Entrepreneurial finance: an overview of the issues and evidence David J. Denis * Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, USA Abstract This article provides an overview of the rapidly growing entrepreneurial finance literature. The studies reviewed in the article focus on four primary areas of inquiry: (i) alternative sources of capital, (ii) financial contracting issues, (iii) public policy, and (iv) the dynamics of private equity returns. Although much has been learned in each area, this survey highlights several areas in which our understanding of the issues remains incomplete. D 2003 Elsevier B.V. All rights reserved. Keywords: Entrepreneurial finance; Venture capital; Private equity 1. Introduction Small firms and new businesses have become an increasingly important component of economic development in the US. For example, Lerner (1994) reports that although large firms have historically accounted for the majority of jobs created in the US, this pattern was reversed in the 1980s. According to Birch (1990), while Fortune 500 firms lost 4 million jobs during the 1980s, firms with fewer than 100 employees added 16 million jobs during the same decade. Moreover, during that time period, the rate of new firm incorporation increased dramatically and small firms created more innovations than their large firm counterparts (Scherer, 1991). These trends have persisted through the decade of the 1990s, particularly during the internet boom of the late 1990s. Correspondingly, there has been a dramatic increase in the amount of capital allocated to the private equity market. Table 1 reports that dollar commitments to venture capital funds increased from US$3.1 billion in 1992 to a high of US$87.3 billion in 2000, before 0929-1199/$ - see front matter D 2003 Elsevier B.V. All rights reserved. doi:10.1016/S0929-1199(03)00059-2 * Tel.: +1-765-494-4434; fax: +1-765-494-9658. E-mail address: daviddenis@mgmt.purdue.edu (D.J. Denis). www.elsevier.com/locate/econbase Journal of Corporate Finance 10 (2004) 301 – 326