Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

Abstract

The US entrepreneurial finance market has changed dramatically over the last two decades. Entrepreneurs who raise 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 start-ups 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 start-ups and investors that help explain how the trade-offs between going public and staying private have changed. We conclude by listing several open research questions. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

IPOs and SPACs: Recent Developments

“…The increase in VC money during recent years is not only because of regulatory changes. Ewens & Farre-Mensa (2022) offer additional explanations. They suggest that the increase in VC funding is due to inflows of money into this asset class for two reasons.…”

Methods and Trends in Financing Entrepreneurship

“…That is, VC firms not only gain a substantial portion of the portfolio company's equity, but they also obtain many additional rights in terms of both cash flow and control. However, other work by Ewens and Farre-Mensa (2022), has noted that recent competition for Open Journal of Business and Management access to the best VC deals has yielded a dramatic increase in the favorability of terms presented to entrepreneurs.…”

Growth of Venture Capital in International Markets

“…Intelligence VC funding allows for rapid shifting of capital across industries and the utilization of novel financing techniques in the face of rapid technological change (Ewens & Farre-Mensa, 2022). As a recent case study, VC funding has played a pivotal role in fostering faster growth within the new and high-risk industries of cryptocurrency and artificial intelligence (AI) (Figure 3).…”