Anushka Gupta

Independent Study and Mentorship

Finance

20 September 2019

Breuer, Wolfgang, and Andreas Pinkwart. “Venture Capital and Private Equity Finance as Key

Determinants of Economic Development.” ​Springer.com,​ Springer Berlin Heidelberg, 2

Feb. 2018, doi.org/10.1007/s11573-018-0892-x.

As I continue to research finance, I find that I am increasingly interested in

entrepreneurial finance and understanding how investment in the new age works. According to

my research, the main ways entrepreneurs gain the funds to sustain their visions is through

venture capital and private equity financing. Through this article, I have come to learn more

about what exactly venture capital (VC) funding is and how it differs from private equity

financing. Though the article did not go down to the specific advantages and disadvantages of

each option for entrepreneurs, it did mention how both were instrumental in demonstrating the

level of prosperity of an economy as well as a reflection of the values for that time.

An interesting point that was brought up in the article was about the extent to which

entrepreneurs have autonomy upon gaining funding. Obviously, to make their businesses work,

entrepreneurs need to be able to secure funding. And most entrepreneurs today do it through

venture capital firms and private equity firms. However, when they secure funding this way they

are essentially transferring a considerable amount of risk and by extension ownership of the

governing board of the business. Initially, it was something I had not considered, but reading the
article made this an obvious connection since these financing firms will naturally do what they

can to maximize the returns on their investments. The article also goes to mention some

criticisms about private equity financing, though, because it presents a more long-term hold on a

business. It takes on a more operational role in managing risks to see growth. The critics

mentioned in the article believe, however, that private equity financing actually “puts a heavy

burden on firms limiting their financial flexibility and lowering their long-term prospects.”

Another point that I thought was interesting about this article was the fact that the health

of a business is heavily influenced by intangible factors relating to a financing firm’s reputation,

national culture, and effectuation. With a better firm reputation, entrepreneurs can come out of

their initial growth period with less debt overall, longer maturities, and lower interest rates. This

part was pretty self-explanatory since it can be assumed that if a firm has a strong track record,

they would provide more benefits to the business they are financing. National culture and

effectuation are not as self-explanatory. With national culture, there are a myriad of components

that can dictate the effectiveness of a firm. An example shared in the article was family structure.

In the past, financing did not have to be relegated to third-party, private investment firms as

much because in a joint-family structure, much of the financing over an extended amount of time

with multiple family members contributing their own money. Similarly, growth would happen in

a similar fashion due to the power over the business being passed down to successors within a

family. With family structure having had changed so much, this is no longer possible, so firms

become instrumental in orchestrating success.

Furthermore, effectuation was a peculiar factor that was mentioned. As it is defined in the

article, effectuation is, “a form of problem solving which assumes the future is largely
unpredictable, but that it can be controlled through entrepreneurial action.” Essentially, the future

is exactly what entrepreneurs want it to be. When this philosophy is implemented by business

angels, it actually leads to more growth and return on investment. The implementation of this

really reflects the impact of simple psychology and confidence in finance and economics.

In conclusion, VC and private equity firms are immensely important in entrepreneurship,

and becoming even more in the changing economy. It is a truly fascinating field, but to fully

grasp how impactful it is, I would need to conduct and equally detailed analysis on the impact of

more traditional methods of investment in entrepreneurship.