‘If the Facts Don't Fit the Theory … ’: The Security Design Puzzle in Venture Finance

21 Pages Posted: 2 Oct 2014

Date Written: October 2014

Abstract

When confronting theory with evidence, divergent results surface with reference to the optimal securities that should be adopted in venture capital (VC) finance. The vast majority of the theoretical models on VC consistently predict that convertible securities, especially in the form of convertible preferred stocks, represent the optimal form of finance. While the theoretical literature seems to be supported by empirical studies in the US, the evidence outside the US shows the opposite results. Puzzling patterns emerge, especially when comparing the evidence from the US, Canada and Europe, and an intensive academic debate is under way. The evidence becomes even more challenging when considering the contrasting financing behaviour of US venture capitalists (VCs) investing in Canada. It has been documented that US VCs investing in Canada adopt a wide range of securities other than convertible stocks. If convertible securities truly represent the optimal form of VC finance, why would US VCs use different types of securities when investing in Canada? At present, researchers are still arguing about which factors would have the most significant impact on explaining the different financing behaviour of VCs around the world. The purpose of this paper is to shed some light on the ongoing international debate on the optimal security design and contracting behaviour in venture finance. With this review, the authors intend to contribute to the VC literature by identifying current trends, explanations and determinants underlying the puzzling empirical evidence on the financing structure adopted by VCs around the world.

Suggested Citation

Zambelli, Simona, ‘If the Facts Don't Fit the Theory … ’: The Security Design Puzzle in Venture Finance (October 2014). International Journal of Management Reviews, Vol. 16, Issue 4, pp. 500-520, 2014, Available at SSRN: https://ssrn.com/abstract=2504285 or http://dx.doi.org/10.1111/ijmr.12032

Simona Zambelli (Contact Author)

University of Florence ( email )

Department of Economics and Management
Via delle Pandette 9
FIRENZE, FI 50127
Italy

HOME PAGE: http://https://www.unifi.it/p-doc2-0-0-A-3f2c352f362e31.html

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