Within the field of entrepreneurship, a prominent attention has been dedicated to venture financing as a factor explaining growth (Hellmann and Puri, 2000; Davila et al., 2003). Relevant contributions argue how external funding may add value to portfolio companies by providing certification effect when coming from venture capitalist (e.g. Dimov and Shepherd, 2005; Puri and Zarutskie, 2012) as well as angels (e.g. Carpentier and Suret, 2015).
Nowadays, the equity funding landscape displays a great variety of sources (Drover et al., 2017). Newly emerged forms of investors, such as equity crowdfunding platforms and accelerators, enriched the variety of risk capital sources besides traditional forms, like ‘formal’ venture capital funds and ‘informal’ angel investors (Bruton et al., 2010). Moreover, new trends and dynamics recently emerged in venture financing among angels and VC funds. With reference to these phenomena, there has been a proliferation angel grouping across the globe (Kerr et al., 2011). By means of resource pooling, angel groups may invest in later stages with a larger amount, partially overlapping to the action space traditionally occupied by VC funds (Hellmann and Thiele, 2015). According to Carpentier and Suret (2015), a professionalization and formalization of the angel market (historically considered as informal VC market) is taking place, which is leading angels to act and impact similarly to VCs. Also, VC funds demonstrate a growing interest in earlier stages than in the past (Dutta and Folta, 2016). Those new trends involving both angels and VC funds may be perceived as an answer to the higher level of uncertainty (as well as new opportunities) brought in by digital technologies, which are leading to an increased unpredictability and non–linearity of new ventures growth (Huang et al., 2017; Nambisan, 2017).
Concerning digital new venture growth, an emergent model is gaining attention among both scholars and practitioners (Blank, 2013; Isenberg and Onyemah, 2016; Huang et al., 2017; Autio et al., 2018; Srinivasan and Venkatraman, 2018). The model applies particularly to digital entrepreneurship and is based on a fundamental distinction between startups still working on validating their business model and scaleups showing significant metrics of traction on customers, and being already funded through a first Series ‘A’ round – over 1 million $ (Autio, 2016). This distinction in the early phase of growth between startups and scaleups is worth studying, to enhance our understanding on digital entrepreneurship (Srinivasan and Venkatraman, 2018). Hence, recent research developments open to further contributions on digital new ventures growth process and the role of emerging venture financing trends involving angel groups and VC funds.
We know that VC funds and angels have been important for the growth of new ventures; what we do not know is if their role is still that relevant in a context characterized by a) more and more agents involved in the entrepreneurial process, b) new trends in venture financing landscape, and c) high influence of digital technologies. This is a key, though unanswered, question in the current research debate.
Enhancing our understanding over the role of angel groups and VC funds to foster digital new ventures growth in their early phases of startup and scaleup is useful, given that: (i) few studies analyze digital new ventures growth process, which radically differs from traditional organization growth in terms of unpredictability and non–linearity (Huang et al., 2017; Nambisan, 2017), and basically no research specifically refers to startup and scaleup phase – where these features are even more evident; (ii) few studies focused on angel grouping (Carpentier and Suret, 2015; Lerner et al., 2018), and even less focus was placed on comparing angel groups with VC (Dutta and Folta, 2016) – which are increasingly overlapping their action-space in the funding process (Drover et al., 2017) and; iii) today, leading political institution (European Commission, 2015) as well as a plethora of actors belonging to the wide entrepreneurial ecosystem (Cavallo et al., 2018b) are calling for research on how to foster digital entrepreneurship. In view of these arguments, this study addresses the following overarching question: How VC funds and angel groups may influence digital new ventures growth in their startup and scaleup phases?
To cope with such research question, we base our investigation on 372 investment rounds – representing our sample cases – regarding 256 digital new ventures in startup and scaleup phases that received investments from angel groups and VC funds in the time span 2012–2017. Data analysis has been performed trough a linear regression. Revenue growth represents our dependent variable (Delmar, 2006), while the amount of investments provided by VC funds or angel groups are employed as independent variables. Data on investments rounds were collected through annual surveys on the main Italian–based investors, complemented also by other secondary sources. Hence, this study will focus on the Italian context as its empirical setting. While prior research had been mainly focused on US Venture Capital (VC) market, less attention has been dedicated to underdeveloped VC markets like those in Southern Europe (Bertoni et al., 2011). This adds originality to this research also in terms of empirical setting.
Our findings suggest that VC funds positively affect the growth of digital new ventures, while no evidence emerges on the angel groups' contribution. Moreover, by focusing on digital startup and digital scaleups – as two distinct stages of growth of digital new ventures – and the relative subsamples, two additional insights emerge from this study. First, digital scaleups, in line with the overall sample of digital new ventures, show a linear path of growth positively correlated with VC funding. Second, contrarily to our expectation, digital startups – as the amount of funding increased – at first grew and then shrank after an optimal level of 300,000$ invested in them.
The remainder of the paper consists in five sections. After introducing the context and the research objectives, we provide the theoretical background underlining two sets of hypotheses (Section 2). This is followed by Section 3 that illustrates the research design and the methodology employed in this study. Section 4 then presents econometric analysis and results. Finally, Section 5 and Section 6 respectively discuss the results and conclude the study by focusing explicitly on research value and relative policy implications.
Section snippets
Digital new venture growth
Organizations grow through multiple stages over their lifetime. This process has been along debated in the literature for about fifty to sixty years (e.g. Fisher et al., 2016; Gaibraith, 1982; Mintzberg, 1984; Penrose, 1959; Phelps et al., 2007) providing several models, both linear (e.g. Greiner, 1972) and non–linear (e.g. Orser et al., 2000). The literature mainly deals with rapidly growing hi–tech new ventures (e.g. Phelps et al., 2007). As regards, an early and remarkable contribution in
The sample
Our database consists of financial data concerning 653 Italian new ventures. In particular, we built a longitudinal dataset by collecting data on 840 investment rounds - as sample cases of this study - provided by angel groups (AG) and venture capital funds (VC) investing in hi-tech and hi-growth new ventures during the years 2012–2017.2 Concerning VC, we collected data from Italian–based (independent) venture capital funds, since marginal investments derive from Corporate
Results
The results of the linear regression models predicting the Revenues Growth of the digital ventures are shown in Table C, which reports the following two models: Model 1.I represents the baseline model and includes all the control variables; Model 1.II includes also the independent variables about the amount of investments received by digital ventures in order to test hypotheses H1.1 and H1.2.
The empirical results described by Model 1.I show as significant controls the following variables:
Discussion
In this section, we analyze and discuss how different venture capital (VC) funds and angel groups affect the growth of digital new ventures.
In accordance with Hellmann and Thiele (2015), our analysis reveals that angel groups and VC funds are partially overlapped in their action space of investment, specifically in the range from $10.000 to $ 8 millions. This finding, confirms that by means of resource pooling angels may invest larger amounts while VC funds are moving into earlier stages than
Conclusion
This study has explored the role of venture capital (VC) funds and angel groups in explaining digital new ventures growth, with particular reference to two different stages: startup and scaleup. A sample of 256 Italian digital new ventures funded by VC funds and angel groups (over the time–span 2012–2017) informed our investigation. Our findings suggest that VC funds positively affect the growth of digital new ventures while no evidence emerges on the angel groups contribution. Moreover, by
Acknowledgments
We would like to thank the Editors, the anonymous Reviewers, who helped significantly enhancing the study's contributions as a result of the revision process. Any errors remain our own.
Angelo Cavallo is Assistant Professor at Politecnico di Milano. His main research areas include Strategic Management, Entrepreneurship and Digital Transformation. His research interests are focused in understanding how digital technologies as pervasive enablers are reshaping organizations, influencing strategy-decision making and entrepreneurial process of both new ventures and existing large organization. He is author of journal articles (appearing in outlets such as Journal of Business
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Angelo Cavallo is Assistant Professor at Politecnico di Milano. His main research areas include Strategic Management, Entrepreneurship and Digital Transformation. His research interests are focused in understanding how digital technologies as pervasive enablers are reshaping organizations, influencing strategy-decision making and entrepreneurial process of both new ventures and existing large organization. He is author of journal articles (appearing in outlets such as Journal of Business Research, and the International Entrepreneurship and Management Journal), book chapters and conference proceedings.
Antonio Ghezzi is Professor of Strategy & Startups at the Department of Management, Economics and Industrial Engineering of Politecnico di Milano – Italy; he is member of the core faculty of MIP – Graduate School of Business, and Director of the Hi-tech Startups Observatory. His main research fields are Strategic Management and Strategic Entrepreneurship applied to Digital industries, with a focus on business model design & innovation. He is author of more than seventy refereed journal articles (appearing in Technological Forecasting and Social Change, International Journal of Management Reviews, Management Decision and R&D Management), books, book chapters and conference proceedings.
Elena Pellizzoni is Assistant Professor at the School of Management - Politecnico di Milano where she serves as a researcher of LEADIN'Lab, the Laboratory for LEAdership, Design and INnovation. Her research interests are focused in Innovation Management. In particular, she has been working on self-engagement innovation activity such as innovation contests, calls for ideas, and idea management systems. She is also focused on mechanisms of value creation and appropriation in mobile apps and the role of the interplay between technology and meaning in high-tech industries.
Claudio Dell'Era is Associate Professor in Design Strategy at the School of Management - Politecnico di Milano, where he serves also as Co-Founder of LEADIN'Lab, the Laboratory of LEAdership, Design and INnovation. He is also Director of the Observatory “Design Thinking for Business”. Research activities developed by Claudio Dell'Era are concentrated in the area of Design Strategy and Design Thinking. He has published in relevant international journals, such as Journal of Product Innovation Management, Long Range Planning, R&D Management, International Journal of Operations & Production Management, Industry & Innovation, International Journal of Innovation Management.