Serial Entrepreneurship, Organisational Capital and Access to Venture Capital

Abstract

The following chapter explores the potential differences in access to venture capital between serial entrepreneurs (who have founded several businesses, either one after the other or simultaneously) and new entrepreneurs (who launch a business for the first time). While empirical results differ regarding the outperformance of serial entrepreneurs compared to that of new entrepreneurs, numerous examples seem to suggest that serial entrepreneurs have easier access to venture capital. We can explain this paradox by drawing on organisational theory. Entrepreneurial experience, which could be considered as a form of entrepreneurial training, gives the serial entrepreneur an advantage since he or she has both more human capital (experience) and social capital (network) than a new entrepreneur, advantages that are liable to give the entrepreneur easier access to venture capital. Empirical studies indicate that experienced entrepreneurs tend to have faster access to funds, and receive larger sums than new entrepreneurs. However, studies are less conclusive when we investigate the higher valuation of serial entrepreneurs’ businesses compared to that of new entrepreneurs.

Venture capital (VC) is a key source of funding for new businesses, especially firms based on the immaterial or intellectual property (Hsu 2007). The figures show that successful access to venture capital financing is very low, around 3–5 % (Shane and Stuart 2002). Yet, in a context of capital rationing, some entrepreneurs seem to find it easier to finance their new venture than others. These are “serial entrepreneurs,” in other words, entrepreneurs who have already launched one or more businesses in the past. Examples include entrepreneurs such as the American Jim Clark, the Dane Janus Friis and his Swedish partner Niklas Zennström, or French entrepreneur Marc Simoncini, who all have multiple business ventures under their belt, on each occasion managing to raise funds through venture capital. These observations raise certain issues, especially since the potential outperformance of businesses launched by serial entrepreneurs compared to other firms has not been clearly proven, and findings from studies conducted in this area are generally inconclusive (Gompers et al. 2006).

This gives rise to a two questions. Without empirical proof to determine which of the two cases achieves better operational performance, why do serial entrepreneurs benefit from easier access to capital venture financing? Aside from the anecdotal examples above, has such privileged access to venture capital been confirmed by empirical studies based on statistically relevant samples?

This paper attempts to answer the following questions: first, are there any elements in entrepreneurial theory that can explain the apparent advantages of serial entrepreneurs when seeking access to venture capital? Secondly, can this assumed advantage be confirmed by entrepreneurial practice?

The question is of interest for a number of theoretical and practical reasons. At theoretical level, putting the issue of how serial entrepreneurs obtain seed capital into perspective requires an understanding of the way investors manage the selection process of funding applications, as well as an analysis of entrepreneurial characteristics and the impact of the latter on their potential to acquire funding. From a practical standpoint, the question of serial entrepreneurs’ potentially easier access to venture capital has thrown up some major issues, insofar as nascent businesses that seek this type of funding mostly belong to sectors where swift development is a key asset.

Our paper is organised as follows. We explore the theoretical reasons that underlie why serial entrepreneurs may be able to access venture capital more easily than others. The awarding of venture capital takes place within a context of information asymmetry. To counteract this problem, contractual solutions can be brought into play, but the relation of trust between investor and entrepreneur is also likely to be important. In this regard, previous entrepreneurial experience, likened to entrepreneurial learning, provides a means to increase the entrepreneur’s human and social capital, giving the serial entrepreneur an advantage when it comes to raising capital. Finally, we examine the findings of empirical studies conducted to determine whether serial entrepreneurs benefit from preferential access to venture capital. We successively consider the possible differences in the way they are treated, depending on whether the company was founded by a serial entrepreneur or not, how quickly the funds are raised, the amounts awarded, and the valuations obtained.