Entrepreneurial Spawning: Experience, Education, and Exit

• Date: 01 November 2016
• DOI: http://doi.org/10.1111/fire.12109
• Author: Jochen Christian Werth,Uwe Walz,Douglas Cumming
• Published date: 01 November 2016

The Financial Review 51 (2016) 507–525

Entrepreneurial Spawning: Experience,

Education, and Exit

Douglas Cumming∗

York University

Uwe Walz

Goethe University and SAFE

Jochen Christian Werth

Goethe University

Abstract

Weinvestigate the career dynamics of high-tech entrepreneurs by analyzing the exit choice

of entrepreneurs: to act as a business angel, to found another firm, or to become dependently

employed. Our detailed data from CrunchBase indicate that founders are more likely to stick

with entrepreneurship as a serial entrepreneur or as an angel investor in cases where the

founder had prior experience either in founding other startups or working for a startup, or had

a “jack-of-all-trades” education.

Keywords: Venture governance, entrepreneurship, entrepreneurial spawning, angel finance,

venture capital, exit

JEL Classifications: G24, G34, L26

∗Correspondingauthor: York University,Schulich School of Business, 4700 Keele Street, Toronto,Ontario

M3J 1P3, Canada; Phone: 416-736-2100, ext. 77942; Fax 416-736-5687; E-mail: dcumming@schulich.

yorku.ca.

We owe thanks to the seminar participants at the 2015 Conference on New Trends in Entrepreneurial

Finance in Trier, Germany.We gratefully acknowledge research support from the Research Center SAFE,

funded by the State of Hessen initiative for research LOEWE. Veryhelpful comments and suggestions of

an anonymous referee are gratefully acknowledged.

C2016 The Eastern Finance Association 507

508 D. Cumming et al./The Financial Review 51 (2016) 507–525

1. Introduction

Gompers, Lerner and Scharfstein (2005), Gompers, Kovner, Lerner and Scharf-

stein (2010), and Cumming and Knill (2012) show an important benefit of venture

capital (VC) finance is that it spawns the creation of new ventures. That is, en-

trepreneurs backed by venture capitalists (VCs) tend to form new companies, or

become coaches for new entrepreneurs in the form of business angels, after VCs exit

the venture.

We examine for the firsttime the specific conditions under which entrepreneurs

actually stick with entrepreneurship in the form of starting a new company or be-

coming a business angel. By examining detailed data on the personal characteristics

of these entrepreneurs, we address more precisely the questions of exactly when and

why does entrepreneurial finance lead to the creation of new ventures.

VC-backed firms are among the most dynamic entrepreneurial firmscontributing

significantly to innovation and economic growth (Sapienza, Manigart and Vermeir,

1996; Manigart, Collewaert, Wright, Pruthi, Lockett, Bruining and Landstrom, 2007;

Nahata, 2008; Schwienbacher, 2008; Yung, 2009; Cumming and Johan, 2013; Ritter,

2015; Audretsch, Lehmann, Paleari and Vismara, 2016). This is particularly true for

firms in high-tech industries on which most of VC financing is concentrated.1One of

the key inputs in this process is, besides VC financing, the spirit and human capital of

the founders and entrepreneurs (Bonardo, Paleari and Vismara, 2011; Meoli, Paleari

and Vismara, 2013). While being a decisiveinput in this process, little is known about

the career paths (after leaving the VC-backed venture) and personal backgrounds

of VC-backed entrepreneurs. Papers which address the exit issue of entrepreneurs

mostly focus (exclusively) on non-high-tech firms (e.g., Wennberg and DeTienne,

2014); given the very different type of activities and firms, look into a very different

setting.

We aim to narrow this gap in the literature on the analysis of career paths of

entrepreneurs in high-tech firms. We address two main research questions. First, we

relate the entry decision of founders (i.e., whether they have worked for a startup

before, and their founding experience and education) with their exit decision (i.e.,

whether they stick with entrepreneurial activity or become dependently employed).

Second, we investigate other factors of the founders’ exit decision such as the exit

choice of the company itself. By answering both questions, we depict a broader

picture of the dynamics of entrepreneurial careers, their patterns, as well as the

driving forces.

We analyze these dynamics of the career paths of VC-backed entrepreneurs

by using a hand-collected sample of high-tech firms which have received venture

1VC-backed firms also embrace growth capital firms which invest in tangible assets and the acquisition

of other companies. Among initial public offerings (IPOs) from 1980 to 2012, 12% of VC-backed firms

are classified as growth capital-backed (Ritter, 2015).See also Deli and Santhanakrishnan (2010), Hoban

(1978), Jindra and Leshchinskii (2015), and Wang, Wang and Zhang (2013).