The author owes special thanks to the Government of Canada. This study was undertaken with the financial support of the Foreign Affairs and International Trade Canada/avec l'appui d'Affaires étrangères et Commerce international du Canada. The author would also like to thank the associate editor (Kathryn Haynes) and three anonymous referees of this Journal for valuable comments and helpful suggestions, as well as the Fondazione Cariplo (Milan) for additional financial support.
‘If the Facts Don't Fit the Theory … ’: The Security Design Puzzle in Venture Finance
Article first published online: 24 APR 2014
© 2014 British Academy of Management and John Wiley & Sons Ltd
International Journal of Management Reviews
Volume 16, Issue 4, pages 500–520, October 2014
How to Cite
Zambelli, S. (2014), ‘If the Facts Don't Fit the Theory … ’: The Security Design Puzzle in Venture Finance. International Journal of Management Reviews, 16: 500–520. doi: 10.1111/ijmr.12032
- Issue published online: 1 OCT 2014
- Article first published online: 24 APR 2014
- Foreign Affairs and International Trade Canada/avec l'appui d'Affaires étrangères et Commerce international du Canada
- Fondazione Cariplo (Milan)
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.