I am sitting in a classroom at Drexel University's Earle Mack School of Law, participating in the Third Law & Entrepreneurship Retreat. Christine, Usha, and a slew of former Glom guest bloggers -- including our host, Karl Okamoto -- are in attendance.

The goals of the Retreat are to encourage the development of scholarship at the intersection of law and entrepreneurship and to build the community of people who identify themselves as interested in such scholarship. In the First Law & Entrepreneurship Retreat, we spent a lot of time talking about the question, "What is Entrepreneurship?" Although that question still hovers over our gathering, most of us have come to terms with the field and are now going about the business of producing scholarship.

The projects being discussed here are mostly at a very early stage of development, which is exactly the way we want it. Our gathering is intentionally small (only 14 people this year), and our discussions are highly interactive. To give you a sense of the subject matter, here is the lineup of papers:

Brian Broughman, Do VCs Misbehave? Some Evidence from Silicon Valley (presented by Bobby Bartlett)

Christine Hurt, The Windfall Myth (presented by Kim Krawiec)

Darian Ibrahim, Building the Next Silicon Valley: The Role of Angel Investors in Economic Development (presented by Roger Dennis)

Florencia Marotta Wurgler, Who Reads Fine Print on the Web? A Test of the "Informed Minority" Hypothesis (presented by Ronald Mann)

Karl Okamoto, After the Bailout: Regulating Systemic Moral Hazard (presented by Bob Lawless)

Usha Rodrigues, Towards a Theory of the Expressive Value of the Nonprofit Form (presented by Diane Burton)

D. Gordon Smith & D. Daniel Sokol, Law & Entrepreneurship: A Literature Review (presented by Danny Sokol)

This is one of my favorite events of the academic year because it's one of those rare venues where all of the participants are engaged.

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It's so nice to have a chance to guest blog over here with many of my friends.  For the next two weeks, I don't have to nudge (or noodge) Gordon and David Zaring when I've posted something resembling corporate or finance at Legal Profession Blog.  Thanks, Gordon!  I thought I'd start off by bringing over here something (slightly edited) that I wrote yesterday morning.

At the end of the week, I am going to participate in the Entrepreneurship in a Global Economy symposium at Western New England College's Law and Business Center for Advancing Entrepreneurship. I will be discussing my somewhat contrarian and deliberately provocative essay Why the Law of Entrepreneurship Barely Matters.  Since the piece was inspired by Gordon's article (with Masako Ueda), Law & Entrepreneurship:  Do Courts Matter?, this seems like a good place and time to explain how my general thesis on lawyers, business, contracts, and entrepreneurship connects up with the present financial crisis.

A while back I wrote a lumbering piece with a point that seems to me more apparent now than it did when I published it in 2005:  the law (I was focusing on contract law) is not a particularly good tool for addressing radical uncertainty.  When it comes time to make difficult predictions about a highly contingent future, the process of judgment is so complex that it overwhelms the law's linguistic model. Imagine writing a contract that depends on the twentieth move of a game of chess that has yet to begin.  In theory, it's possible, but in practice, we still don't know if it's merely impractical or impossible.  And chess is simple compared to life.

I have joked over and over again (I apologize for it) that I like to work at the intersection of Kantian philosophy and venture capital, and Thomas Friedman's column in yesterday's New York Times brought me back to the thesis.  He quotes a friend to the effect that nature is just chemistry, biology, and physics, and you can't spin it, bribe it, or sweet talk it.  In Kantian terms, that is the heteronomous world in which we live, of physical cause-and-effect of which we must necessarily be a part.  Friedman's point is the same one I tried to make in a late footnote to the lumbering piece:  markets are very much the same as nature.  "At their core markets are propelled by fear and greed.  They're just the balance at any given moment of those two impulses." 

I believe that as well.  There's little that is moral about markets, just as there is little that is moral about physics.  Nor do we really, after all is said and done, want to eliminate fear and greed.  It's what sustains our bodies, and Kant was enough of an empiricist, I think, to conclude that if there was a soul, the only way you could know anything about it was because it was housed in a body.  Or to put it in terms of Jewish lore:  we have a "bad" impulse, the yetzer hara, by which we lust and amass, and a good impulse, the yetzer tov, by which we love and contribute, and we can't live (or live well) without either of them.  The Aristotelians looking for a golden mean should like this as well.  In present terms, it leaves me equally repulsed by unrepentant free market apologists and by blame-seeking moralists.  (The need to "blame" somebody for the current crisis is an interesting exercise in teleology as well, but that is for another time.  Suffice it to say that innocent people losing savings in market crashes is as almost as troubling as innocent people dying in airplane crashes, and reconciling either one is a tough philosophical issue.)

What does this have to do with entrepreneurship?  Again, to quote Friedman on the coming global workout of this credit bubble:  "The workout promises to be painful, complicated, and protracted.  Government will have to do its part.  But it must regulate the excesses without smothering the underlying innovative, entrepreneurial and risk-taking attributes of our economy, which are what will ultimately bail us out - as they always have."

So my project as a business person and lawyer of some worldly experience, and as a teacher of lawyers, has been a tad contrarian: suggesting to business lawyers that they ought to approach their task with some amount of modesty about their role in dealing with radical uncertainty.  (It's hard to get a feel for what I mean if all you do is read cases, or even litigate cases.  That is merely structured second-guessing.)  The lawyer's role not trivial, but it's not the be-all that law and economics would suggest by the notion of an "incomplete contract" (think back to my chess example) as though the idea of a complete contract does any helpful intellectual work at all.  And that's just law!  Ethics is another ball of wax.  Unless the proposal is that we go back to pre-Industrial Revolution agrarian society, somebody has to make our iPods and laptops and hybrid cars and get all that stuff to Whole Foods, and industry, even when it's done well and responsibly, is a dirty business that calls on us to make tough choices.

What I really love about the juxtaposition of lawyers and entrepreneurs is this jarring contrast in the approach to uncertainty. At the behest of my son, I've been wading through Gore Vidal's dense historical novel, Burr.  Burr was a practicing lawyer to the end of his life, and, in the novel, the young clerk in his office who narrates the story wants to know if he should take the bar exam.  Burr says he should because he will certainly pass.  The narrator replies, "But I don't want to be a lawyer."  Burr responds, "Well, who does?  I mean what man of spirit?  The law kills the lively mind.  It stifles originality.  But it is a stepping-stone. . . ."  Why does the micro-law of entrepreneurship barely matter?  Because it can barely contain the wide-ranging orientation to change and innovation in the face of uncertainty that is the mark of an entrepreneur.  Effective lawyers to entrepreneurs, like effective lawyers to business people, and like effective ethicists dealing with the workings of amoral markets, have to be able to walk and chew gum.

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Two economists at the Kauffman Foundation, Robert Litan and Tim Kane, have started Growthology, a new blog on entrepreneurship and economic growth.  Gotta love the name.  The Kauffman Foundation announcement is here.

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A few years ago, while I was still at the University of Wisconsin, I started investigating the business of cheesemaking. Wisconsin has long been the leading producer of cheese in the United States, but as California has increased production, Wisconsin cheesemakers have turned increasingly to the production of specialty cheeses. I noticed that some of these specialty cheesemakers were organized as corporations or limited liability companies, while others were organized as cooperatives.

At roughly the same time that I was looking into cheesemaking, I had a couple of students who were interested in the law governing cooperatives. I did a bit of reading and started asking around in the local legal community. We never discuss cooperatives in Business Organizations, and very few legal scholars write about cooperatives (Henry Hansmann being the notable exception). I became fascinated by this lost corner of our law, which obviously still has some traction in the U.S.

So last year I recruited Brayden King and Marc Schneiberg, two organizational sociologists, as co-authors. We applied for and received a grant from the University of Wisconsin Center for Cooperatives. And I took the occasion of the Wisconsin Contracts Conference to visit some cheesemakers in southwest Wisconsin. This is my first time using interviews as a research methodology, and it's a lot more fun than sitting in my office hatching theories of fiduciary duty. Not that there's anything wrong with that.

The only problem is the weather. A storm on Sunday -- rain followed by snow -- left the roads icy, and most of these cheesemakers reside in very small towns ... or in no town at all. They are accessible only by country roads, which are beautiful in the summer, but treacherous this week. Yesterday, I ended up in a snowbank on an unmarked curve. Fortunately, a cheesemaker named Ole (I am not making this up) had a truck and a chain and was able to pull me out.

My discussions with the cheesemakers are fascinating. I am constantly reminded of Stewart Macaulay's famous study of non-contractual relations because the smaller cheesemakers simply can't be bothered with formal contracts. If they come crosswise with a farmer who supplies them with milk or a distributor who sells their cheese, they just stop dealing with them. Simple.

UPDATE: If you want to get a feel for some disturbing local culture, this is one of the towns I visited yesterday.

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Over the past few weeks, I have heard several condemnations of French employment law prompted by the well-publicized inability of Société Générale to terminate Jerome Kerviel for his trading activities. The suggested lesson for Americans: we are lucky to have employment at will as the default rule because it encourages employment (and, thus, economic development).

Certainly, one of the oft-cited impediments to entrepreneurship in Europe is employment law, but it turns out that the facts underlying Kerviel's activities are messier than first presented. We have emails showing that Kerviel had an accomplice, right? Not so fast ... the purported accomplice now says that the emails were altered to make him look more involved with Kerviel than he actually was. And Kerviel's lawyer says that the accomplice is a fabrication designed to keep Kerviel locked up.

Of course, Kerviel's position remains that SocGen was complicit in the fraud. Or, in the words of Kerviel's lawyer, "everyone knew what Jérôme was doing." Which means, interestingly, that one of the live questions in the case is whether Kerviel is entitled to his year-end bonus! (French version. HT Alan Hyde)

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Last spring a group of young scholars gathered in Madison, Wisconsin for the Law and Entrepreneurship Retreat. Some members of the group were enthusiastic about this emerging field of legal study, while others were quite skeptical of the endeavor. One recurring issue at the conference came to be known as the "definitional question": what is "law and entrepreneurship"?

In the wake of that conference, I was approached by a representative of the University of Chicago Press, who suggested that I write a book about Law and Entrepreneurship. My response: "That sounds great, but I'm not sure it exists!"

Despite my own reservations about "law and entrepreneurship" as a new field of study, I was intrigued by the possibility of exploring entrepreneurship from the perspective of a legal scholar. Darian Ibrahim at the University of Arizona shared that interest, and we mapped out a series of articles that would explore the intersection of law and entrepreneurship. We decided to begin at the beginning, discussing the notion of "entrepreneurial opportunities" from a legal perspective. Rather than approaching our work through the usual legal doctrinal categories, we decided to take our cues from the entrepreneurship literature, using the prominent concepts in that literature as a framework, but bringing our expertise in law to the discussion.

While we were working on that initial project, we received an invitation to contribute an essay to a special edition of the Arizona Law Review. We decided to seize the opportunity to take a shot at the pesky "definitional question." A draft of that essay is now on SSRN, and it is entitled, Entrepreneurs on Horseback: Reflections on the Organization of Law. As implied by the subtitle, we believe that the essay holds some value for people who are thinking about the organization of law generally, though our focus is on entrepreneurship law.

The main title alludes to an old law review article by Karl Llewellyn that is said by some to be the origins of the joke about the Law of the Horse. Many of us were introduced to that joke by Judge Frank Easterbrook's oft-cited essay criticizing the notion of cyberlaw. In our essay, Darian and I join a chorus of others who conclude that Judge Easterbook missed the joke.

As you will see if you read the paper, it still has some rough spots. Comments are most welcome.

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The skepticism regarding entrepreneurial studies continues over at Credit Slips. Last week Bob Lawless posted Entrepreneurs Among the Bankrupt, and today Elizabeth Warren adds an interesting story of her attempt to construct a joint study of failed entrepreneurs with Stuart Gilson at Harvard Business School:

Stuart loved the topic, and over lunch we agreed that we should study only "small start-ups." ... While Stuart talked about angel investing and venture capital, I speculated that a lot of the failed entrepreneurs in bankruptices we financed on credit cards and the spouse's job at an insurance office. We drifted apart.

The stumbling block was the wide variation among entrepreneurial firms:

The Consumer Bankruptcy Project has lots of variation, from the unemployed 25 year old to the widow on social security and the couple making over $100,000.  But the Business Bankruptcy Project multiplied the variations. Tina's Tax Preparation and Tanning Salon (a real business in our sample) had just as fancy a corporate charter as Memorex (also in our sample), and both were in Chapter 11. If there is this much variety in failure, I suspect there is even more within the range of starting up businesses and where they eventually end up.

The problem here is fairly obvious, isn't it? Professor Warren is interested in bankruptcy, not entrepreneurship. Could she have conducted a study of venture-backed firms in bankruptcy? Certainly. Would it make sense to slice off that part of the bankruptcy universe for special consideration? Sure, if you were interested in venture capital financing. I am not sure what, if anything, such a study would tell us about the bankruptcy system, but it certainly would tell us something about venture-backed firms.

Law professors are accustomed to thinking about the world in doctrinal categories, which have their own peculiar origins, but we have seen successful attempts to cut across doctrinal lines. For example, scholars who are interested in the phenomenon of discrimination consider various legal and institutional arrangements that promote or enable discriminatory practices, even though "discrimination" is quite varied. Not only are the objects of discrimination quite varied -- by race, gender, age, ethnic origin, sexual orientation ... or fatness -- but the mechanisms of discrimination are infinitely varied and subtle. (I made a similar argument in my response to Bob Lawless about the phenomenon we call "corporate governance.") In the end, the test lies not in the variability of the underlying phenomenon, but in the essential commonality of activities we call "discrimination" or "entrepreneurship."

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In his new paper, The Entrepreneurial Spirit and What the Law Can Do about It, Amir Licht covers a lot of ground in pursuit of a "small theory of entrepreneurial motivations." That small theory depends in important part on the psychological profile of entrepreneurs, which he derives from a survey of recent scholarship:

Research on the individual psychology of the entrepreneur after two decades is beginning to yield a clear portrait, the features of which are well-anchored in rigorous analysis. Entrepreneurs are indeed special individuals in that they tend to exhibit a particular combination of psychological attributes compatible with their role in the economy as new venture creators.

This is an aggressive paper, galloping from economics to psychology to sociology to law and back around again. Amir eventually addresses a normative question: can legal reform encourage entrepreneurship? He emerges a skeptic, concluding that there is "disappointingly little room for effective intervention targeted at fostering entrepreneurship."

He may be right. And as a person who is largely ambivalent on these sorts of normative questions, I would not be disappointed if he were right. But Amir is fairly audacious in his efforts to build the foundation for his conclusion, and, by his own admission, the theoretical and empirical support for strong conclusions is missing.

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Bob Lawless offers some thoughts on "law and entrepreneurship" in the wake of the Law & Entrepreneurship Retreat:

One concept of entrepreneurial studies might be that it defines a group of scholars with cross-disciplinary interests in what might loosely be called "emerging businesses." Under this concept, entrepreneurial studies is a label that helps a set of scholars identify papers, conferences, and other opportunities for scholarly exchange. Thus, entrepreneurial studies can be seen as a flag around which a group of scholars have rallied. This loose social organization facilitates the accumulation of knowledge because these scholars otherwise would have stayed within their own intellectual silos, and the information that each knew would not have been shared with the larger scholarly community. That is a useful role for entrepreneurial studies.

There is a stronger claim, however, about entrepreneurial studies on which I remain a strong skeptic. That claim is that there exists a phenomenon called the "entrepreneur" and that we would agree on who is an entrepreneur such that the phenomenon can be the subject of scholarly study. My skepticism is not people do not start business, for they obviously do. Are all business startups entrepreneurial? If so, then is entrepreneurial studies just the study of business startups?

I agree with Bob that even the modest version of "law and entrepreneurship" is useful, but I disagree with his characterization of the more ambitious version of the concept. Imposing a requirement of consensus over the definitional question "What is 'law and entrepreneurship'?" is a deal killer, and it is simply unnecessary.

Many who frequent this site consider themselves "corporate law scholars," but what is "corporate law," anyway? It obviously includes state incorporation statutes and judicial opinions relating to fiduciary duties. Surely, it also includes some aspects of federal securities law, but which parts are in and which parts are out? What about rules governing stock listings -- in or out? Could we include portions of the Internal Revenue Code or the Bankruptcy Code, both of which are mentioned in my Business Organizations casebook? Obviously, we do not need to define the boundaries of the field with precision before "corporate governance" is recognized as an important and distinctive phenomenon, and "corporate law" becomes a meaningful concept.

On the other hand, if we need a more precise definition of "corporate law," we simply specify the definition that we are using. You can see an example of this in my recent paper on The Dystopian Potential of Corporate Law, where I challenge Kent Greenfield's assertion that "Corporate law is a big deal." Likewise, when we need precision in the definition of "law and entrepreneurship," we simply specify the definition. Again, you can see this in my paper, with Masako Ueda, entitled Law & Entrepreneurship: Do Courts Matter?

My colleague Anne Miner spoke to the participants in the Law & Entrepreneurship Retreat and warned us of the perils of endless definitional debates. While I think that some attention to the definitional issue is necessary, I agree with Anne that we should not belabor the point. Rather, we should continue to explore the connections between law and entrepreneurship and observe what emerges from those studies.

The crux of Bob's skepticism, however, is not simply the lack of precision in "law and entrepreneurship," but a deeper skepticism about "entrepreneurship" as a distinctive phenomenon worthy of study. Just to be clear, no one is arguing that "entrepreneurship" is a discipline in the same way that economics, sociology, psychology, or political science are disciplines. That is, entrepreneurship has no distinctive causal theories. Rather, the claim is that "entrepreneurship" is something distinct from other forms of individual or institutional behavior, such as "corporate governance," and that legal scholars would benefit by organizing courses and scholarship around the intersection of law and entrepreneurship. In other words, "law and entrepreneurship" is not equivalent to the "law of the horse."

Though I disagree with Bob about the need to resolve the definitional problem, I have not fully come to terms with the notion that "law entrepreneurship" is more than merely the aggregation of various doctrinal areas of law, such as corporate law, intellectual property law, tax law, etc. Knocking down silos is worthwhile, but my hunch is that there is much more to be gained from this effort. In particular, my hope is that the study of "law and entrepreneurship" will yield insights that simultaneously enhance our understanding of entrepreneurial behavior and deepen our appreciation of various areas of law.

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Sorry for the light posting lately. In addition to the usual end-of-semester scramble, I have been working feverishly on several articles. In one of those papers (co-authored with Masako Ueda), I try to push the ball forward on "law and entrepreneurship." I have posted previously about that paper here and here, and a near final version will soon go up on SSRN.

In the course of writing that paper, I encountered an number of fascinating articles in finance and in the entrepreneurship literature. Of course, I am particularly interested in the development of entrepreneurship as a separate field, so I found this co-citation analysis quite helpful in developing a map of that field, such as it is: Henri A. Schildt et al., Scholarly Communities in Entrepreneurship Research: A Co-Citation Analysis, 30 Entrepreneurship Theory & Prac. 399 (2006).

Unfortunately, I didn't find a linkable copy of the article, but this is the money sentence: "Our research reveals 25 distinct groups of studies, attesting to the diversity and fragmentation of past entrepreneurship research." Among the top ten groups of studies are "Entrepreneurial Networks and Resource Accumulation," "Corporate Entrepreneurship and Venturing," "Conceptualizations of Entrepreneurial Processes," "Alertness, Opportunity Creation, and Creative Destruction," "Psychological Characteristics of Entrepreneurs," and "Psychological Characteristics of Entrepreneurs."

Entrepreneurship scholars seem concerned about the possibility of excessive fragmentation in their field, and several attempts have been made to reduce the field to more manageable central concepts. See, e.g., Scott Shane & S. Venkataraman, The Promise of Entrepreneurship as a Field of Research, 25 Acad. Mgmt. Rev. 217 (2000); Jonathan T. Eckhardt & Scott A. Shane, Opportunities and Entrepreneurship, 29 J. Mgmt. 333 (2003). The latter article, co-authored by my friend and colleague Jon Eckhardt, contains the following:

[W]e assume that equilibrium is either never fully realized in market economies (Kirzner, 1985), or is intermittently disrupted by the profit-seeking actions of individuals (Schumpteter, 1934). Thus, in contrast to equilibrium theories, which assume away the existence of entrepreneurial opportunities, we view entrepreneurship as requiring those opportunities (Shane, 2000).

Following Venkataraman (1997),we define entrepreneurship as the discovery, evaluation, and exploitation of future goods and services. This definition suggests that, as a scholarly field, entrepreneurship involves the study of opportunities (Shane & Venkataraman, 2000).

If entrepreneurship involves the study of opportunities, "law and entrepreneurship" might find a home in the study of positive law (constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to “the discovery and exploitation of profitable opportunities." At least that is where I am on this issue today.

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The draft of my paper with Masako Ueda, which I blogged about here, is now available for download at SSRN. Go here.

In an attempt to set your expectations at the right level, I note that we don't actually answer the titular question. We think that this answer might be "yes," but we don't know.

This is a relatively short symposium piece that is designed to set the stage for a comparative empirical study of courts that might get us closer to an answer. The methodological obstacles to such a study are legion, but we are working through them because we are convinced that the results would be valuable. In any event, it may take us awhile to nail down the methodology, but in the meantime, we would appreciate your suggestions.

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This past summer, I posted some preliminary thoughts on "law and entrepreneurship" as a field of study. Since then I have been reading more of the entrepreneurship canon, and working with my finance colleague, Masako Ueda, on a project, the first product of which I will post on SSRN later this week. My views on "law and entrepreneurship" have evolved. Here are some paragraphs (sans footnotes) from a draft of my paper with Masako:

Joseph Schumpeter famously identified the “process of Creative Destruction” as the “essential fact about capitalism.” In Schumpeter’s view, the entrepreneur is the agent of creative destruction, and the distinguishing attribute of entrepreneurial activity is novelty. Entrepreneurs create new products, improve the manufacture of existing products with new methods, exploit new sources of supply, and develop new forms of organization.

According to Schumpeter, entrepreneurial activity “constitutes a distinct economic function” because its very novelty ensures that it transcends the present body of understanding and because society resists novelty, thus requiring of the entrepreneur the distinctive skill of “getting things done.” Schumpeter’s prediction that entrepreneurs would become obsolete seems passé in the wake of the revolutionary technological developments of the past few decades, but getting novel things done remains at the heart of modern conceptions of the entrepreneurial process.

Though entrepreneurship as a distinct field of research is still searching for an identity, entrepreneurship scholars gradually are forging a consensus about the core commitments of the field. In describing the entrepreneurial process, for example, scholars typically focus on “the discovery and exploitation of profitable opportunities.” Novelty is inherent in such opportunities, and “entrepreneurship is the mechanism by which society more fully appreciates its investment in the creation of new knowledge, such as research and education.”

...

We restrict our attention to “the discovery and exploitation of profitable opportunities” by new firms and exclude entrepreneurial activities by established firms from our definition of entrepreneurship. The latter is sometimes called “intrapreneurship." Scholary interests in intrapreneurship are clustered around the issue of how to circumvent organizational inertia in established firms and to get novel things done, as opposed to conducting routine business. Important issues in entrepreneurship by new firms arise from lack of experience and resources, which established firms usually possess. Given these significant differences between intrapreneurship and entrepreneurship by new firms, we gain little from mixing the two forms of entrepreneurship together.

Our conception of “law and entrepreneurship” follows naturally from the foregoing description of entrepreneurship and encompasses positive law (including constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to “the discovery and exploitation of profitable opportunities by new firms.” While much entrepreneurship research focuses on the characteristics of entrepreneurs or on the performance of entrepreneurial firms, law and entrepreneurship studies should focus on the legal structure and regulation of entrepreneurial firms. Many entrepreneurship scholars emphasize the importance of organization to the study of entrepreneurship.

Of course, as always, comments are most welcome.

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Vic and Bill Sjostrom both respond with great questions to my earlier post on angel investing. My post claimed that angel investment differs dramatically from venture capital investment, with angels taking relatively unfavorable terms. Vic wants to know whether angels act more like venture capitalists now than they used to, while in Bill’s experience, most angels do in fact invest on VC-like terms.

There’s a second piece to this puzzle that may explain how Bill and I can both be right. That is, while the traditional, informal model is still very important and explains some angel investment, a new breed of angel investor has also emerged. Rather than flying solo under the radar screen and investing informally, angels are increasingly joining “angel investment organizations” to facilitate funding opportunities. (Silicon Valley's Band of Angels was the first of these.) These organizations provide an audience of angels to which local entrepreneurs can pitch their ideas, after which interested angels can jointly invest in promising ventures. My research on these organizations is in its infancy (members of angel investment organizations: if you’re reading this, please contact me!). But my understanding is that the joint investments that arise out of these organizations do look more like venture capital deals than traditional angel deals. This makes sense – as Bill suggests, the “trust factor” may be lower, and the transaction costs justified by the larger amounts invested. So I think we’re seeing an important shift in angel investing, although the traditional model persists and still needs explaining…

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Thanks to my hosts for the opportunity to visit, and to Gordon for the warm welcome.  Like Gordon and Vic, one of my primary interests is the emerging field of “law and entrepreneurship.”  However this field is defined, it must include entrepreneurial finance.  Much important work has been done on venture capital, but relatively little has been done on angel investing. 

Who are angel investors?  They’re high net worth individuals, often ex-entrepreneurs, who invest in early stage start-up companies.  The term “angel” originally referred to wealthy investors in early 1900s Broadway shows.  Today, angels typically invest in start-ups within their fields of expertise and geographic area.  Angels are said to provide more capital, and perhaps significantly more capital, to start-up businesses than do venture capitalists.  If this is true, then why do angels receive scant attention from academics?  The most likely explanation is that angels are difficult to study, given their informal nature and penchant for secrecy (to avoid being inundated with funding requests).  Nonetheless, the available information we do have – some of it empirical but much of it of the conventional wisdom/anecdotal variety – suggests that angel investing differs dramatically from venture capital investing.  Most notably, angels take common stock, while venture capitalists take preferred, and angels do not bargain for protective provisions or board seats, while venture capitalists do.

My first project in this area will explore the reasons for these radically different investment strategies. I hope to explain why angels may opt for relatively unfavorable terms compared to venture capitalists, despite enjoying similar bargaining power over entrepreneurs.  Some attribute this to a lack of sophistication, but the likely explanation strikes me as much more complex…

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The study of entrepreneurship in law schools is primitive. While legislatures, regulators, and courts sometimes tailor rules to small or emerging businesses, law typically is not organized according to whether the regulated actor is an entrepreneur. As a result, scholars who aspire to study "law and entrepreneurship" must confront the fundamental challenge of defining their field.

The word "entrepreneur" is derived from the French word entreprendre, which means "to undertake." An entrepreneur, therefore, connotes "one who undertakes." Implicit in this general description of an entrepreneur is the existence of an opportunity that the entrepreneur is attempting to exploit.

Opportunities sometimes are portrayed as gemstones: a valuable item that is to be discovered by the entrepreneur. Others portray opportunities as inventions: they are meant to be created. Under either characterization, however, the entrepreneur does not rest once the opportunity is identified. The process of exploiting the opportunity is the essence of entrepreneurship, and this process inevitably leads to the creation of organization:

At the most general level, entrepreneurship is the creation of value through the creation of organization. Entrepreneurs discover, invent, reveal, enact, and in other ways make manifest some new product, service, transaction, resource, technology, and/or market that has value to the community or marketplace…. [T]he process of creating value operates through the creation of a multiperson system (organization) that transforms input such as materials, money, and time into output such as product and services. Excluded are the activities of the solely self-interested (the clever thief and the con artist) and those who create without deliberate and choiceful organizing of human resources (e.g., artists, inventors, and solo-self-employed professionals). Included are those who start a business or nonprofit agency and those who transform (acquire, redirect, restructure, and "turn around") existing organizations so they add new values to the community or marketplace. (Barbara J. Bird, Entrepreneurial Behavior 3 1989).)

The domain of "law and entrepreneurship" follows naturally from this understanding of entrepreneurship. "Law and entrepreneurship" is, at root, the study of the legal structure of organizations. This study includes the contracts, statutes/regulations, and common law doctrines that apply to the formation, governance, and termination of organizations.

If you are still reading, you may be wondering why I feel impelled to organize the study of "law and entrepreneurship." The explanation is that our understanding of the legal structure of organizations is lumpy (e.g., we understand a lot about public corporations and venture capital relationships, but relatively little about strategic alliances) and incomplete (i.e., empirical studies of organizations tend to focus on a narrow range of questions). By searching for coherence across various types of organizations and asking a broader range of questions about those organizations, I believe that we can improve our understanding of the role of law in shaping organizations of all type. This is the motivation for my interest in empirical studies of relational contracts.

With that background, does the notion of "law and entrepreneurship" articulated above seem like a  sensible first step at defining the field? I realize that the definition is very broad, including, among other things, the entirety of "business organizations" law. But why not consider business organizations a sub-field of "law and entrepreneurship"? Under what theory are the formation, governance, and termination of partnerships, corporations, and other limited liability firms outside the scope of "law and entrepreneurship"? And if the study of those business forms were connected in more meaningful ways to other organizations, wouldn't that be a good thing?

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