Essays on Entrepreneurial Finance

This PhD dissertation is organized in three independent chapters, that address different topics in the field of entrepreneurial finance. The first two chapters consider individual entry into entrepreneurship, and the third chapter considers interactions between founders and angel investors in informal venture capital markets.

Chapter 1. On the Anatomy of Entrepreneurship (with Damiano Argan and Leonardo Indraccolo)
We investigate the relationship between individuals’ skill composition and self-selection into entrepreneurship. Using administrative micro-data from Denmark, we measure analytical skills and communication skills using high school grades in math and native language as proxies. We find that specialized skill sets are rewarded in the labor market, but are nega-tively related to the probability of becoming an entrepreneur. We also find that for students with high analytical skills, the probability of becoming an entrepreneur is monotonically increasing in communication skills, while the reverse case is not true for students with high communication skills. Motivated by evidence that individuals with high analytical skills run more profitable firms, we propose an identification strategy based on peer effects to estimate the causal effects of skill balance on the probability of entry into entrepreneurship. For the subpopulation of high-performing math students, we use within-school and between-cohort variation in exposure to peers that have parents with a university degree in humanities. We find that the most treated individuals have 20% higher probability of becoming an entrepreneur, compared to the least treated individuals. These findings highlight the impor-tance of improving communication skills of individuals with high analytical proficiency to facilitate the creation of high-performing firms.

Chapter 2. Entrepreneurship, Wealth and Human Capital (with Leonardo Indraccolo)
How important is the accumulation of human capital versus wealth in explaining selection into entrepreneurship over an individual’s life-cycle? To answer this question we construct a new dataset based on Danish administrative data and use it to study the characteristics of individuals that select into entrepreneurship at different stages of their life. We provide new evidence on the fact that entrepreneurs are self-selected along several measures of human capital and skills. We show that entrepreneurs, compared to workers of the same age, on average i) earn higher wages before starting their business ii) experience higher growth rates in wages iii) have more years of education and labor market experience. We show that this self-selection, in terms of human capital, is even stronger across the most productive entrepreneurs. We also show that future entrepreneurs hold slightly higher wealth, compared to workers of the same age, prior to starting the business. We ask whether aspiring entrepreneurs face liquidity constraints and use fathers’ wealth as indirect proxy for the easiness in access to credit. We find that the probability of becoming an entrepreneur is essentially flat along the central part of the family wealth distribution and increasing only at the tails, which is inconsistent with the view that future entrepreneurs face major liquidity constraints. To quantify the relative importance of human capital accumulation versus wealth in affecting individuals’ decisions to start a business we propose a quantitative general equilibrium life-cycle model with human capital accumulation, financial frictions and occu-pational choices. The model is used to disentangle the role of wealth, skills and the quality of the business idea in affecting self-selection into entrepreneurship. Through counterfactual exercises we establish how financial frictions affect the quality of new ventures by distorting individuals’ human capital accumulation decisions. Finally, we use the calibrated model to quantify the efficiency and welfare effects of a tax policy aimed at incentivising business creation by young individuals.

Chapter 3. Angels Don’t Fall From Heaven (solo authored)
I investigate the impact of angel investors’ human and social capital in informal venture capital markets. I assemble a novel dataset that identifies the population of angel investors in Denmark, and I use prior experience in management and governance related roles to proxy for human and social capital. I find that angel investors with high management experience, relative to founders, obtain equity at discounted valuations, and also observe superior post-investment firm outcomes. The effects are progressive and amplified when experience is acquired in entrepreneurship. In contrast, high governance experience does not affect valuations or outcomes. These findings suggest that managerial human capital generates surplus for investees, and therefore commands an investment premium, while governance-related human capital or overall social capital does not. The findings provide a rationale for targeted rather than generic investment policies.