VC&PE Week 4 Discussion Questions

“Crowdfunding and Venture Capital: Substitutes or Complements?”by D’Ambrosio and Gianfrate (2016)

Question 1:

1.What is the relationship between VC_SEED/CF and VC_AFTERSEED/CF?  What does this tell us and why is it important?

• Both VC_SEED and VC_AFTERSEED are positively correlated with CF

• Both VC_SEED and VC_AFTERSEED are negatively correlated with CF

• VC_SEED is negatively correlated with CF while VC_AFTERSEED is positively correlated with CF

• VC_SEED is positively correlated with CF while VC_AFTERSEED is negatively correlated with CF

Answer explanation

VC funding at the seed stage is negatively related to crowdfunding whereas VC funding after the seed round is positively correlated with with crowdfunding.

The authors note that this supports the idea that crowdfunding can be a substitute for VC early on and potentially a complement to VC funding in later rounds.

“Crowdfunding and Venture Capital: Substitutes or Complements?”by D’Ambrosio and Gianfrate (2016)

Question 2:

What is the intuition behind these variables’ (VC_SEED/CF and VC_AFTERSEED/CF) cross-correlations in Exhibits 7 and 8?

• Crowdfunding is predictive of future successful VC rounds of funding.

• Crowdfunding is a bad source of financing for early stage startups.

• VC funding is predictive that future crowdfunding campaigns will fail.

• The cross-correlations are all over the place suggesting no statistical relationship.

Answer explanation

Exhibit 7 does show negative cross-correlations between CF and VC_SEED early on, though is does pop up as positive later (~2 years). However, Exhibit 8 -- seen here -- is particularly insightful as it shows very strong positive correlation between CF and VC_AFTERSEED suggesting the successful crowdfunding campaigns can be predictive in successful post-seed funding rounds. The effect does decay but is still significant 16 months out!

“Crowdfunding and Venture Capital: Substitutes or Complements?”by D’Ambrosio and Gianfrate (2016)

Question 3:

Is crowdfunding helpful to provide financing to start-ups that are not located in venture capital geographical clusters? What does this tell you?

• Not really. Similar clustering patterns exist in VC funding and crowdfunding.

• Yes. The authors find evidence that crowdfunding can provide better access to startups that are not in a VC geographical cluster (SF, LA, NY, Boston).

• VC clusters are like the tooth fairy. It's a story we tell in business school classes but doesn't really exist.

Answer explanation

This is counterintuitive. The data suggests that the same geographical clustering that is associated with VC funding traditionally - SF, NYC, LA, Boston, etc. - is present in crowdfunding too!

“Overview of Investing in Private Corporate Debt” by Fabozzi (2022)

Question 1:

What are some of the reasons given for why demand has increased for private debt in recent years?

• The GFC and the regulations that followed made mid-market lending less attractive for banks.

• ZIRP resulted in a reach-for-yield strategy on the buy side (credit funds)

• Borrowers do not have to disclose as much

• All of the above

Answer explanation

Fabozzi notes that there are a mixture of supply side and demand side factors that have made private debt a very attractive alternative asset class in recent years. ZIRP increased the "reach-for-yield" phenomenon, which is the major demand-side factor. On the supply-side, capital requirements and other post-GFC regulations made mid-market lending less attractive to banks; shadow banks were able to step in and fill the void. Also, from a corporate borrowing perspective, private debt can be attractive because there are less disclosures.

“Overview of Investing in Private Corporate Debt” by Fabozzi (2022)

Question 2:

What are the four credit strategies in the private debt space? 

[select four out of the five below]

• Venture Debt

• Direct Lending

• Distressed Debt

• Capital Structure Arbitrage

• Mezzanine Debt