Book review: Advanced introduction to entrepreneurial finance Hans Landström

This recent book by Hans Landström offers a unique perspective on entrepreneurial finance. The book is divided into four parts and seven chapters: Part I includes Chapter 1 on the basics of entrepreneurial finance; Part II is labelled the ‘financial context’ and encompasses Chapter 2 on the context of entrepreneurial finance and Chapter 3 on public interventions in entrepreneurial finance; Part III is labelled the ‘entrepreneur’s perspective’ and encompasses Chapter 4 on the demand for capital – empirical evidence and Chapter 5 on the demand for capital – theoretical explanations; Part IV is on the ‘financiers’ perspective’ encompasses Chapter 6 on debt capital finance and Chapter 7 on equity capital finance. The themes that run through the sections of the book is that there are information asymmetries and agency problems in entrepreneurial finance (Chapter 1), a shortage of entrepreneurial finance (Chapter 2), government interventions to deal with the shortage of entrepreneurial finance (Chapter 3), hurdles in obtaining entrepreneurial finance in evidence (Chapter 4) and theory (Chapter 5) and uses for debt (Chapter 6) and equity finance (Chapter 7). Each chapter is accompanied by a reference list with a selected few papers listed as ‘classic references’ followed by the regular non-classic references.

While I could spend an enormous amount of time reviewing all of the positive things about this book and its author, I will not do that here because it would take too much time. Instead, in this brief review, I will focus on some things that may further guide the reader as to some alternative perspectives in entrepreneurial finance.

The first thing that struck me about the book was the scope of coverage. There are no tables or data offered in the book in any of the chapters, which I found unusual for a topic that is supposed to be at the ‘advanced’ level as per the title of the book. In the earlier parts of the book in Chapters 2 and 3, there are assertions and reference to prior studies regarding capital gaps and the role of government policy. But a book that relies on external references without presenting any figures or summary statistics or data analysis itself is only as good as its references. And in many cases, the references provided are highly incomplete and/or wrong and discredited. For example, a ‘classic’ reference provided for Chapter 3 is a book published in 2009 by Josh Lerner, which is full of mistakes itself. Among other things, that book relies on empirical evidence that ranks the Austrian and Hungarian venture capital markets as being the best in the Europe and among the best in the world and the UK venture capital market as being the very worst in Europe and among the worst in the world. (I have previously explained these problems in Cumming, 2011a, 2011b.) Unfortunately, the book by Hans Landström perpetuates the mistake and continues to misinform the public about what this line of research actually says. Moreover, the book fails to reference other studies carried out prior to, during and after these papers that do not make these types of mistakes.

Pushing further into the other chapters, I would just say a very brief few words about Chapters 4 and 5. It is unusual to put evidence in Chapter 4 prior to theory in Chapter 5. But again, neither chapter refers to data, so it is not a major problem. The other issue, however, is that Parts III and IV refer separately to entrepreneurs interests (Part III) and investors interests (Part IV), which is unusual and a departure from the important part of the literature in entrepreneurial finance which deals with endogenous matching between entrepreneurs and their investors. This matching cannot be segregated as separate issues, and with the organisation of the book, it seems to be missing altogether.

The final two chapters on debt and equity are unusual as well for a few reasons. First, crowdlending (debt crowdfunding or peer-to-peer lending) is a subject for Chapter 6 on debt but is not mentioned there and briefly mentioned in Chapter 7 on equity. Second, in Chapters 6 and 7. there are no primary references to either debt or equity crowdfunding at all, which is a shame, as there has been an explosion of work on this topic in recent years that would be of interest to students in entrepreneurial finance. Third, the chapters miss some of the key insights from other research papers that debt and equity are often used together, even in the same financial transaction. Fourth, there is no look at security design in venture capital or reference to the use of convertible preferred equity in the United States and other types of securities in all other countries around the world outside the United States. Fifth, the details provided on veto and control rights are very thin and miss many important aspects about financial contracting in entrepreneurial finance. Here too, the literature referenced is very distorted and targeted towards papers that are scantly cited in other papers, missing some key references from the United States and other countries with hundreds (and in some cases thousands) of citations.

In addition, I think readers can learn a great deal from this book. Indeed, I hope it will inspire more researchers to engage in entrepreneurial finance as a fascinating research topic. In my brief review, as I said, I am unable to take time to discuss all of the excellent things in this book. I hope my comments are not seen as critical of the author’s excellent work and extremely well accomplished career. Instead, I have highlighted some areas of concern only for the purpose of providing readers with some important corrections and a more balanced perspective about various areas that are missing from the book.