Master of Finance
Academic year 2019-2020 semester 1
The difference between private equity financing in the US and Europe;
A study into the listing gap, financing behaviour, exit strategies and Unicorns
Abstract
Keywords: IPOs; Unicorns; exit strategies; trade sales
Name: Laurens Heideman Student number: S2557908 Supervisor: Dr. W. Bessler
This thesis investigates differences between the US and Europe in the domain of private equity finance. I find that the number of initial public offerings has decreased dramatically and find an increase in trade sales as an exit strategy. Additionally, I study the concept on Unicorns and why they fail to develop in Europe. I lay out several possible explanations for these issues and hypothesize that the main factor driving the differences between the US and Europe are growth options.
Table of Contents
1. Introduction ... 2
1.1 The listing gap ... 2
1.2 Disruptive innovation ... 5
1.3 Exit strategies ... 6
1.4 Dual class shares ... 6
1.4.1. Dual class shares in general ... 6
1.4.2 DCS and institutional investors ... 7
1.5 Growth options ... 8
1.6 Unicorns ... 12
1.6.1 Unicorns in general ... 12
1.6.1 Unicorns acquisition activity ... 12
1.7 Mutual funds ... 13
1.8 Problem statement and motivation ... 13
2. LITERATURE REVIEW ... 14
2.1 Private Equity added value ... 14
2.2 The IPO as an exit strategy ... 15
2.3 Legal origins ... 16
2.4 Financing rounds and number of investors ... 16
2.5 Unicorns ... 17
2.5.1 Unicorns in General ... 17
2.5.2 Unicorns in relation to financing rounds and number of investors ... 17
2.6 Private vs public ... 17
3. RESEARCH QUESTIONS AND HYPOTHESES ... 18
3.1 Financing behaviour of entrepreneurial firms ... 18
3.2 Exit strategies ... 20
3.3 Unicorns ... 20
4. METHODOLOGY ... 22
4.1 Difference tests ... 22
4.2 Probit model exit strategy ... 23
4.3 Probit model Unicorns ... 24
5. DATA ... 24
6. RESULTS ... 25
6.1 Financing behaviour ... 25
6.1.1 Descriptive statistics ... 25
6.1.2 Rounds, number of investors and industries ... 28
6.1.3 First financing ... 29
6.2 Exit strategies ... 31
6.2.1 IPO statistics ... 33
6.2.2 IPO probit model ... 35
6.2.3. Trade sales ... 36
6.3 Unicorns ... 37
7. CONCLUSION ... 38
7.1 Main conclusion ... 38
7.1.1 financing behaviour ... 38
7.1.2 Exit strategies ... 39
7.1.3 Unicorns ... 40
7.2 Private or public ... 40
7.3 Limitations ... 41
8. REFERENCES ... 42
9. APPENDIX ... 47
1. Introduction
The structure of financial markets in the U.S. and Europe changed significantly during the last two decades as private equity (PE) financing grew substantially, at least in the US, resulting in a listing gap, where less firms go public and more firms are going private (PE buyouts) Karolyi et al. (2019). Consequently, private capital markets have become a successful competitor to public equity markets with a tremendous impact on the financing behaviour of entrepreneurial firms. This thesis analyses the difference in financing behaviour and success of entrepreneurial firms in the US and Europe that receive private equity (PE) financing. More specifically: I study the factors that may explain the differences between the United States and Europe during the period from 1998 to 2017. One major hypothesized difference are Unicorns, firms with a market value above one billion dollars. The number of Unicorns is quickly growing in the US but they are hardly present in Europe. This thesis examines the concept of Unicorns and explain why these companies develop in the US but fail to grow in Europe.
In the paragraphs below the concepts that are relevant for this study are introduced, which are: the listing gap, disruptive innovation, exit strategies, dual class shares, growth options, Unicorns, and mutual funds. These concepts will finally build up to a brief problem statement in which I will also describe the motivation for this research.
1.1 The listing gap
Over the past two decades, there has been a sharp decline in the number of initial public offerings in the United States (IPOs) (Ritter, J. 2019). Moreover, an increasing number of firms have decided to delist from the stock exchange due to Mergers & Acquisitions (M&A) or were taken private (Lattanzio, Megginson and Sanati, 2019, Karolyi, et al. 2019). As a result of the increase in M&As and firms taken private, the number of listed firms has decreased by about 50% in the US from 8,000 to 4,000 since 1998. The decrease of listed firms did not entail a decrease of firms in total. It merely means that this is a decrease in firms that are publicly traded. The decreasing percentage of non-listed companies in the total number of companies is known as the listing gap, which means that given the total number of firms, more firms are expected to be publicly traded.
At the same time, the market capitalization of the firms that are still listed is now substantially higher than before, which means that the changes described above resulted in a higher concentration of large firms in specific industries. More growth of market capitalization must have occurred through acquisitions of other firms than through Research & Development (R&D), resulting in the fact that smaller firms are absorbed by a few large incumbent firms.
The decline of the number of listed firms leads to a large decrease in the opportunity set for investors. If this trend of decreasing investing opportunities continues, it might pose a problem over the long term since the opportunities for investment diversification will become increasingly limited, at least on a country level.
Some researchers concluded from these observations that during the previous 20 years a listing gap has developed in the US. Doidge, Karolyi and Stulz (2017) investigate this phenomenon and conclude that the listing gap resulted from an increase in trade sales. This means that the preferred exit strategy of many start-up firms or venture capitalists is to not to go public, but to exit through trade sales, i.e. being acquired by another firm.
An additional explanation is provided by Lattanzio, Megginson and Sanati (2019), who argue that the introduction of the Securities Market Improvement Act of 1996 explains the decreasing number of new listings and marks the starting point for the increase of PE activity in the US as the relative tax advantages of private equity were initiated an PE financing became less regulated. In this thesis, further which factors contribute to the listing gap are investigated by studying exit strategies taken by PE firms.
Gao et al. (2013) hypothesized that the reason why there is such a decline in IPOs are economies of scope. The authors emphasize that there is an increasing pressure across industries to bring new products to the market and that it is easier for large organizations to acquire innovation through acquisitions than to develop new ideas and products on its own. In addition, the authors state that it is easier for start-up firms to sell innovation, than to capitalize on it alone. The authors have a different approach than the conventional wisdom that states that low market prices are the result of lower earnings, which in turn are caused by the increased compliance costs after the implementation of the Sarbanes Oxley Act (SOX) in 2002 and the increase of other costs of being listed. The authors state: “Our explanation for why many small firms are being acquired rather than going public is that earnings before compliance costs are higher as part of a larger organization that can realize economies of scope and economies of scale.”
When combining the findings in Gao et al. (2013) and Lattanzio et al. (2019), it can be concluded that the combination of a less regulated PE market and increased costs of being a publically traded company makes it more attractive for small firms to engage in a trade sale due to economies of scale and scope, especially if the small firm does not have a disruptive idea which I will further discuss in section 1.2. Overall these factors explain the decline in IPO activity in the US, without ruling out the possibility that decline in IPO activity is also the result of some other factors.
The increase of trade sales of small innovative firms partly explains why listed firms currently have a much higher market capitalization. These listed firms buy the smaller innovative firms as a part of their growth strategy. They obtain their innovations from outside the company rather than investing in in-house R&D. Evidence of this phenomenon is presented by Bena et al. (2014). They find that companies with large patent portfolios and low R&D expenditures are acquiring firms, while companies with high R&D expenditures and slow growth in patent outputs are target firms. This implies that innovative firms that invest a substantial amount of
resources in order to develop one or very few ideas become targets. This kind of target firm tends to be bought up by large acquiring firms who do not invest large amounts in R&D, but who own a large portfolio of already developed ideas.
The incorporation of the new firm in the existing portfolio of the acquirer resulting in higher pre-compliance turnover mentioned before, is called an innovation synergy strategy. These innovation synergies are a main driver of acquisition activities. For European firms, such M&A activities may occur before going public for some acquiring firms or after going public, resulting in higher growth rates than through R&D and capital expenditure (Bessler, Schneck and, Zimmermann, 2017). Celikyurt Sevilir & Shivdasani (2010A) find that firms’ M&A activity increases substantially after their IPO and relate this to ongoing access to capital markets.
For Europe, the decrease in new listing mainly stems from the introduction of several corporate governance codes, introduced by several European Union member states. Engelen et al. (2019) find that EU SOX-like provisions decrease the number of small firms and high-tech and knowledge-intensive services (HTKIS) that go public. This is due to the fact that they are reluctant to disclose sensitive information of which their competitors might take advantage. It is also important to recognize that the decline of IPO activity in Europe began a decade later than in the U.S., as a result of the global financial crisis. Before the crisis, Europe experienced an IPO boom during the new economy period (1999-2001).
While the US PE market regulation in 1996 explains the increase in PE financing in the US, it is harder to indicate the exact cause in Europe. Europe has seen most of its increase of PE after the financial crisis of 2008. This might be due to the fact that Europe has seen a stronger new economy wave than the US in the early 2000s. This hypothesis, however, has not yet been properly tested in the literature to date. Still, it is interesting to see the correlation between decreasing IPO activity and increasing PE investments.
The article by Engelen et al. (2019), might signal a potential cause for the increase in PE activity. Engelen et al. (2019) argue that due to the fact that HTKIS firms and smaller (entrepreneurial) firms prefer to stay private as a result of current market developments, the need for PE financing increases. Therefore, it is possible that the trends in Europe are similar to those in the US, but with a lag of several years.
Another explanation for the decrease in listed firms is signalled by Bessler, Beyenbach, Rapp & Vendrasco (2019), who find that many family firms in Germany delisted from the main stock exchange. These delistings might appear to be a move away from being publicly traded, but in fact many of these firms went to a lower stock market segment in order to prevent higher costs resulting from compliance regulation. Bernstein et al. (2019) find that second-tier stock exchanges are responsible for much of the global IPO activity. In this study, they find that stronger investor protection boosts the level of IPO activity. Consequently, there is still ambiguity as to what drives the listing gap in Europe.
Graph 1 shows the increase in private equity deal volume in the period 2006-2018. From this graph it becomes clear that PE is increasing rapidly, which is in line with the results found by Megginson (2019) and Doidge, Karolyi and Stulz (2017). The amount of IPOs has decreased in the period in which PE activity has grown, which I will show in my results section. This is an important result, since it shows that PE fills the financing need of entrepreneurial firms who prefer not to use public capital markets.
Graph 1. Private equity market activity by volume (2006-2018)1.
1.2 Disruptive innovation
Bowen et al. (2019) use a text based patent analysis and find that firms with disruptive patents, which are patents that break the current market equilibrium resulting in a temporary monopoly, are more likely to continue on their own and exit through an IPO, while less innovative firms are more likely to engage in a trade sale. The authors subsequently explain the decrease in IPOs through the fact that disruptive innovation has become harder to achieve over the past decades than was the case many decades before. At that time, firms went public very early in their development trying to get early growth financing. Examples are Microsoft, Apple, Dell, et cetera. Moreover, the authors claim that 20% of the decrease in IPOs and 50% of the increase in trade sales is attributable to technology changes, which occurs much faster nowadays than it did three decades ago.
The findings Bernstein et al. (2019) underscore the advantages of being listed as an entrepreneurial firm. However, it should be noted that only firms with true disruptive
1 Source: White & Case’s M&A Explorer powered by Mergermarket
innovation can benefit from these advantages in the long term. An important aspect in finance ,which is hardly considered in the literature is how securities markets and stock exchanges should create and regulate market segments to encourage these start-up firms to go public and raise public funds rather than to seek additional funds through private equity.
1.3 Exit strategies
This study will also focus on the difference between exit strategies of PE firms between the US and Europe. PE firms can exit through an IPO, a PE buyout or trade sale. The current trend of exit strategies is towards trade sales as mentioned in section 1.1, but differences between the US and Europe might still be present due to a difference in the regulatory and legal climates.
Since PE firms can only capitalize on their investment at the point at which they sell the company that they invested in, an artificial secondary market is created so that a PE firms can sell a company to another investor after some time. Therefore, another exit strategy is secondary buyouts: PE to PE selling. In this study, I will model the probability that a PE firms exits through an IPO or trade sale, which is a sale of the firm to another company (M&A). This will increase our understanding of which factors drive the listing gap.
1.4 Dual class shares
1.4.1. Dual class shares in general
A possible explanation for the differences in financing behaviour of entrepreneurial firms in different countries that are examined in this study is the existence of dual class shares (DCS).
These shares enable an entrepreneur to keep control over a company, while not being in possession of the majority of the shares and full economic exposure. This means the entrepreneur has less economic exposure, while retaining the majority of the voting rights. DCS are under debate in many countries. Opponents argue that while a small minority keeps the voting power, the larger portion of investors who provide the most capital and bear the economic exposure have nothing to say. Proponents, on the other hand, argue that these privileged shares enable the entrepreneur to exert strong leadership and enable the entrepreneur to keep control of his/her company. Retaining control benefits the company because, at least for some time, the entrepreneur usually has more knowledge about the firm itself and the market it operates in. The company will benefit from this knowledge, which will be reflected in its performance. Therefore, it makes sense to the proponents that the entrepreneur keeps control of the company, at least as long as these advantages persist.
Interesting in this regard is that we currently observe an opposite trend in the US and Europe.
Bessler & Vendrasco (2019) find that there is a large decrease in DCS in Europe, especially in the Nordic countries, while they are still growing in the US. Therefore, some European entrepreneurs decided to go public through an IPO in the US instead of in Europe if they own
a fast growing firm with an already high market value and a preference for keeping control.
Some entrepreneurs prefer to employ this kind of structure in order to keep control of their company, while benefitting from substantial external financing at the same time. A caveat, however, is that IPO financing while the entrepreneur retains his/her decision power is only possible for firms with high growth potential and the circumstance that the entrepreneur possesses some unique innovative and value creating skills.
Another interesting finding by Bessler and Vendrasco is the fact that Italy, Spain and France allow loyalty shares. The voting rights associated with loyalty shares double after being held for two years. Belot, Ginglinger & Starks (2019) found that after the introduction of the Florange act in France in 2014, which allowed the implementation of loyalty shares by companies, the firms that opted out received negative stock reactions. This signals that investors have a positive sentiment towards these loyalty shares and see value in attracting costly monitoring by long term shareholders. Bourveau, Brochet & Garel (2019), however, find opposing results on the Florange act introduction. Therefore, the true effects of such an act is still ambiguous.
1.4.2 DCS and institutional investors
Currently there is growing opposition of institutional investors towards DCS in the U.S., which is contained in the letter2 by the council of institutional investors (CII) to the Delaware state bar Association, where the CII proposes and amendment in order to limit the use of DCS. This is mainly due to the fact that these investors do not appreciate the wedge between ownership and control that is the result of loyalty share schemes. A possible explanation for the existence of DCS is the concentration of voting power of institutional investors, which is becoming increasingly problematic from a governance perspective. There are a lot of passive investors in the stock market, who invest in mutual funds and exchange traded funds (ETFs), which are provided by companies like Blackrock, Vanguard and State Street.
A study conducted by Proxy insights (Fields, 2018) finds that these two leading ETFs providers have very large correlations in their voting behaviour with the recommendations of their proxy advisors, who recommends how to exercise the voting rights. Especially in the case of “For” recommendations, the correlation is 99.5%. This implies that ETF investors are very passive, trying to minimize analyst’s costs. Only when the proxy advisor recommends an
“against” vote, the funds tend to disregard the advice. Mutual funds will be discussed more in- depth in section 1.7.
In addition to the findings of Fields, Qian et al. (2019) distinguish between transient and dedicated institutions. A transient institution is a passive institution such as the institutions
2 Retrieved from :https://corpgov.law.harvard.edu/2019/09/24/letter-to-delaware-state-bar- association-limiting-multi-class-voting-structures/
that I just outlined. A dedicated institution has higher involvement and is more active during shareholder meetings. The authors find that transient institutions tend to sell before initial failure (a drop in stock price directly after the IPO), but not before final failure. Dedicated institutions do not sell before both initial and final failure. Therefore, we can conclude that transient institutions invest more on the basis of market sentiment, which might not be beneficial for the newly listed stock. Kwon et al. (2019) find that there has been a significant increase of capital available to private firms. The increase is can be accounted for by the investments made through mutual funds. The authors state that the increase in available capital is beneficial to private companies, since they can reach a higher level of development before having to deal with the compliance and disclosure costs of being listed. Moreover, the authors state that the mutual funds benefit from abnormal returns which are almost uncorrelated with the public market index returns. After analysing the papers of Fields (2018) and Kwon et al.
(2019), I conclude that private firms should be very careful when dealing with mutual funds, since they are likely to behave passively. This development might be sub-optimal since entrepreneurs will have to deal with the influence of passive investors who do not truly know their business. This may results in the same problems as when these firms would be publically listed: a decrease in decision power as a result of investor interference. DCS could therefore be a solution to this problem.
1.5 Growth options
Growth options may be another explanation for the difference in financing behaviour mentioned before. The business Europe Reform Barometer (2019) outlines the reasons why the EU is currently falling behind in the overall business environment, particularly around innovation and digitalisation. The authors state that 1) economic development of the EU has fallen dramatically behind that of the US since the crisis. Moreover, they state that 2) some temporary programs like the ECB’s QE program has underpinned the developments.
Therefore, The EU seems to be falling behind the US as far as growth opportunities is concerned. This may explain some of the differences between the US and Europe that I will further outline in section 2. In this thesis, I will proxy growth opportunities by GDP per capita growth, education and P/E ratios. I will further explain why I chose these proxies at the discussion of each separate proxy. These proxies are illustrated by the graphs below.
Graph 2. GDP per capita growth (1997-2018).
Graph 2 depicts the GDP growth per capita in the US, the UK and subsets of European countries. From this graph it becomes clear that after the financial crisis, GDP growth is falling behind in Europe when compared to the US and the UK. This might be one of the reasons why entrepreneurial firms might opt for going public in the US instead of in Europe, since market conditions are more favourable there. When splitting the European countries in Northern and Southern European countries, it becomes evident that the southern European countries had negative GDP growth after the crisis while the northern part recovered quite quickly. Still, the UK and the US almost recovered immediately and had stable economic growth since 2010. A description of which countries are in the Northern European and Southern European subset can be found in table 1 in the methodology section.
-6 -4 -2 0 2 4 6
1997199819992000200120022003200420052006200720082009201020112012201320142015201620172018
GDP per capita growth percentage
Year
GDP per capita growth 1997-2018
Northern Europe subsample Southertn Europe subsample United States graph United Kingdom graph Average Europe subsample
Graph 3. The percentage population with tertiary education (2000-2018).
One of the explanations why Europe is lagging behind the US in terms of its capacity to produce an environment where private entrepreneurial firms can flourish is the fact that the population in Europe is less educated when compared to the US. Graph 3 shows the percentage of the population with tertiary education (education beyond high school) for the US, the UK, the Nordic, Northern European and the Southern European countries. Although the percentage of the population with tertiary education is rising in all the regions, it is clear that the UK and the Nordic countries are well ahead of the rest of Europe. Moreover, there is a large difference in education levels between the northern and southern part of Europe. The northern part of Europe consequently dominates the southern part of Europe with regard to education levels. High education levels are important for start-ups since it provides them with a larger pool of talent.
The general theory of start-up growth is that they flourish in environments where there are close connections to other start-ups and where there is an abundance of highly educated people. Special hubs are created where investors and entrepreneurs are brought together, in order to facilitate starting entrepreneurs with finance and knowledge. Geibel & Manickam (2015) analyse differences between Germany and the US and find that these infrastructures are more developed in the US compared to Germany. Therefore, it is not surprising to see that most successful start-ups were founded or moved to start-up hubs such as Silicon Valley, Orange county or London at an early stage in their development. Expectedly, Gornall & Strebulaev (2019) report that out of their sample of 135 Unicorns in the US, 66% are based in California.
This implies that (successful) firms tend to cluster in environments with favourable growth conditions.
0 10 20 30 40 50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
percentage with tertiary education
Year
Percentage of population with tertiary education
United States United Kingdom Average nordic countries
Average northern Europe Average southern Europe
Graph 4. P/E ratio of the S&P 500 index 1996-2018.
Graph 4 shows that the P/E ratio in the US has been steadily increasing after the crisis in 2009.
The P/E ratio is a good indicator of growth expectations because it is an indicator of investors believes about future earnings. A high P/E ratio implies that the market expects high earnings growth in the future. When expectations are less positive, either the price goes down, which lowers the P/E ratio, or the earnings decrease, which also decreases the P/E ratio. The P/E ratio is currently around 21 in the US which is relatively high. The P/E ratio of the STOXX 600 Europe index in Europe displays far lower ratios, ranging between 15 and 18 last year3. This implies that investors have a less positive outlook on firm’s earnings growth in Europe than in the US.
Europe counted 50 Unicorns as per October 20194. Out of these, 21 were based in the UK and 11 in Germany. Only 4 Unicorns were based in non-northern European countries.
Therefore, the correlation between countries with high Unicorn development and factors like GDP growth, P/E ratios and education levels is very obvious. Since start-ups are the key driver for innovation within the economy and innovation is the only way in which long-term growth can be realized (Solow, 1956), facilitating the growth of start-ups and keeping them within the country should therefore be one of their the core concerns of policy makers as securing long- term growth is one of their main objectives. Investing in education could be a means to reaching this objective, since this will create a better climate for entrepreneurial firms to settle and grow their activities.
3 Retrieved from https://www.stoxx.com/document/Bookmarks/CurrentFactsheets/SXXGR.pdf
4 Found on https://www.cbinsights.com/research-Unicorn-companies -
20.00 40.00 60.00 80.00 100.00 120.00 140.00
1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018
P/E ratio
Year
P/E ratio S&P 500
PE ratio
In all three proxies listed above it is demonstrated that Europe is falling behind of the US when it comes to generating growth potential through innovation, although there are also big differences within Europe itself. Therefore, I will make subgroups within Europe in order to test whether sub-regions like the Nordic countries are also falling behind of the US. Based on my data I found that the Nordic countries do well as to the creation of an environment where firms conduct an IPO rather than PE financing.
1.6 Unicorns
1.6.1 Unicorns in general
As I mentioned before, this study will also investigate so-called ‘Unicorns’. These are companies that are valued over 1 billion dollars, but are still private. These companies are mainly present in the US and China, which has the second largest Venture Capital/Private Equity Market in the world. This study will also view these companies separately and investigate how these companies have grown so large and how they are different from other privately held firms. According to several recent news articles, the hot issue market for these kind of firms is coming to an end. Several previously highly valued firms have lost a lot of value after their IPO. These so called ‘Undercorns’ signal that the market does not always believe the valuations made by analysts before a Unicorn goes public. Former Unicorn firms such as Uber and Pinterest suffered from a massive devaluation after their IPO. Facebook, which was once a Unicorn as well, on the other hand, seemed to be overvalued at first, resulting in a price drop after the IPO5, but managed to convince the market of its value. Facebook currently is priced higher than its original offer price, which makes it an example of a successful Unicorn IPO in the long run.
1.6.1 Unicorns acquisition activity
One of the reasons why Unicorns grow so big is the fact that they engage in many acquisitions themselves. Bessler, Schneck, & Zimmermann (2017) find that the preferred growth strategy for firms that conduct an IPO is a strategy of growing through performing acquisitions. In order to finance this growth strategy, these firms acquire extra external capital. Celikyurt, Sevilir &
Shivdasani (2010B) find similar results and also conclude that firms employed an acquisition strategy after their IPO. Good examples of firms who employ this growth strategy are Google and Facebook, which both had a business plan that enabled them to keep growing on their own without going public. Now that these companies are in a more mature phase, they went public and acquire companies with less radical ideas every week in order to keep growing.
It must be noted that this strategy is not without risk. Moeller et al. (2005) find that companies tend to self-destruct due to overconfidence after a string of successful deals. The
5 Stock data retrieved from https://www.macrotrends.net/stocks/charts/FB/facebook/stock-price- history
authors find that companies tend to have multiple value adding smaller deals prior to one big deals which destroys the entire value that was created with the deals made before. This is explained by Moeller et al. by the hypothesis that companies pick the easy and sensible targets at first, but run out of options as they go on. After a period of time, overconfidence triggers management to engage in a deal which is not NPV positive. This hypothesis is also tested and confirmed by Doukas & Petmezas (2007) who find that due to self-attribution, CEOs become overconfident after a sequence of deals, which in turn leads to decreasing wealth in the subsequently completed deals.
1.7 Mutual funds
The trend towards a decreasing number of listed firms as described by Doidge, Karolyi and Stulz (2017) has a large impact on how investors can invest and participate in a firm’s growth opportunities. The gains that investors can potentially make are not open to all investors in public equity markets but only to those that can engage in private equity markets. We currently observe that the growth potential of start-up firms is now realized mostly during the period in which firms are held privately. Therefore, investors in the public market miss out on these opportunities. Typically, it is hard for private investors to invest in a PE firm, which usually asks a commitment over $250,000. Mutual funds allow investors with less wealth to tap in to the potential excess gains of the private market by investing in PE firms, since not enough publicly traded companies are available.
A caveat, however, is that mutual funds are usually restricted to having a certain percentage of their investments in illiquid assets. As a result of this, the share of investments that they can commit to PE firms is low compared to the total invested capital. Moreover, mutual funds provide an additional layer of costs for the private investor, namely onetime expenses when they buy or sell, and costs through an expense ratio, which covers management, legal and marketing expenses.
1.8 Problem statement and motivation
After reviewing and assessing the literature and statistics mentioned above, I conclude that a listing gap is present in the US but and Europe, which seems to be caused by different factors.
In section 1.2 I find that it is important for companies to have disruptive innovation in order to grow on its own. Since it is harder for companies to develop disruptive innovation, the amount of trade sales has increased. I discussed possible explanations for a difference in listing gaps, 1) being the (non)existence of dual class shares in Europe which I discuss in section 1.4, and the 2) the lack of growth options in Europe which I explain in section 1.5. Furthermore, I describe in section 1.6 that the presence of Unicorns is correlated with growth options. Finally, I conclude that private investors suffer from the current listing gap, since investors in Europe miss out on diversification benefits due to the reduced number of assets they can invest in, which I outlined in section 1.7. All these factors influence the current financing behaviour of
entrepreneurial firms. Section 2 will further analyse these financing choices and will help me construct my hypotheses.
As mentioned in the introduction, this thesis will investigate which factors contribute to the current trend of decreasing IPOs using a probit model and several other tests, which I will outline in section 4. Moreover, factors that influence the potential that an entrepreneurial firm can grow into a Unicorn will be analysed. Since I have concluded that having disruptive innovation is important for companies to achieve high growth without being sold in a trade sale, I believe being in the technology sector might be a significant predictor to a firm’s growth potential. This is why we are expecting that Unicorns will be more present in this sector. The way in which a firm is financed also has implications from a governance perspective. Listed firms are now much bigger than they were two decades ago and will therefore have more benefit of the monitoring effect of being public. Private companies, on the other hand, have more freedom to execute their strategy since they do not have to answer each strategic decision to outside investors who do not have the same level of information and/or goals as the firm. It is important to discuss why firms have an increasing preference to stay private because this will explain the listing gap.
2. Literature review
To understand financing behaviour of entrepreneurial firms which is the subject of my research, it is important to understand the way in which PE firms and IPO investors operate. The difference between staying private with PE financing and going public below will be set out by providing a literature review on these subjects. To subsequently understand the impact of financing rounds and the number of investors on entrepreneurial firms, the literature on this subject will be reviewed. Finally, the relevance of literature on Exit strategies and Unicorns is discussed.
2.1 Private Equity added value
The papers by Gompers et al. (2016;2019) provide insight into the investment selection motivations of venture capital (VC) and PE firms in the US. The authors find that VC firms tend to value the composition of management even over the business model itself. As regards PE, they find that PE firms as well as VC firms use the internal rate of return (IRR) and multiples of invested capital as methods to evaluate their PE investments.
Akcigit et al. (2019) developed an endogenous growth model and find that with regard to growth and innovation prospects, VC backed entrepreneurs do significantly better compared to bank financed entrepreneurs due to assortative matching between venture capitalists and entrepreneurs. Moreover, the authors find that these VC backed firms significantly boost aggregate innovation and productivity growth. This also signals that capable management is key in achieving growth. As a result of the factor of management composition in value creation,
it makes sense for entrepreneurial firms to prefer private funding over public funding, since public funding comes with several costs, as mentioned by Fuller (2004). Moreover, because of assortative matching, entrepreneurial talent can be more confident that it will be better recognized in private market opposed to public markets.
2.2 The IPO as an exit strategy
PE firms have to orchestrate their exit well to maximize their return on investments. One exit strategy is selling the firm on the public market through an IPO. Benninga, Helmantel & Sarig (2005) view IPOs as a one shot decision. They argue that the decision to go public or to go private is a continuous one, which can be timed. Their hypothesis is that entrepreneurs constantly weigh the benefits of being public against the costs of going/being public. This hypothesis is also confirmed for family firms in Germany by Bessler, Beyenbach, Rapp &
Vendrasco (2019).
The notion of being able to time the moment to conduct an IPO is closely tied with the concept of hot issue markets, as described by Ritter (1984). The main conclusion of Ritter’s paper is that IPOs come in waves, which are driven by favourable market conditions which makes them
‘hot issue markets’. From the findings by Benninga et al. and Ritter, we may conclude that PE firms might also time their exit. However, from practice it has been is seems very hard for PE firms to time the right moment for their investment to go public.
The devaluations directly following the IPOs of previous Unicorns such as Facebook, Snap, Uber and Lyft illustrate this. However, even with these large devaluations, PE investors who financed these companies from an early stage still managed to get a high return on their investments (Zöttl, 2019). Additionally, Qian et al. (2019) find that initial failure of IPOs is mostly driven by negative market sentiment and underwriter prestige. The authors find that long term failure is often averted by professional shareholder monitoring. Therefore, it is likely that firms that initially underperform, but are backed by institutional investors with a long term vision, tend to survive in the long term.
Gornall & Strebulaev (2019) find that most current Unicorns in the US are private, while only few were acquired or conducted in an IPO. They report that 37 out of their 135 Unicorns conducted in an IPO, while the large majority stayed private. This might signal that PE investors who hold Unicorns within their portfolio are hesitant to capitalize on their investment through an IPO, which might be because of the reasons I just listed.
Currently, we see a trend of decreasing IPO activity Ritter (2019). Gao et al. (2013) and Lattanzio et al. (2019) explain this by stating that there is an increase in tradesales because this enables PE firms to achieve higher returns. In this paper, a probit model will be constructed to find factors that can predict an IPO exit and an trade sale exit. Finding these factors can add to the literature by increasing our understanding of what other factors are relevant to explain the
causes of the difference in exit strategies, apart from those already found by Doidge, Karolyi and Stulz (2017) and Lattanzio, Megginson and Sanati (2019).
2.3 Legal origins
One of the factors that I expect to be of influence on financing behaviour are the legal origins of in the entrepreneurial firms’ home country. Aminadav et at (2019) find that legal origin as described in La porta (1998), as well as the political theories as described by Rajan and Zingales (2003), explain the structure of corporate control and investor protection. Therefore, these theories will be included in my analysis, to find an explanation for differences between the US and Europe in financing behaviour and exit strategies. In addition, Engelen & Van Essen (2010) find that underpricing in IPOs is larger in countries with a lower standard of legal protection, measured by the level of investor protection in different jurisdictions, enforcement and the quality of their legal system. Therefore, I expect that French civil law will have a negative influence on IPO activity and common law to have a positive predictive value. La Porta, Lopez- de- Silanes, Shleifer& Vishny (1998) find that common law countries provide the best protection to both shareholders and creditors, while French civil law countries provide the lowest protection. The way the sample is divided as regard legal origins is listed in table 1 in the methods section.
2.4 Financing rounds and number of investors
One of the key aspects of analysis in this thesis is entrepreneurial firms’ growth. In the literature, financing rounds are often used to track the progress of an entrepreneurial firms’
growth. Davila, Foster & Gupta (2003) find that the fact that a firm enters in a first financing round provides a signal of the quality of the start-up, which increases in credibility as the financing becomes more probable. Moreover, they find that the distinctive growth path of these firms is not identifiable before the first financing, which means that abnormal growth is realized when firms enter in PE funding.
As regards the number of investors, Du & Hellmann (2019) find that VC firms that have multiple joint investments tend to underperform and have negative network effects.
Therefore, the fact that Unicorns have a larger consortium backing them should not be immediately be considered positive as long as the PE firms have worked together in the past.
However, having multiple investors who have not previously worked together could be positive because each investor can bring different knowledge and guidance to the entrepreneurial firm.
Humphery-Jenner (2013) found that diversification in PE firms investments increases returns, implying that it is beneficial for them to have smaller several investments together with other PE firms instead of having one large investment as a sole investor.
Therefore, it is important to test whether having multiple investors is a factor that influences the likelihood of a certain exit strategy and whether it influences whether a firm will grow in to a unicorn.
2.5 Unicorns
2.5.1 Unicorns in General
There has been very little research in to the prediction of firms becoming a Unicorn. Dellerman et al. (2017) developed a hybrid intelligence which combines human and machine intelligence.
Although this is still in the testing phase, it shows the direction in which the literature is going.
These kind of methods will contribute both to academia and practise. In this thesis, a probit model will be constructed in order to find factors which might contribute to firms becoming in to a Unicorn. These factors might in turn be integrated in to models such as those of Dellerman et al.
2.5.2 Unicorns in relation to financing rounds and number of investors
Out of the finding mentioned in section 2.4, we may expect that Unicorns have gone through more rounds of investment compared to their non-Unicorn counterparts. Hall & Lerner (2010) find that many R&D intensive start-ups are faced with relatively high costs of capital, which slows down growth in countries with a poorly developed PE market. Therefore, I expect that countries with less PE activity will have a lower amount of financing rounds and number of investors.
2.6 Private vs public
One of the major roles of PE investors, apart from providing financing, is the monitoring and consulting role. PE firms meet with the entrepreneurs in face to face meetings and offer advice on how to proceed with the company. This is an added value of PE financing that is hard to effectuate in the event of public financing, since the distance between the entrepreneur and the capital providers is much higher. Moreover, from a strategic perspective, there is less focus or direction since publicly traded firms usually have dispersed ownership in which all parties may have different interests. Acharya et al. (2012) prove this by studying returns during the private phase of entrepreneurial firms. They find a positive relationship between relevant former functions of PE general partners and excess returns. This implies that knowledge brought to the entrepreneurial firm by the PE firm increases performance.
The idea that private ownership is better than public ownership is also strongly dependent on the believe that the entrepreneur has more skills and knowledge than the average shareholder.
If this superior knowledge has an influence on entrepreneurial firms’ performance, a second question would be for how long the entrepreneur is better fit to lead the company compared to
selling the company an letting a professional manager lead the firm. Forbes (2005) for example finds that founding entrepreneurs tend to be more overconfident than managers who are not entrepreneurs. The authors of this paper suggest that educators and practitioners undertake interventions order to guide the entrepreneur in making better decisions. PE acts under the same mechanism as the interventions of educators and practitioners in steering the entrepreneur to make good decisions.
Furthermore, the introduction of the Sarbanes Oxley Act (SOX) in 2002 has significantly increased the amount of potentially sensitive information a US listed company has to disclose to the public (Fuller, 2004). This might yield a disadvantage compared to private companies who do not have to disclose such information. Net private costs as a result of SOX are mainly driven by section 404, which requires internal control tests to be implemented/disclosed in order to ensure the accuracy financial reports. The law was implemented to increase consumer confidence according to Iliev (2010). The author finds that section 404 led to a significant increase in costs to being public using a quasi-natural experiment.
From these aspects of the public-private divide, it can be concluded that increased regulation decreases IPO activity. This is relevant to this thesis because regulation is influenced by legal systems, which might therefore be a predictor of whether a firm conducts an IPO.
3. Research questions and hypotheses My main research question is:
“Can the difference in growth options explain the current listing gap, Unicorn development and PE investments of entrepreneurial firms between the US and Europe?”
I will study this in the period between 1998-2017. I have chosen 1998 as a starting point because as I set out in the literature review, Lattanzio et al. (2019) have marked this year as the point from which PE activity has rapidly increased in the US. I will compare the US to several subsets of European countries.
I will answer the research question through testing several hypotheses, set out in the sections below, on the differences in financing behaviour between the US and Europe.
3.1 Financing behaviour of entrepreneurial firms
In order to test financing behaviour of entrepreneurial firms, three hypotheses are constructed.
The first hypothesis tests differences in the number of rounds of financing, the second hypothesis tests differences in the number of investors, and the third hypothesis tests differences in the number of firms that received first investments. All hypotheses are based on the literature review and my interpretation of the current economic circumstances. The hypotheses are listed below.
Hypothesis 1:
“Are there any significant differences between the length of financing in the period up to the exit from the investment of PE firms between the US and Europe?”
H0: Number of rounds US ≤ number of rounds Europe H1: Number of rounds US > number of rounds Europe Formally:
H0: Y1 - Y2 ≤ 0 H1: Y1 - Y2 > 0
Where Y1 is the average number of rounds in Europe, and Y2 is the average number of rounds in the US. I expect to reject H0 since the PE capital markets are more developed in the US when compared to Europe. This will lead to firms using PE financing instead of for instance bank loans or public finance, resulting in more financing rounds.
Hypothesis 2:
“Are there any significant differences in the number of investors in the period up to the exit from the investment of PE firms between the US and Europe?
H0: Number of investors US ≤ number of investors Europe H1: Number of investors US > number of investors Europe Formally:
H0: Y1 - Y2 ≤ 0 H1: Y1 - Y2 > 0
Where Y1 is the average number of investors in Europe, and Y2 is the average number of investors in the US. Based on the literature and economic data, I expect H0 to be rejected because the PE market in the US is more developed, leading to a bigger pool of investors.
Therefore, I expect US entrepreneurial firms to have a greater amount of financier backing them compared to European firms. I will also test this and the previous hypothesis when differentiating for Unicorns. Section 3.3 further describes this.
Hypothesis 3:
“Have the differences in financing behaviour between Europe and the US converged in the period 2009-2017, relative to the period 1998-2008?”
H0: Δ number of deals ≤ 0 H1: Δ number of deals > 0
From the literature I have found that Europe currently lags behind the US with as regards PE market development. Therefore, I expect that in the first section of my dataset (1998-2008), the differences in financing behaviour will be higher than in the last part (2009-2017), since
the PE market in Europe is developing. However, this might not be the case since growth options are present, as I outlined in the introduction. Therefore, it is important to assess whether Europe is actually caching up, or falling even further behind. I selected the breakpoint of 2009 due to the fact that the financial crisis has had a large impact in the European markets.
3.2 Exit strategies
In addition to the hypotheses mentioned in 3.1, I will analyse factors that predict exit strategies.
Hypothesis 4:
“Are there any factors with significant predictive power as to whether a PE firm will exit through an IPO?”
H0: The factor has significant predictive power
H1: The factor does not have significant predictive power Or in mathematical form:
H0: βfactor = 0 H1: βfactor ≠ 0
For this hypothesis, I will test several factors, which include legal origins, number of investment rounds, number of different investors and whether the firm operates in the tech sector. Based on Engelen & Van Essen (2010), I expect that firms will choose an IPO exit strategy less often in countries with a lower standard of investor protection, since the potential revenue is lower is those countries, which I have outlined in section 2.3.
3.3 Unicorns
I have several questions regarding Unicorns, which I will use to further construct an hypothesis on which factors are a determinant for a firm to grow in to a Unicorn. My questions regarding Unicorns are:
1) “Why do Unicorns prefer private funding to public funding?”
Is it because current investors would not like to miss out on further potential growth, or is it because the costs of being public is too high?
2) “When does the development of entrepreneurial firms diverge? Do smaller firms have faster growth of the company than large firms?”
Does the fact that a firm has generated an equilibrium breaking idea speed up the process of growth of the company, and will there therefore not be a difference in the duration of PE financing between Unicorns and other entrepreneurial firms?
3) “Do Unicorns have the same number of investors as their non-Unicorn peers, or do they attract more PE firms later on?”
For the answer to this question, the sequence of the type of investors is also important since this might be an important predictor of the growth direction. It is relevant to know whether mutual funds come in to play only at a later stage, when the firm could have gone public, or earlier, when the firm has more benefit by a more actively engaged investor such as a PE firm. Are there benefits to having multiple investors instead of one sole PE investor that can provide financing and guidance the entrepreneurial firm at each growth stage, for example through network effects.
The first question is of a more qualitative nature, and will be answered by a discussion of the literature. My expectation regarding this first question is that firms stay private if they believe they have ideas that are good enough to capitalize on, on their own. On the other hand, trade sales may also be the result of firms not having ideas that are good enough to create a successful company. The second question is mostly based on the findings of Bowen (2019), who finds that having more disruptive patents decreases the likelihood of engaging in a trade sale. This matter will be discussed further this matter in the conclusion.
The second and third question relate to the first hypothesis and second hypothesis respectively:
Both tests will also be performed while differentiating for Unicorns. I expect that Unicorns are financed by PE for a longer amount of time, since Unicorns generally have above average ideas and therefore need to have time to fully develop these ideas without being burdened by outside investor pressures. In addition, investors are likely to be reluctant to exit since high value is created while they invest. Therefore, it will be less attractive to sell prematurely. This hypotheses will be tested for Unicorns by analysing the number of rounds and the total time frame of PE investment in Unicorns.
Moreover, I expect that the current market climate has caused PE firms to extend the period in which they keep the entrepreneurial firm private because of the reasons outlined in section 2.2.
The aforementioned devaluations and stock price declines of former Unicorns after recent IPOs are a signal that the costs of going public might be too high currently. My expectation is that PE firms currently weigh the costs of being public as too high relative to gains that this provides over being private. Legal environment might be a factor which could mitigate the costs of being public however, which will be tested in the probit model. By analysing whether IPO activity has decreased over the past years, I will test whether PE firms keep firms private for longer.
Hypothesis 5:
“Are there any factors with significant predictive power as to whether a firm will grow in to a Unicorn?”
H0: The factor has significant predictive power
H1: The factor does not have significant predictive power Or in mathematical form:
H0: βfactor = 0 H1: βfactor ≠ 0
Additionally, a fifth hypothesis will be tested, which allows to analyse whether there are factors that can predict a firm becoming a Unicorn. Based on the literature review, indications that firms are benefitted from a well-functioning legal environment are found. Therefore, this will be tested by adding dummy variables to test which legal environment is beneficial and which legal environment has a negative impact. Moreover, I expect that having more financing rounds and investors will also be a predictor of Unicorn development. Since having been through more rounds signals that the firm has had extra financing need multiple times, implying they have enough investment opportunities. Finally, it will be analysed whether being in the tech sector increases the likelihood of becoming a Unicorn, since most current Unicorns are in the tech industry.
4. Methodology
In this section, the statistical methods that are used to test the hypotheses are outlined. I will first describe the tests employed to test the first three hypotheses, and thereafter describe the probit model for testing hypotheses four and five. To test summarize the data, the pivot table tool in excel is employed to process the large quantity of data quickly and organise it in an accessible way.
4.1 Difference tests
After establishing the statistics for both the US and Europe, a t-test is conducted to examine the differences in the number of deals and the number of investors. This leads to testing the first and second hypothesis. The regression for the difference test is:
Formula 1. T-test in order to test for differences
𝑡 = #$% #'
(#$ (1) Where β1 is the mean of the US, and β2 is the mean Europe. A rejection of the H0 hypothesis
suggests that there is a significant difference between the number of financing rounds and/or
the number of investors. The sign of the difference provides information in which direction this difference leads. The third hypothesis is tested by performing the same test but in this case β1 is the mean of first financing round in the period 1998-2008 and β2 in the period 2009- 2017.
4.2 Probit model exit strategy
The fourth hypothesis relates to finding factors that contribute to the firms deciding for going public (IPO). For testing this hypothesis, a probit model is constructed with the regression outlined in formula 2:
Formula 2. Probit model explaining the likelihood that an entrepreneurial firm chooses to exit through an IPO.
𝐼𝑃𝑂 = ∁ + 𝛽1 𝐶𝑜𝑚𝑚𝑜𝑛𝑙𝑎𝑤 + 𝛽2 𝐶𝑖𝑣𝑖𝑙𝑁𝑜𝑟𝑑𝑖𝑐 + 𝛽3 𝐶𝑖𝑣𝑖𝑙𝐺𝑒𝑟𝑚𝑎𝑛 +
𝛽4 𝐶𝑖𝑣𝑖𝑙𝐹𝑟𝑒𝑛𝑐ℎ + 𝛽5 𝑁𝑜𝑜𝑓𝐷𝑒𝑎𝑙𝑠𝑖𝑛𝑇𝑜𝑡𝑎𝑙 + 𝛽6 𝑁𝑜𝑜𝑓𝐹𝑖𝑟𝑚𝑠𝑖𝑛𝑇𝑜𝑡𝑎𝑙 + 𝛽7 𝑇𝑒𝑐ℎ + 𝜖 (2)
This regression includes the following: four dummies for law origins, the number of financing rounds, the number of investing firms, and a dummy for whether the entrepreneurial firm is in the tech industry. The previous literature suggests that the legal systems of the countries where the firms are located (civil law vs common law countries) might influence the financing behaviour. Therefore, the dataset is split for Europe in such a way that countries with civil law origins can be compared to those with common law origins. Table 1 specifies which country belongs to which dummy group. The graph is differentiated between growth option subsamples of the European countries, which are used in the graphs in the introduction, and the law origin dummies, which are used in the probit model. GDP per capita growth, P/E ratios and education levels are used as proxies to identify growth options. From the graphs in the introduction, it is fair to conclude that a separation between Nordic, Northern European, Southern European and the UK is a good grouping, since these sub-regions have roughly the same scores on the above mentioned proxies. With respect to the legal origins dummies, the paper by Qian & Strahan (2007) is employed to group the countries by legal origin. It is important to note that the Netherlands is classified under the French system in their paper, while in fact it has a mixed legal system. However, the Netherlands is classified under this system for consistency. This suggests how difficult it is to classify countries, especially those that are foreign countries to the authors.
Table 1. Dummy specification
Growth options subsamples Law origin dummies
Nordic North South Common
law
Civil Nordic
Civil German
Civil French Sweden
Norway
Germany Belgium France Netherlands
Italy Portugal Spain
The US The UK
Sweden Norway
Germany France Spain Italy Belgium Portugal Netherlands 4.3 Probit model Unicorns
To test the fifth hypothesis another probit model is constructed to find factors that can explain why a firm is growing into a Unicorn. It is important to model the likelihood that a firm develops into a Unicorn, since PE firms can use this knowledge to make profitable investments.
The model was constructed out of the same factors as the factors used to test the fourth hypothesis, as I expect that the same variables determine the probability that a firm becomes a Unicorn. The formula is stated below:
Formula 3. Probit model explaining the likelihood that an entrepreneurial firm will grow in to a Unicorn.
𝑈𝑛𝑖𝑐𝑜𝑟𝑛 = ∁ + 𝛽1 𝐶𝑜𝑚𝑚𝑜𝑛𝑙𝑎𝑤 + 𝛽2 𝐶𝑖𝑣𝑖𝑙𝑁𝑜𝑟𝑑𝑖𝑐 + 𝛽3 𝐶𝑖𝑣𝑖𝑙𝐺𝑒𝑟𝑚𝑎𝑛 +
𝛽4 𝐶𝑖𝑣𝑖𝑙𝐹𝑟𝑒𝑛𝑐ℎ + 𝛽5 𝑁𝑜𝑜𝑓𝐷𝑒𝑎𝑙𝑠𝑖𝑛𝑇𝑜𝑡𝑎𝑙 + 𝛽6 𝑁𝑜𝑜𝑓𝐹𝑖𝑟𝑚𝑠𝑖𝑛𝑇𝑜𝑡𝑎𝑙 + 𝛽7 𝑇𝑒𝑐ℎ + 𝜖 (3)
5. Data
For the empirical analysis, I collected 74,406 observations of deal-level data on the number of financing rounds each entrepreneurial firm goes through before the PE firm exits. Moreover, I obtained information on the exit strategies that the PE firm takes (IPO, PE buyout, trade sale, failure). Furthermore, I obtained a list of Unicorns to distinguish between Unicorns and smaller entrepreneurial firms. Other important characteristics are industry, company country, number of investing parties, founding date, first financing date, last financing date, and exit date (if applicable). Moreover, the data on the current status of the companies are used to identify the companies that went out of business. I used the Thomson Reuters EIKON database to collect data on each transaction. Companies are screened on nation to identify the deals that are required for my analysis. Furthermore, I selected deals for the period from1998 to 2017. The countries included in the analysis are: The United States, Belgium, Germany, France, Norway, Sweden, Spain, Italy, the UK and the Netherlands. The OECD database is used for information on education levels in Europe and the United States. Data on GDP per capita growth is collected from the World Bank database. Data on P/E ratios are from the Macrotrends database6. A
6 https://www.macrotrends.net/
dataset from CBInsights is used for information on current Unicorns, and the website TechCrunch7 for former Unicorns.
6. Results
This section present the results from testing the hypotheses outlined in section 3, using the methods described in section 4. First the data is described. Thereafter, the empirical tests for the differences in the number of financing rounds and the number of investors are presented.
In section 6.2, the probit models are introduced in section 4 to analyse the factors that contribute to a PE firm to execute certain exit strategies. Finally, a probit models is used to analyse factors that increase the likelihood that an entrepreneurial firm grows into the size of a Unicorn.
6.1 Financing behaviour 6.1.1 Descriptive statistics
As mentioned in the methodology section, summary statistics are presented to make the dataset more accessible. Table 2 shows descriptive statistics on the number of rounds and investors per entrepreneurial firm. The sample is then split into the US, Europe (all European countries as mentioned before the left-hand side of table 1, except the UK) and the UK. Moreover, three additional rows are introduced to show the financing characteristics of the Unicorns within the sample. This reveals the difference in financing behaviour compared to non-Unicorns, which is tested in section 6.1.2.
Table 2. Number of financing rounds and investors.
Observations Average number of rounds
Average number of investing firms
US sample 45372 2.84 3.62
European sample 20873 1.78 2.3
UK sample 8164 1.95 2.35
Unicorns US 145 6,47 11,37
Unicorns Europe 14 3,78 7,14
Unicorns UK 15 4,53 8,13
From the numbers presented in table 2, I find, on average, that US entrepreneurial firms receive more financing rounds of PE financing and have a larger consortium of PE investors backing them. This implies that US entrepreneurial firms rely more on PE than European entrepreneurial firms. Entrepreneurial firms in the United Kingdom have slightly more financing rounds and investors compared to Continental Europe, which suggests that the PE
7 https://techcrunch.com/Unicorn-leaderboard/
