08832323.2015.1019820
Journal of Education for Business
ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
The Bias in Favor of Venture Capital Finance in
U.S. Entrepreneurial Education: At the Expense of
Trade Credit
Thomas Clement, Steven LeMire & Craig Silvernagel
To cite this article: Thomas Clement, Steven LeMire & Craig Silvernagel (2015) The Bias in
Favor of Venture Capital Finance in U.S. Entrepreneurial Education: At the Expense of Trade
Credit, Journal of Education for Business, 90:5, 233-240, DOI: 10.1080/08832323.2015.1019820
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Date: 11 January 2016, At: 19:24
JOURNAL OF EDUCATION FOR BUSINESS, 90: 233–240, 2015
Copyright Ó Taylor & Francis Group, LLC
ISSN: 0883-2323 print / 1940-3356 online
DOI: 10.1080/08832323.2015.1019820
The Bias in Favor of Venture Capital Finance in U.S.
Entrepreneurial Education: At the Expense
of Trade Credit
Thomas Clement and Steven LeMire
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:24 11 January 2016
University of North Dakota, Grand Forks, North Dakota, USA
Craig Silvernagel
South Dakota State University, Brookings, South Dakota, USA
The authors examine whether U.S. college-level entrepreneurship education demonstrates a
bias favoring venture capital (VC) financing while marginalizing trade credit financing, and
the resulting impact on entrepreneurship students. A sample of U.S. business textbooks and
survey data from entrepreneurship students reveals a significant bias toward VC at the
expense of trade credit. Despite this overexposure to VC, students only indicate a very basic
understanding of how VC works. These findings suggest that business educators are doing a
poor job by favoring a complex and rare finance method such as VC over a widely used and
accessible source such as trade credit.
Keywords: entrepreneurial finance, entrepreneurship, trade credit, venture capital
Entrepreneurship has established itself as a major component of business education across the United States (Katz,
2003; Kuratko, 2005). Here we examine the extent to which
entrepreneurship education favors VC as a method of
finance and if that bias marginalizes more accessible methods such as trade credit. Trade credit is a widely used
source of debt financing impacting most business models
(Berger & Udell, 1998; Petersen & Rajan, 1997; Wilner,
2000). In contrast, venture capital (VC), a form of private
equity financing, is used by a very small percentage of firms
(Bygrave & Zacharakis, 2008; Lerner, Leamon, & Hardymon, 2012; Metrick & Yasuda, 2011). There is evidence
that VC is overexposed to students in textbooks and classroom curriculum relative to other finance sources such as
trade credit. What is unknown is the extent of the bias in
curriculum and how it may be impacting students. The critical need for this study is to expose a misalignment between
theory and practice, where students receive an overwhelming message in textbooks and classroom materials, and yet,
encounter a far different reality when entering the business
Correspondence should be addressed to Thomas Clement, University
of North Dakota, Department of Entrepreneurship, 293 Centennial Drive,
Stop 8098, Gamble Hall Room 110, Grand Forks, ND 58202-8098, USA.
E-mail: thomas.clement@business.und.edu
market to launch a venture. To test the proposed bias and
resulting incongruities among students, we examined popular business textbooks for space dedicated to trade credit
versus venture capital. We also distributed a survey to students at 11 U.S. universities measuring student’s exposure
to VC and trade credit. In addition, the survey posed questions about very basic trade credit and VC concepts not to
demonstration formal learning, but rather to gauge whether
students are gaining any understanding of these two finance
methods in coursework.
LITERATURE REVIEW
Capital financing for entrepreneurs can be classified three
ways: equity, debt, and bootstrapping (Barringer & Ireland,
2012; Kuratko, 2014; Rogers, 2009). Equity financing,
including VC, occupies a specific financial position on the
balance sheet of a company (Weygandt, Kimmel, & Kieso,
2012) and encompasses raising capital in exchange for an
ownership stake (Kuratko, 2014; Rogers, 2009). Debt
financing, including trade credit, involves borrowing
money or another asset from a third party with a promise to
pay plus, in some cases, a user’s fee in the form of interest
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234
T. CLEMENT ET AL.
(Kuratko, 2014; Rogers, 2009). Debt is also shown on a
company’s balance sheet as a liability (Weygandt et al.,
2012). Finally, bootstrapping is raising capital for a venture
through nontraditional finance sources. Examples of bootstrapping could include (a) trade and barter and (b) off-balance sheet activities such as borrowing capital assets from
acquaintances (Bhide, 2000; Kuratko, 2014; Van Auken,
2004; Winborg & Landstr€
om, 2001).
Contrary to popular belief (Kuratko, 2014), the majority
of new businesses launched in the United States have very
little innovation or novelty (Reynolds, 2005; Shane, 2008).
In fact, among the highest growth startup companies in the
United States, only about 10% sell something unique that
no one else offers (Bhide, 2000; Shane, 2008). Studies also
demonstrate that the historical average sales of small, selfemployed firms is usually under $100,000 a year (Bitler,
Moskowitz, & Vissing-Jørgensen, 2005; Shane, 2008) and
more than 80% of these entrepreneurs report they have little
intention of pursuing measurable growth (Shane, 2008; van
Gelderen, Thurik, & Bosma, 2005).
These statistics on U.S. entrepreneurs show that a majority of entrepreneurial ventures do not seek to produce
highly innovative products or services or to develop a rapidly growing business. The profile of typical U.S. entrepreneurs plays an important role in this study in determining
which type of financing most entrepreneurs pursue and
manage. Much of the misconception involving the realities
of entrepreneurial finance appears to stem from how information is delivered through textbooks and curriculum.
Textbooks and Course Curriculum
Ornstein (1994) stated that “textbooks have come to drive
the curriculum” (p. 70) and argued that reliance on textbooks in curriculum development is a perpetuation, because
many teachers are also educated and guided by the textbook. Despite a perceived superior U.S. educational system, modern teachers are not trained properly and do not
have adequate time to develop new curriculum, and therefore, depend heavily on texts to provide course content
(Ornstein, 1994).
Similarly, Kauffman, Moore Johnson, Kardos, Liu, and
Peske (2002) found that reliance on textbooks in course or
curriculum development is often a result of desperation on
the part of teachers. While Lattuca and Stark (2009) argued
that textbooks are “cultural artifacts” (p. 10), they recognize
that many higher education faculties rely on textbooks for
organization and sequencing of a course based on, for
example, a table of contents.
Trade Credit
Trade credit financing or the ability to acquire goods and
services without having to immediately pay, is the largest
source of short-term debt financing in the United States and
is considered, by some, to also be a source of bootstrapping
(National Small Business Association, 2008; Rogers, 2009;
Wilner, 2000). Petersen and Rajan (1997) noted that trade
credit is “the single most important source of short-term
external finance for firms in the United States” (p. 661), and
that the use of trade credit has been traced as far back as
about 1,000 B.C. (Cheng & Pike, 2003; Christie & Bracuti,
1981). The amount of trade credit outstanding is, historically, double that of other short-term credit sources
(Wilner, 2000), and about 20% of businesses use it as their
exclusive source of finance (Cole, 2010).
Trade credit is synonymous with credit terms such as
“2/10 net 30” on a sales invoice (Ng, Smith, & Smith,
1999; Weygandt et al., 2012) with almost two thirds of
credit terms falling between 21 and 30 days (Cu~
nat &
Garcia-Appendini, 2012; Giannetti, Burkart, & Ellingsen,
2011). Trade credit, therefore, requires suppliers and
entrepreneurs to enter into a debtor–creditor relationship
involving inventory as opposed to money (Ng et al.,
1999; Peterson & Rajan, 1997; Wilner, 2000). Trade
credit impacts virtually every type of business model
(Petersen & Rajan, 1997; Wilner, 2000), and is used at
virtually every stage in a company’s life (Berger &
Udell, 1998; Cu~nat, 2007).
Trade credit often acts as a substitute for more traditional sources of finance, such as bank loans (Blasio,
2005; Petersen & Rajan, 1997). Huyghebaert, Van de
Gucht, and Van Hulle (2007) determined this substitution is especially true for startup companies that banks
are not as willing to take a chance on financing. Wilner
(2000) found that suppliers are also much more likely
than banks to renegotiate terms with entrepreneurs.
Some scholars, therefore, have argued that trade credit
is as much a form of bootstrap financing as it is traditional debt, because of the leveraging of relationships,
negotiability, and the need for entrepreneurs to network
with suppliers (Bosse & Arnold, 2010; Winborg &
Landstr€om, 2001).
Suppliers also appear to have an advantage over banks in
that goods purchased on trade credit can be more easily
repossessed or the supply simply cutoff (Mian & Smith,
1992; Petersen & Rajan, 1997). For the entrepreneur, trade
credit reduces transaction costs by allowing entrepreneurs
to pay for several purchases at one time as opposed to cash
on delivery (COD) (Ferris, 1981; Petersen & Rajan, 1997;
Schwartz, 1974). Entrepreneurs also use trade credit as a
way to monitor the quality of goods and services, with
credit term periods allowing for inspection and a potential
withholding of payment for poor quality (Long, Malitz, &
Ravid, 1993; J. K. Smith, 1987). The impact and benefits of
trade credit, therefore, are felt by virtually every type of
business at every stage. While trade credit has been studied
extensively in the literature for decades, venture capital
also attracts the interest of scholars looking to study equity
forms of finance.
THE BIAS IN FAVOR OF VENTURE CAPITAL FINANCE
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Venture Capital
Almost the opposite of trade credit, VC is a type of private
equity financing in which an outside investment fund finances a venture in exchange for a percentage of ownership
(Lerner et al., 2012; Metrick & Yasuda, 2011). VC impacts
less than 2% of all entrepreneurial ventures (Berger &
Udell, 1998; Rogers, 2009). The Small Business Administration Office of Advocacy (2011) reported that private
equity financing, including VC, accounts for about 6% of
total finance sources. Compared to trade credit, VC is also
relatively young, having been formally recognized as a
finance source since the mid-1940s and attracting attention
in primarily the last 30 years (Cumming & MacIntosh,
2004; Gompers & Lerner, 2004; Lerner et al., 2012;
Metrick & Yasuda, 2011; Samila & Sorenson, 2011).
VC is typically used only during the growth or expansion of a venture, beyond startup, or as a bridge between
bootstrapping and more traditional finance methods (Gompers & Lerner, 2001; Zider, 1998). Venture capitalists,
therefore, are not generally known for providing development or startup financing for ventures. Early-stage financing, therefore, comes from sources such as angel investors,
or through the use of bootstrapping techniques (Rogers,
2009).
The reasons for the limited use of VC include the
expected returns to investors, the narrow fit with specific
business models, and the limited geography of VC dollars
(Bygrave & Zacharakis, 2008; Lerner et al., 2012; Metrick
& Yasuda, 2011). Venture capitalists are attracted to highly
innovative businesses that grow very quickly, typically
within a two- to eight-year time frame (Cumming & MacIntosh, 2004; Rogers, 2009). Gompers and Lerner (2001)
noted that in 1999 roughly 60% of VC was invested in computer technology and communications, with an additional
10% in medical science firms. Recently, a report prepared
by Thomson Reuters (March, 2013) ranked the top three
industries attracting VC as software (31%), biotechnology
(15%), and industrial–energy (10%).
Geographically, in the United States, VC investing is
centered in three primary metropolitan areas: San Francisco
and San Jose (a.k.a., Silicon Valley), Boston and greater
New England, and New York City (Chen, Gompers,
Kovner, & Lerner, 2010; Metrick & Yasuda, 2011). In fact,
the state of California alone is home to about 50% of the
total VC investments in the United States (Metrick &
Yasuda, 2011).
For VC investors, R. L. Smith and Smith (2004)
observed, “new ventures are high-risk investments that tie
up investor’s capital for several years, with no easy means
of exit” (p. 231). Because of the risk, venture capitalists
expect very high rates of return on their investments. Typical returns range from 30% to 60% in earlier stages of
financing to a lower 20–30% for expansion of established
businesses (R. L. Smith & Smith, 2004). The ultimate cost,
235
however, of VC to the entrepreneur may be an involuntary
exit from his or her own firm. Literature suggests that companies using VC are far more likely to have their founders
removed and replaced by an outside CEO, either for lack of
experience, personality clashes with investors, or poor performance (Hellmann & Puri, 2002; Kaplan & Lerner,
2010).
Even though VC makes headlines, its impact is significantly smaller than trade credit. In total dollars financed,
trade credit accounts for almost three times the amount provided by private equity investors (Lerner et al., 2012; Ng
et al., 1999; Wilner, 2000). As this section showed, VC is
rare, narrowly focused, expensive, and complex. Central to
the theme of this study, trade credit is not as complex as
VC, it impacts a wider array of ventures, and yet, it receives
little mention in classrooms or textbooks. As a result, students may be presented with financing options that do not
align with the realities of mainstream business, especially
at the early stages of a venture.
METHOD
Textbook Survey/Analysis
To investigate the problem of a potential bias toward VC at
the expense of trade credit in entrepreneurial education, a
quantitative survey of textbooks (n D 13) was first conducted. Specifically, textbooks were analyzed to determine
how much physical space was dedicated to discussing trade
credit financing versus VC. The textbooks were chosen
from sales market share data of the most popular texts in
the following disciplines: entrepreneurship, entrepreneurial
finance, introduction to business, corporate–managerial
finance, and small business management.
The textbooks were examined in two ways. First, each
index was reviewed for specific mention of terms related
directly to trade credit and VC. The second part of the textbook analysis involved quantification of space dedicated to
trade credit versus VC in terms of sentences, paragraphs,
pages, or full chapters. The researchers used the evidence
found in the textbook analysis to develop a survey instrument which was administered to college-level students.
Survey Analysis
Participants. Participants were 126 undergraduate and
graduate college students, including 94 men and 28 women.
Participants were invited to complete the survey in a classroom setting by instructors known to the principal investigators. Students entered in a Midwestern university
business plan competition also voluntarily participated. Participants were either enrolled or had been enrolled in entrepreneurship courses or programs of study at 11 U.S. fouryear universities, including eight public and three private
236
T. CLEMENT ET AL.
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institutions. The geography of these schools included seven
Midwestern schools, one Southeastern, one East coast, one
Southwestern, and one West coast school. Of the 11 schools
participating, two had been consistently ranked as having
among the best entrepreneurship programs in the United
States (“Colleges & business schools,” 2014). No restrictions were imposed regarding a student’s status (i.e., undergraduate, graduate), or by their specific field of study (i.e.,
business, nonbusiness). The estimated response rate to the
survey was about 77%.
Instrument. The survey contained demographic questions including gender, education status, area of study, and
number of entrepreneurship courses taken. Participants
were also asked to rate their level of agreement on 32 questions using a 6-point Likert-type scale ranging from 1
(strongly disagree) to 6 (strongly agree). Four constructs
were designed with six specific survey questions within
each construct: This accounted for 24 of the 32 survey
questions. The survey concluded with eight additional
entrepreneurial finance questions to test their more
advanced knowledge of trade credit and VC.
Construct 1 (C1), student exposure to VC, contained
questions designed to measure how often students were
reading, hearing, and seeing VC and related terminology.
Construct 2 (C2), student exposure to trade credit, measured the amount of exposure students received to the topic
of trade credit. Construct 3 (C3), basic student understanding of VC, measured student’s agreement with statements
about VC. Finally, construct 4 (C4), basic student understanding of trade credit, displayed student’s agreement with
statements about trade credit concepts.
The relationship between exposure and student
responses to questions on VC concepts was tested through
a Pearson’s correlation between C1 and C3 determining
how exposure to VC changed the level of agreement with
these conceptual questions on VC. Similarly, the relationship between trade credit exposure and conceptual agreement was addressed by a Pearson’s correlation between C2
and C4. This correlation determined how exposure to trade
credit affected agreement with conceptual statements on
trade credit.
Procedure. Recruitment of survey participants was
through an oral presentation of the study and survey instrument. Subjects were informed that their participation was
completely voluntary. If a subject chose not to participate,
(s)he was told to return a blank or incomplete survey along
with the rest of the participants, and their survey would be
disregarded. This option was made available so that nonparticipants would not feel singled out as a result of their decision to not complete a survey.
Participants were asked to complete all demographic
information and provide a response to all 32 Likert-type
questions. Once the survey was completed, participants
were instructed to return their surveys to an envelope held
by the survey proctor. The principal investigators were not
present during the completion or collection of the surveys.
The survey instrument contained no distinguishable personal information regarding participants, thus safeguarding
participant anonymity.
RESULTS
Textbook Data
Analysis. Using the 32 survey Likert-type questions,
descriptive data was calculated including each question’s
percentage of agreement, mean, and standard deviation.
Reliability testing was also performed using IBM SPSS Statistics 20 software calculating Cronbach’s alpha and
Pearson’s correlation coefficient for each construct.
To determine if a bias favoring VC existed, participants’
exposure to VC was measured by the mean level of agreement with questions in C1. To address whether trade credit
was being marginalized in entrepreneurship education, participants’ mean level of agreement to questions in C2 was
examined. In evaluating student’s feelings on VC concepts,
the average level of agreement for C3 was reviewed. The
overall level of agreement to four of the additional questions not grouped into a construct was also analyzed with
levels of agreement testing more advanced concepts of VC.
Student opinions on trade credit concepts were determined
by the mean level of agreement to questions in C4. Similar
to VC, two additional nonconstruct questions were also
examined to test more advanced trade credit information
among students.
Table 1 presents a summary of the textbook analysis
results, which compares the total space allocated to topics
related to VC and trade credit among the 13 textbooks
reviewed. The table shows the total number of texts containing each topic within the index and quantification of
separate chapters, pages, paragraphs, and sentences devoted
to each topic in hierarchal, noninclusive fashion. The difference in coverage between VC and trade credit topics was
substantial. Given that the topic of venture valuation could
be independent of VC financing, and setting aside the data
in Table 1 for this topic, VC coverage alone still results in
seven chapters, 54 pages, and 47 paragraphs of coverage.
Even when examined on a topic-by-topic basis, attention to
VC far eclipsed that of trade credit.
Survey Data
The significant demographics of the survey participants
(n D 126) are detailed in Table 2. Nearly 75% of the students who completed the survey instrument were men.
THE BIAS IN FAVOR OF VENTURE CAPITAL FINANCE
TABLE 1
Summary of Textbook Analysis Comparing VC and Trade
Credit–Related Topics
Number
indexed Chapters Pages Paragraphs Sentences
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Topic
VC-related topics
VC/venture capitalist
Valuation
Exits, exit strategies,
and/or harvest
Total
Trade credit-related
topics
Trade credit, supplier
credit, trade
payables, and/or
accounts payables
Total
13
7
7
13
3
5
4
38
17
16
31
4
16
0
0
0
12
71
51
0
0
6
32
9
0
6
32
9
Respondents were either studying entrepreneurship in some
capacity (n D 68) or were pursuing another business major
(n D 40). Not shown in Table 2, student participants had
completed an average of 2.3 entrepreneurship courses prior
to participating in the survey. The relatively low average
number of entrepreneurship courses could indicate that
many of these students were pursuing entrepreneurship as a
minor, certificate, or concentration as opposed to a full
major.
All of the responses within each construct were averaged
and calculated using Cronbach’s alpha reliability coefficient and Pearson’s correlation coefficient. The results of
these measures are shown in Table 3. The reliability of
each of the subscales was adequate. Correlations existed
between all subscales, but in particular, exposure to VC
was associated with students’ perceived understanding of
VC (r D .78, p < .05).
Each individual survey question was also analyzed to
determine some form of agreement (i.e., slightly agree,
TABLE 2
Significant Demographic Information of Sample
Characteristic
Gender
Male
Female
Student education status
Junior
Senior
Area of study
Entrepreneurship
Other business
Engineering
Other
n
%
94
28
74.6
22.2
40
79
31.7
62.7
68
40
3
12
54.0
31.7
2.4
9.5
237
agree, strongly agree) and highlights of those results are
depicted in Table 4. Almost 90% of respondents agreed
they had been exposed to VC (q. 1) compared to less than
40% with exposure to trade credit (q. 7), and less than 30%
having been offered trade credit as a finance option on an
assignment (q. 10). Although not a large margin, the standard deviation of responses to (C2), exposure to trade credit
questions, was higher indicating a wider spread of
responses from students.
A majority of students indicated that they agreed with
statements about basic VC concepts. Mean responses, however, were lower while standard deviations were higher
compared with questions about exposure to VC. The
change in mean and standard deviation could indicate
slightly less confidence and more diversity in responses
The responses to questions about trade credit concepts
(C4) were striking given the context of the research
revealed here. Key questions in this construct not only produced a percentage of agreement far below 50%, but mean
responses were all below 3.2 on a six-point item. Most significant was the students’ lack of understanding on trade
credit’s effect on cash flows (q. 24), and what types of firms
might use trade credit (q. 21). Although very low, students’
inability to name a company started with trade credit (q.
23) was not surprising given the relative lack of exposure
and understanding of trade credit indicated by other
responses.
The final eight questions on the survey instrument, not
organized into a specific construct, were meant to delve
more deeply into VC and trade credit concepts. Specifically, questions 25, 29, and 31 indicated incongruities
between how much exposure students’ received to VC and
their opinions of how it really works. For example, in question 25, 50.8% of students felt that VC financing resulted in
additional business partners for the entrepreneur—a majority, but with a response mean of only 3.6, not a strong one.
A majority of students (62.4%) did not agree that the scenario of surrendering 15% equity for a $250,000 investment
was enough information to value a firm (q. 29) and 58.1%
did not agree that VC-backed ventures have a strong likelihood of being sold in five years (q. 30). And most telling of
all, a majority of respondents (56.8%) felt that at least 10%
of entrepreneurs receive VC, even though almost every
document researched regarding VC noted how rare a form
of finance it actually was at around 2% or less of firms
receiving it (q. 31).
DISCUSSION
Entrepreneurship educators appear to be doing an inadequate job of informing students about a common finance
technique, trade credit, which is used by millions of businesses every day, all around the world (Ng et al., 1999;
Petersen & Rajan, 1997; Wilner, 2000). Trade credit is far
238
T. CLEMENT ET AL.
TABLE 3
Correlation of Subscale Constructs and Measures of Internal
Consistency
Subscale
(C1) Exposure to VC
(C2) Exposure to TC
(C3) VC concepts
(C4) TC concepts
Question
numbers
Exposure
to VC
1–6
7–12
13–18
19–24
.53*
.78*
.47*
Exposure
to TC
.58*
.66*
VC
concepts
.57*
a
.81
.86
.90
.84
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*p < .05.
more accessible than VC (Rogers, 2009) and substitutes for
a lack of available bank credit (Blasio, 2005; Huyghebaert
et al., 2007; Petersen & Rajan, 1997; Wilner, 2000).
In contrast, entrepreneurial education demonstrates a
significant bias in favor of VC, a relatively rare and complex form of private equity finance (Lerner et al., 2012;
Metrick & Yasuda, 2011). VC is primarily used during the
growth and expansion phases of software, biotechnology,
and energy companies (Gompers & Lerner, 2001; Zider,
1998) located in places such as San Francisco, Boston, and
New York City (Chen et al., 2010; Metrick & Yasuda,
2011). Firms attractive to venture capitalists must generate
20–60% returns and scale very rapidly in sales in order to
justify the risk to investors (Rogers, 2009; R. L. Smith &
Smith, 2004). As a result, VC has such an acute connection
to so few business models that most mainstream
entrepreneurs have a better chance of winning a lottery
than attaining VC funding (Bygrave & Zacharakis, 2008).
As the previous textbook sample data showed, there was
a noticeable gap in coverage between VC and trade credit,
especially in entrepreneurship texts. The survey results
indicate that this gap translated directly to the classroom
coverage of VC and trade credit. As a result, students could
end up lacking sufficient exposure, in the area of trade
credit, or, in some cases, forming incorrect opinions on VC
financing despite the high exposure. For example, students
may not understand how to negotiate with a supplier for
better terms (Ng et al., 1999; Petersen & Rajan, 1997),
align payments for merchandise with the sale of those
goods (Ferris, 1981; Petersen & Rajan, 1997; Schwartz,
1974), or take an early-pay discount to increase the profitability of a firm (Ng et al., 1999; Weygandt et al., 2012).
IMPLICATIONS FOR PRACTICE
As a consequence of the bias revealed in this research
favoring VC over trade credit, the college students in this
national sample are not being shown an accurate picture of
how the majority of business ventures are being financed
today. This bias appears so prevalent that some students
may actually avoid starting ventures if they perceive their
business idea does not fit within the VC model. Furthermore, if the lack of true understanding of VC persists
among students, there is the risk they could seek improper
TABLE 4
Highlights of Descriptive Statistics Including Percentage of Some Form of Agreement (Slightly Agree, Agree, Strongly Agree), Mean,
and Standard Deviation
Question
number
C1: Exposure to VC
q1
q2
q5
C2: Exposure to trade credit
q7
q10
C3: VC concepts
q13
q14
q15
C4: Trade credit concepts
q19
q21
q23
q24
Additional conceptual questions
q25
q26
q29
q31
% of
agreement
M
SD
My professors have discussed VC
I have seen the term VC
I have been exposed to the term business valuation
89.7
87.2
82.5
4.7
4.7
4.5
1.1
1.1
1.3
My professors have discussed trade credit
I have been given trade credit as a finance option
37.9
29.3
3.1
2.8
1.4
1.4
I understand how VC works
I understand the risks and rewards of VC
I know companies that are a good fit for VC
79.2
78.6
68.0
4.5
4.5
4.1
1.3
1.3
1.3
I would know how to use trade credit to my advantage
I am aware of the kinds of firms that use trade credit
Name at least one company started by using trade credit
I understand how trade credit affects cash flow
37.6
36.8
23.8
30.4
3.2
3.1
2.5
2.8
1.5
1.3
1.4
1.4
When I hear VC I think business partner
When I hear accounts payables, I think free money
$250,000 for 15% equity is enough to value a firm
At least 10% of entrepreneurs receive VC
50.8
19.0
37.6
56.8
3.6
2.4
3.1
3.6
1.3
1.4
1.6
1.3
Question
THE BIAS IN FAVOR OF VENTURE CAPITAL FINANCE
financing alternatives, resulting in lost opportunities or burdensome finance arrangements. Historically, if would-be
entrepreneurs perceived and summarily abandoned ideas
not innovative enough for venture capitalists, over 97% of
the products or services we enjoy today would be either significantly delayed or worse, never see the light of day. This
study indicates a serious gap exists between theory and
practice that must be addressed by educators in order to
give students the best chance at success in the marketplace.
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ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
The Bias in Favor of Venture Capital Finance in
U.S. Entrepreneurial Education: At the Expense of
Trade Credit
Thomas Clement, Steven LeMire & Craig Silvernagel
To cite this article: Thomas Clement, Steven LeMire & Craig Silvernagel (2015) The Bias in
Favor of Venture Capital Finance in U.S. Entrepreneurial Education: At the Expense of Trade
Credit, Journal of Education for Business, 90:5, 233-240, DOI: 10.1080/08832323.2015.1019820
To link to this article: http://dx.doi.org/10.1080/08832323.2015.1019820
Published online: 25 Mar 2015.
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Date: 11 January 2016, At: 19:24
JOURNAL OF EDUCATION FOR BUSINESS, 90: 233–240, 2015
Copyright Ó Taylor & Francis Group, LLC
ISSN: 0883-2323 print / 1940-3356 online
DOI: 10.1080/08832323.2015.1019820
The Bias in Favor of Venture Capital Finance in U.S.
Entrepreneurial Education: At the Expense
of Trade Credit
Thomas Clement and Steven LeMire
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:24 11 January 2016
University of North Dakota, Grand Forks, North Dakota, USA
Craig Silvernagel
South Dakota State University, Brookings, South Dakota, USA
The authors examine whether U.S. college-level entrepreneurship education demonstrates a
bias favoring venture capital (VC) financing while marginalizing trade credit financing, and
the resulting impact on entrepreneurship students. A sample of U.S. business textbooks and
survey data from entrepreneurship students reveals a significant bias toward VC at the
expense of trade credit. Despite this overexposure to VC, students only indicate a very basic
understanding of how VC works. These findings suggest that business educators are doing a
poor job by favoring a complex and rare finance method such as VC over a widely used and
accessible source such as trade credit.
Keywords: entrepreneurial finance, entrepreneurship, trade credit, venture capital
Entrepreneurship has established itself as a major component of business education across the United States (Katz,
2003; Kuratko, 2005). Here we examine the extent to which
entrepreneurship education favors VC as a method of
finance and if that bias marginalizes more accessible methods such as trade credit. Trade credit is a widely used
source of debt financing impacting most business models
(Berger & Udell, 1998; Petersen & Rajan, 1997; Wilner,
2000). In contrast, venture capital (VC), a form of private
equity financing, is used by a very small percentage of firms
(Bygrave & Zacharakis, 2008; Lerner, Leamon, & Hardymon, 2012; Metrick & Yasuda, 2011). There is evidence
that VC is overexposed to students in textbooks and classroom curriculum relative to other finance sources such as
trade credit. What is unknown is the extent of the bias in
curriculum and how it may be impacting students. The critical need for this study is to expose a misalignment between
theory and practice, where students receive an overwhelming message in textbooks and classroom materials, and yet,
encounter a far different reality when entering the business
Correspondence should be addressed to Thomas Clement, University
of North Dakota, Department of Entrepreneurship, 293 Centennial Drive,
Stop 8098, Gamble Hall Room 110, Grand Forks, ND 58202-8098, USA.
E-mail: thomas.clement@business.und.edu
market to launch a venture. To test the proposed bias and
resulting incongruities among students, we examined popular business textbooks for space dedicated to trade credit
versus venture capital. We also distributed a survey to students at 11 U.S. universities measuring student’s exposure
to VC and trade credit. In addition, the survey posed questions about very basic trade credit and VC concepts not to
demonstration formal learning, but rather to gauge whether
students are gaining any understanding of these two finance
methods in coursework.
LITERATURE REVIEW
Capital financing for entrepreneurs can be classified three
ways: equity, debt, and bootstrapping (Barringer & Ireland,
2012; Kuratko, 2014; Rogers, 2009). Equity financing,
including VC, occupies a specific financial position on the
balance sheet of a company (Weygandt, Kimmel, & Kieso,
2012) and encompasses raising capital in exchange for an
ownership stake (Kuratko, 2014; Rogers, 2009). Debt
financing, including trade credit, involves borrowing
money or another asset from a third party with a promise to
pay plus, in some cases, a user’s fee in the form of interest
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234
T. CLEMENT ET AL.
(Kuratko, 2014; Rogers, 2009). Debt is also shown on a
company’s balance sheet as a liability (Weygandt et al.,
2012). Finally, bootstrapping is raising capital for a venture
through nontraditional finance sources. Examples of bootstrapping could include (a) trade and barter and (b) off-balance sheet activities such as borrowing capital assets from
acquaintances (Bhide, 2000; Kuratko, 2014; Van Auken,
2004; Winborg & Landstr€
om, 2001).
Contrary to popular belief (Kuratko, 2014), the majority
of new businesses launched in the United States have very
little innovation or novelty (Reynolds, 2005; Shane, 2008).
In fact, among the highest growth startup companies in the
United States, only about 10% sell something unique that
no one else offers (Bhide, 2000; Shane, 2008). Studies also
demonstrate that the historical average sales of small, selfemployed firms is usually under $100,000 a year (Bitler,
Moskowitz, & Vissing-Jørgensen, 2005; Shane, 2008) and
more than 80% of these entrepreneurs report they have little
intention of pursuing measurable growth (Shane, 2008; van
Gelderen, Thurik, & Bosma, 2005).
These statistics on U.S. entrepreneurs show that a majority of entrepreneurial ventures do not seek to produce
highly innovative products or services or to develop a rapidly growing business. The profile of typical U.S. entrepreneurs plays an important role in this study in determining
which type of financing most entrepreneurs pursue and
manage. Much of the misconception involving the realities
of entrepreneurial finance appears to stem from how information is delivered through textbooks and curriculum.
Textbooks and Course Curriculum
Ornstein (1994) stated that “textbooks have come to drive
the curriculum” (p. 70) and argued that reliance on textbooks in curriculum development is a perpetuation, because
many teachers are also educated and guided by the textbook. Despite a perceived superior U.S. educational system, modern teachers are not trained properly and do not
have adequate time to develop new curriculum, and therefore, depend heavily on texts to provide course content
(Ornstein, 1994).
Similarly, Kauffman, Moore Johnson, Kardos, Liu, and
Peske (2002) found that reliance on textbooks in course or
curriculum development is often a result of desperation on
the part of teachers. While Lattuca and Stark (2009) argued
that textbooks are “cultural artifacts” (p. 10), they recognize
that many higher education faculties rely on textbooks for
organization and sequencing of a course based on, for
example, a table of contents.
Trade Credit
Trade credit financing or the ability to acquire goods and
services without having to immediately pay, is the largest
source of short-term debt financing in the United States and
is considered, by some, to also be a source of bootstrapping
(National Small Business Association, 2008; Rogers, 2009;
Wilner, 2000). Petersen and Rajan (1997) noted that trade
credit is “the single most important source of short-term
external finance for firms in the United States” (p. 661), and
that the use of trade credit has been traced as far back as
about 1,000 B.C. (Cheng & Pike, 2003; Christie & Bracuti,
1981). The amount of trade credit outstanding is, historically, double that of other short-term credit sources
(Wilner, 2000), and about 20% of businesses use it as their
exclusive source of finance (Cole, 2010).
Trade credit is synonymous with credit terms such as
“2/10 net 30” on a sales invoice (Ng, Smith, & Smith,
1999; Weygandt et al., 2012) with almost two thirds of
credit terms falling between 21 and 30 days (Cu~
nat &
Garcia-Appendini, 2012; Giannetti, Burkart, & Ellingsen,
2011). Trade credit, therefore, requires suppliers and
entrepreneurs to enter into a debtor–creditor relationship
involving inventory as opposed to money (Ng et al.,
1999; Peterson & Rajan, 1997; Wilner, 2000). Trade
credit impacts virtually every type of business model
(Petersen & Rajan, 1997; Wilner, 2000), and is used at
virtually every stage in a company’s life (Berger &
Udell, 1998; Cu~nat, 2007).
Trade credit often acts as a substitute for more traditional sources of finance, such as bank loans (Blasio,
2005; Petersen & Rajan, 1997). Huyghebaert, Van de
Gucht, and Van Hulle (2007) determined this substitution is especially true for startup companies that banks
are not as willing to take a chance on financing. Wilner
(2000) found that suppliers are also much more likely
than banks to renegotiate terms with entrepreneurs.
Some scholars, therefore, have argued that trade credit
is as much a form of bootstrap financing as it is traditional debt, because of the leveraging of relationships,
negotiability, and the need for entrepreneurs to network
with suppliers (Bosse & Arnold, 2010; Winborg &
Landstr€om, 2001).
Suppliers also appear to have an advantage over banks in
that goods purchased on trade credit can be more easily
repossessed or the supply simply cutoff (Mian & Smith,
1992; Petersen & Rajan, 1997). For the entrepreneur, trade
credit reduces transaction costs by allowing entrepreneurs
to pay for several purchases at one time as opposed to cash
on delivery (COD) (Ferris, 1981; Petersen & Rajan, 1997;
Schwartz, 1974). Entrepreneurs also use trade credit as a
way to monitor the quality of goods and services, with
credit term periods allowing for inspection and a potential
withholding of payment for poor quality (Long, Malitz, &
Ravid, 1993; J. K. Smith, 1987). The impact and benefits of
trade credit, therefore, are felt by virtually every type of
business at every stage. While trade credit has been studied
extensively in the literature for decades, venture capital
also attracts the interest of scholars looking to study equity
forms of finance.
THE BIAS IN FAVOR OF VENTURE CAPITAL FINANCE
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Venture Capital
Almost the opposite of trade credit, VC is a type of private
equity financing in which an outside investment fund finances a venture in exchange for a percentage of ownership
(Lerner et al., 2012; Metrick & Yasuda, 2011). VC impacts
less than 2% of all entrepreneurial ventures (Berger &
Udell, 1998; Rogers, 2009). The Small Business Administration Office of Advocacy (2011) reported that private
equity financing, including VC, accounts for about 6% of
total finance sources. Compared to trade credit, VC is also
relatively young, having been formally recognized as a
finance source since the mid-1940s and attracting attention
in primarily the last 30 years (Cumming & MacIntosh,
2004; Gompers & Lerner, 2004; Lerner et al., 2012;
Metrick & Yasuda, 2011; Samila & Sorenson, 2011).
VC is typically used only during the growth or expansion of a venture, beyond startup, or as a bridge between
bootstrapping and more traditional finance methods (Gompers & Lerner, 2001; Zider, 1998). Venture capitalists,
therefore, are not generally known for providing development or startup financing for ventures. Early-stage financing, therefore, comes from sources such as angel investors,
or through the use of bootstrapping techniques (Rogers,
2009).
The reasons for the limited use of VC include the
expected returns to investors, the narrow fit with specific
business models, and the limited geography of VC dollars
(Bygrave & Zacharakis, 2008; Lerner et al., 2012; Metrick
& Yasuda, 2011). Venture capitalists are attracted to highly
innovative businesses that grow very quickly, typically
within a two- to eight-year time frame (Cumming & MacIntosh, 2004; Rogers, 2009). Gompers and Lerner (2001)
noted that in 1999 roughly 60% of VC was invested in computer technology and communications, with an additional
10% in medical science firms. Recently, a report prepared
by Thomson Reuters (March, 2013) ranked the top three
industries attracting VC as software (31%), biotechnology
(15%), and industrial–energy (10%).
Geographically, in the United States, VC investing is
centered in three primary metropolitan areas: San Francisco
and San Jose (a.k.a., Silicon Valley), Boston and greater
New England, and New York City (Chen, Gompers,
Kovner, & Lerner, 2010; Metrick & Yasuda, 2011). In fact,
the state of California alone is home to about 50% of the
total VC investments in the United States (Metrick &
Yasuda, 2011).
For VC investors, R. L. Smith and Smith (2004)
observed, “new ventures are high-risk investments that tie
up investor’s capital for several years, with no easy means
of exit” (p. 231). Because of the risk, venture capitalists
expect very high rates of return on their investments. Typical returns range from 30% to 60% in earlier stages of
financing to a lower 20–30% for expansion of established
businesses (R. L. Smith & Smith, 2004). The ultimate cost,
235
however, of VC to the entrepreneur may be an involuntary
exit from his or her own firm. Literature suggests that companies using VC are far more likely to have their founders
removed and replaced by an outside CEO, either for lack of
experience, personality clashes with investors, or poor performance (Hellmann & Puri, 2002; Kaplan & Lerner,
2010).
Even though VC makes headlines, its impact is significantly smaller than trade credit. In total dollars financed,
trade credit accounts for almost three times the amount provided by private equity investors (Lerner et al., 2012; Ng
et al., 1999; Wilner, 2000). As this section showed, VC is
rare, narrowly focused, expensive, and complex. Central to
the theme of this study, trade credit is not as complex as
VC, it impacts a wider array of ventures, and yet, it receives
little mention in classrooms or textbooks. As a result, students may be presented with financing options that do not
align with the realities of mainstream business, especially
at the early stages of a venture.
METHOD
Textbook Survey/Analysis
To investigate the problem of a potential bias toward VC at
the expense of trade credit in entrepreneurial education, a
quantitative survey of textbooks (n D 13) was first conducted. Specifically, textbooks were analyzed to determine
how much physical space was dedicated to discussing trade
credit financing versus VC. The textbooks were chosen
from sales market share data of the most popular texts in
the following disciplines: entrepreneurship, entrepreneurial
finance, introduction to business, corporate–managerial
finance, and small business management.
The textbooks were examined in two ways. First, each
index was reviewed for specific mention of terms related
directly to trade credit and VC. The second part of the textbook analysis involved quantification of space dedicated to
trade credit versus VC in terms of sentences, paragraphs,
pages, or full chapters. The researchers used the evidence
found in the textbook analysis to develop a survey instrument which was administered to college-level students.
Survey Analysis
Participants. Participants were 126 undergraduate and
graduate college students, including 94 men and 28 women.
Participants were invited to complete the survey in a classroom setting by instructors known to the principal investigators. Students entered in a Midwestern university
business plan competition also voluntarily participated. Participants were either enrolled or had been enrolled in entrepreneurship courses or programs of study at 11 U.S. fouryear universities, including eight public and three private
236
T. CLEMENT ET AL.
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institutions. The geography of these schools included seven
Midwestern schools, one Southeastern, one East coast, one
Southwestern, and one West coast school. Of the 11 schools
participating, two had been consistently ranked as having
among the best entrepreneurship programs in the United
States (“Colleges & business schools,” 2014). No restrictions were imposed regarding a student’s status (i.e., undergraduate, graduate), or by their specific field of study (i.e.,
business, nonbusiness). The estimated response rate to the
survey was about 77%.
Instrument. The survey contained demographic questions including gender, education status, area of study, and
number of entrepreneurship courses taken. Participants
were also asked to rate their level of agreement on 32 questions using a 6-point Likert-type scale ranging from 1
(strongly disagree) to 6 (strongly agree). Four constructs
were designed with six specific survey questions within
each construct: This accounted for 24 of the 32 survey
questions. The survey concluded with eight additional
entrepreneurial finance questions to test their more
advanced knowledge of trade credit and VC.
Construct 1 (C1), student exposure to VC, contained
questions designed to measure how often students were
reading, hearing, and seeing VC and related terminology.
Construct 2 (C2), student exposure to trade credit, measured the amount of exposure students received to the topic
of trade credit. Construct 3 (C3), basic student understanding of VC, measured student’s agreement with statements
about VC. Finally, construct 4 (C4), basic student understanding of trade credit, displayed student’s agreement with
statements about trade credit concepts.
The relationship between exposure and student
responses to questions on VC concepts was tested through
a Pearson’s correlation between C1 and C3 determining
how exposure to VC changed the level of agreement with
these conceptual questions on VC. Similarly, the relationship between trade credit exposure and conceptual agreement was addressed by a Pearson’s correlation between C2
and C4. This correlation determined how exposure to trade
credit affected agreement with conceptual statements on
trade credit.
Procedure. Recruitment of survey participants was
through an oral presentation of the study and survey instrument. Subjects were informed that their participation was
completely voluntary. If a subject chose not to participate,
(s)he was told to return a blank or incomplete survey along
with the rest of the participants, and their survey would be
disregarded. This option was made available so that nonparticipants would not feel singled out as a result of their decision to not complete a survey.
Participants were asked to complete all demographic
information and provide a response to all 32 Likert-type
questions. Once the survey was completed, participants
were instructed to return their surveys to an envelope held
by the survey proctor. The principal investigators were not
present during the completion or collection of the surveys.
The survey instrument contained no distinguishable personal information regarding participants, thus safeguarding
participant anonymity.
RESULTS
Textbook Data
Analysis. Using the 32 survey Likert-type questions,
descriptive data was calculated including each question’s
percentage of agreement, mean, and standard deviation.
Reliability testing was also performed using IBM SPSS Statistics 20 software calculating Cronbach’s alpha and
Pearson’s correlation coefficient for each construct.
To determine if a bias favoring VC existed, participants’
exposure to VC was measured by the mean level of agreement with questions in C1. To address whether trade credit
was being marginalized in entrepreneurship education, participants’ mean level of agreement to questions in C2 was
examined. In evaluating student’s feelings on VC concepts,
the average level of agreement for C3 was reviewed. The
overall level of agreement to four of the additional questions not grouped into a construct was also analyzed with
levels of agreement testing more advanced concepts of VC.
Student opinions on trade credit concepts were determined
by the mean level of agreement to questions in C4. Similar
to VC, two additional nonconstruct questions were also
examined to test more advanced trade credit information
among students.
Table 1 presents a summary of the textbook analysis
results, which compares the total space allocated to topics
related to VC and trade credit among the 13 textbooks
reviewed. The table shows the total number of texts containing each topic within the index and quantification of
separate chapters, pages, paragraphs, and sentences devoted
to each topic in hierarchal, noninclusive fashion. The difference in coverage between VC and trade credit topics was
substantial. Given that the topic of venture valuation could
be independent of VC financing, and setting aside the data
in Table 1 for this topic, VC coverage alone still results in
seven chapters, 54 pages, and 47 paragraphs of coverage.
Even when examined on a topic-by-topic basis, attention to
VC far eclipsed that of trade credit.
Survey Data
The significant demographics of the survey participants
(n D 126) are detailed in Table 2. Nearly 75% of the students who completed the survey instrument were men.
THE BIAS IN FAVOR OF VENTURE CAPITAL FINANCE
TABLE 1
Summary of Textbook Analysis Comparing VC and Trade
Credit–Related Topics
Number
indexed Chapters Pages Paragraphs Sentences
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Topic
VC-related topics
VC/venture capitalist
Valuation
Exits, exit strategies,
and/or harvest
Total
Trade credit-related
topics
Trade credit, supplier
credit, trade
payables, and/or
accounts payables
Total
13
7
7
13
3
5
4
38
17
16
31
4
16
0
0
0
12
71
51
0
0
6
32
9
0
6
32
9
Respondents were either studying entrepreneurship in some
capacity (n D 68) or were pursuing another business major
(n D 40). Not shown in Table 2, student participants had
completed an average of 2.3 entrepreneurship courses prior
to participating in the survey. The relatively low average
number of entrepreneurship courses could indicate that
many of these students were pursuing entrepreneurship as a
minor, certificate, or concentration as opposed to a full
major.
All of the responses within each construct were averaged
and calculated using Cronbach’s alpha reliability coefficient and Pearson’s correlation coefficient. The results of
these measures are shown in Table 3. The reliability of
each of the subscales was adequate. Correlations existed
between all subscales, but in particular, exposure to VC
was associated with students’ perceived understanding of
VC (r D .78, p < .05).
Each individual survey question was also analyzed to
determine some form of agreement (i.e., slightly agree,
TABLE 2
Significant Demographic Information of Sample
Characteristic
Gender
Male
Female
Student education status
Junior
Senior
Area of study
Entrepreneurship
Other business
Engineering
Other
n
%
94
28
74.6
22.2
40
79
31.7
62.7
68
40
3
12
54.0
31.7
2.4
9.5
237
agree, strongly agree) and highlights of those results are
depicted in Table 4. Almost 90% of respondents agreed
they had been exposed to VC (q. 1) compared to less than
40% with exposure to trade credit (q. 7), and less than 30%
having been offered trade credit as a finance option on an
assignment (q. 10). Although not a large margin, the standard deviation of responses to (C2), exposure to trade credit
questions, was higher indicating a wider spread of
responses from students.
A majority of students indicated that they agreed with
statements about basic VC concepts. Mean responses, however, were lower while standard deviations were higher
compared with questions about exposure to VC. The
change in mean and standard deviation could indicate
slightly less confidence and more diversity in responses
The responses to questions about trade credit concepts
(C4) were striking given the context of the research
revealed here. Key questions in this construct not only produced a percentage of agreement far below 50%, but mean
responses were all below 3.2 on a six-point item. Most significant was the students’ lack of understanding on trade
credit’s effect on cash flows (q. 24), and what types of firms
might use trade credit (q. 21). Although very low, students’
inability to name a company started with trade credit (q.
23) was not surprising given the relative lack of exposure
and understanding of trade credit indicated by other
responses.
The final eight questions on the survey instrument, not
organized into a specific construct, were meant to delve
more deeply into VC and trade credit concepts. Specifically, questions 25, 29, and 31 indicated incongruities
between how much exposure students’ received to VC and
their opinions of how it really works. For example, in question 25, 50.8% of students felt that VC financing resulted in
additional business partners for the entrepreneur—a majority, but with a response mean of only 3.6, not a strong one.
A majority of students (62.4%) did not agree that the scenario of surrendering 15% equity for a $250,000 investment
was enough information to value a firm (q. 29) and 58.1%
did not agree that VC-backed ventures have a strong likelihood of being sold in five years (q. 30). And most telling of
all, a majority of respondents (56.8%) felt that at least 10%
of entrepreneurs receive VC, even though almost every
document researched regarding VC noted how rare a form
of finance it actually was at around 2% or less of firms
receiving it (q. 31).
DISCUSSION
Entrepreneurship educators appear to be doing an inadequate job of informing students about a common finance
technique, trade credit, which is used by millions of businesses every day, all around the world (Ng et al., 1999;
Petersen & Rajan, 1997; Wilner, 2000). Trade credit is far
238
T. CLEMENT ET AL.
TABLE 3
Correlation of Subscale Constructs and Measures of Internal
Consistency
Subscale
(C1) Exposure to VC
(C2) Exposure to TC
(C3) VC concepts
(C4) TC concepts
Question
numbers
Exposure
to VC
1–6
7–12
13–18
19–24
.53*
.78*
.47*
Exposure
to TC
.58*
.66*
VC
concepts
.57*
a
.81
.86
.90
.84
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:24 11 January 2016
*p < .05.
more accessible than VC (Rogers, 2009) and substitutes for
a lack of available bank credit (Blasio, 2005; Huyghebaert
et al., 2007; Petersen & Rajan, 1997; Wilner, 2000).
In contrast, entrepreneurial education demonstrates a
significant bias in favor of VC, a relatively rare and complex form of private equity finance (Lerner et al., 2012;
Metrick & Yasuda, 2011). VC is primarily used during the
growth and expansion phases of software, biotechnology,
and energy companies (Gompers & Lerner, 2001; Zider,
1998) located in places such as San Francisco, Boston, and
New York City (Chen et al., 2010; Metrick & Yasuda,
2011). Firms attractive to venture capitalists must generate
20–60% returns and scale very rapidly in sales in order to
justify the risk to investors (Rogers, 2009; R. L. Smith &
Smith, 2004). As a result, VC has such an acute connection
to so few business models that most mainstream
entrepreneurs have a better chance of winning a lottery
than attaining VC funding (Bygrave & Zacharakis, 2008).
As the previous textbook sample data showed, there was
a noticeable gap in coverage between VC and trade credit,
especially in entrepreneurship texts. The survey results
indicate that this gap translated directly to the classroom
coverage of VC and trade credit. As a result, students could
end up lacking sufficient exposure, in the area of trade
credit, or, in some cases, forming incorrect opinions on VC
financing despite the high exposure. For example, students
may not understand how to negotiate with a supplier for
better terms (Ng et al., 1999; Petersen & Rajan, 1997),
align payments for merchandise with the sale of those
goods (Ferris, 1981; Petersen & Rajan, 1997; Schwartz,
1974), or take an early-pay discount to increase the profitability of a firm (Ng et al., 1999; Weygandt et al., 2012).
IMPLICATIONS FOR PRACTICE
As a consequence of the bias revealed in this research
favoring VC over trade credit, the college students in this
national sample are not being shown an accurate picture of
how the majority of business ventures are being financed
today. This bias appears so prevalent that some students
may actually avoid starting ventures if they perceive their
business idea does not fit within the VC model. Furthermore, if the lack of true understanding of VC persists
among students, there is the risk they could seek improper
TABLE 4
Highlights of Descriptive Statistics Including Percentage of Some Form of Agreement (Slightly Agree, Agree, Strongly Agree), Mean,
and Standard Deviation
Question
number
C1: Exposure to VC
q1
q2
q5
C2: Exposure to trade credit
q7
q10
C3: VC concepts
q13
q14
q15
C4: Trade credit concepts
q19
q21
q23
q24
Additional conceptual questions
q25
q26
q29
q31
% of
agreement
M
SD
My professors have discussed VC
I have seen the term VC
I have been exposed to the term business valuation
89.7
87.2
82.5
4.7
4.7
4.5
1.1
1.1
1.3
My professors have discussed trade credit
I have been given trade credit as a finance option
37.9
29.3
3.1
2.8
1.4
1.4
I understand how VC works
I understand the risks and rewards of VC
I know companies that are a good fit for VC
79.2
78.6
68.0
4.5
4.5
4.1
1.3
1.3
1.3
I would know how to use trade credit to my advantage
I am aware of the kinds of firms that use trade credit
Name at least one company started by using trade credit
I understand how trade credit affects cash flow
37.6
36.8
23.8
30.4
3.2
3.1
2.5
2.8
1.5
1.3
1.4
1.4
When I hear VC I think business partner
When I hear accounts payables, I think free money
$250,000 for 15% equity is enough to value a firm
At least 10% of entrepreneurs receive VC
50.8
19.0
37.6
56.8
3.6
2.4
3.1
3.6
1.3
1.4
1.6
1.3
Question
THE BIAS IN FAVOR OF VENTURE CAPITAL FINANCE
financing alternatives, resulting in lost opportunities or burdensome finance arrangements. Historically, if would-be
entrepreneurs perceived and summarily abandoned ideas
not innovative enough for venture capitalists, over 97% of
the products or services we enjoy today would be either significantly delayed or worse, never see the light of day. This
study indicates a serious gap exists between theory and
practice that must be addressed by educators in order to
give students the best chance at success in the marketplace.
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:24 11 January 2016
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