The financing landscape for startups has changed so rapidly over the past decade, that it is difficult to be up to date in terms of the roles that different financing structures play in the lives of startups and high-growth firms. Most of the literature is focused on venture capital (VC) firms, even though they only provide about 25 percent of the funding for companies.
In the meantime, angel investors, who used to be geographically focused and operate individually have been increasingly operating in groups, and the role of corporate venture capital has become more significant in providing financing for high-growth firms. These are a few recent trends whose impact has yet to be seen.
A group of researchers at London Business School conducted a comprehensive review of everything that has been scientifically proven about financial mechanisms for high-growth firms.
In conclusion of the remarkably detailed review, they have also noted that there are still a few gaps in the literature, exactly because the landscape has been expanding so fast. A few of their remaining questions are listed below.
1. Why do accelerators tend to bring capital into their regions?
There is mounting evidence that accelerators bring more capital in the regions where they are active, both for firms who participate in the accelerator, and for those who do not. The reasons for this effect are unclear, however. What role do different firms in a cohort play in helping each other? What is the role of mentorship? What kinds of financing mechanisms are most helpful?
2. Why are VC-funded firms more likely to survive below the age of 5 and why does this trend gets reversed after the age of 5?
VC-funded firms tend to survive more before they hit their 5-year anniversaries, but then the trend gets reversed. Among firms older than five years, why are non-VC-funded more likely to persist? Is that associated with the average life span of VC funds?
3. How do different financing mechanisms work together?
There is still a knowledge gap about the links between different actors in the startup financing game. What if accelerators bring in more equity for a region because VC firms are more likely to invest in a startup that has been vetted by an accelerator program? Or is it because mentors in an accelerator tend to decide to make an angel investment the companies they work with?
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Contributed by Lili Torok.