Entrepreneurial experiences from venture capital funding: exploring two-sided information asymmetry. Issue 4 (1st October 2020)

• Record Type: Journal Article
• Authors: Glücksman, Sarah
• Is Part Of: Venture capital. Volume 22:Issue 4(2020)
• Page Start: 331
• Page End: 354
• Publication Date: 2020-10-01
• Subjects: Venture capital -- information asymmetry -- agency theory -- adverse selection -- moral hazard -- entrepreneurial perspective; Venture capital -- Periodicals; Entrepreneurship -- Periodicals; 332.041
• DOI: 10.1080/13691066.2020.1827502
• Languages: English
• ISSNs: 1369-1066

Abstract

ABSTRACT: Information between entrepreneurs and venture capitalists (VCs) is often shared unequally. VCs are experienced and professional dealmakers, while entrepreneurs have great knowledge about their venture but usually limited knowledge about VCs' financing process and requirements. For entrepreneurs, VCs' asymmetric information advantage can lead to difficulties in receiving funding, unfavorable terms, or negative startup experiences. Based on in-depth interviews with 20 Swedish entrepreneurs, this study investigates entrepreneurial experiences of mitigating the problems arising from information asymmetry in a VC–entrepreneur relationship. Four themes emerged from these interviews: (1) choosing the optimal time to raise the initial external capital, (2) ensuring that the VC fits the startup, (3) studying and understanding the venture capital process beforehand, and (4) building an open and honest relationship with the VC. Although entrepreneurs have not developed any formal tools similar to what VCs employ to mitigate information asymmetry risks, our study shows that entrepreneurs use informal tools based on their own and others' experiences. This indicates that the entrepreneur might play a more active role in the VC–entrepreneur relationship than most previous studies have assumed.