Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

Abstract

The U.S. entrepreneurial finance market has changed dramatically over the last two decades. Entrepreneurs raising their first round of venture capital retain 30% more equity in their firm and are more likely to control their board of directors. Late-stage startups are raising larger amounts of capital in the private markets from a growing pool of traditional and new investors. These private market changes have coincided with a sharp decline in the number of firms going public--and when firms do go public, they are older and have raised more private capital. To understand these facts, we provide a systematic description of the differences between private and public firms. Next, we review several regulatory, technological, and competitive changes affecting both startups and investors that reveal how the trade-offs between going public and staying private have changed. We conclude by listing several open research questions.

Gender and race in entrepreneurial finance

“…• A stark pattern of changing bargaining power between entrepreneurs and investors has emerged in several areas. Valuations for startups are increasing (Ewens and Farre-Mensa, 2022), contract terms are becoming more entrepreneur-friendly, founders are more likely to have dual-class shares (Aggarwal et al, 2021) and corporate governance power has shifted to entrepreneurs (Ewens and Malenko, 2022). How do these bargaining power shifts impact the gender or racial gap at entry and financing?…”

Race and Gender in Entrepreneurial Finance

“…Perhaps most relevant for our discussion here is the "democratization of capital access" for entrepreneurs and private firms. Each change attempted to lower barriers for entrepreneurs seeking to raise private capital, connect retail investors to startups, or lower the chances that traditional early-stage investors triggered costly regulatory triggers (see Ewens and Farre-Mensa, 2022, for a thorough review). If successful at lowering barriers, then the literature surveyed above provides some predictions about affects for women and minorities.…”

“…The private equity financing landscape has changed significantly over the last 25 years (Ewens and Farre-Mensa, 2022). The changes can in part be explained by regulatory changes, but otherwise appear to be driven by participation of new investors and financial innovations.…”

“…• A stark pattern of changing bargaining power between entrepreneurs and investors has emerged in several areas. Valuations for startups are increasing (Ewens and Farre-Mensa, 2022), contract terms are becoming more entrepreneur-friendly, founders are more likely to have dual-class shares (Aggarwal et al, 2022) and corporate governance power has shifted to entrepreneurs (Ewens and Malenko, 2022). How do these bargaining power shifts impact the gender or racial gap at entry and financing?…”