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Article
Publication date: 5 October 2020

Nirjhar Nigam, Sondes Mbarek and Afef Boughanmi

Financing investments in a knowledge-intensive sector may be more difficult as there is a greater degree of uncertainty and asymmetries of information. This paper aims to…

Abstract

Purpose

Financing investments in a knowledge-intensive sector may be more difficult as there is a greater degree of uncertainty and asymmetries of information. This paper aims to examine whether a company’s intellectual capital (human capital, relational capital and structural capital) can serve as a quality signal in the financing of health care startups with new business models.

Design/methodology/approach

The study constructed a manual database using several paid and unpaid databases. This paper collected random data from 204 startups that obtained funding during the 2014–2017 period and used signaling theory to examine the factors that impact access to external financing for Indian health care technology startups.

Findings

This paper found that venture capitalists partly base their financing decisions on the relational capital of the startup represented by startups’ age and the average number of website visits, the presence of a syndicate of investors. Human capital variables and structural variables do not show much significant impact. This paper also find some business models show a negative impact on financing implying that investors are reluctant to invest in new technologies that carry more uncertainty and take a longer time to become profitable.

Research limitations/implications

Before concluding this paper, it is important to acknowledge the limitations of the study and some implications for future research purposes. First, the study is conducted on only 204 startups from India, and as such, it suffers from a small sample size, like many other comparable survey-based studies in entrepreneurship. Second, the results are obtained with respect to data collected from Indian startups and represent the Indian context which limits the generalization on a global level.

Practical implications

The results suggest that years of experience and prior relevant experience, do not actually impact the financing of a new venture. These results are crucial as India has a unique demographic advantage over other countries in relation to age. If young minds are adequately nurtured, this can result in innovation, entrepreneurship and job creation (which still remains as a foremost challenge for India).

Social implications

From a policy perspective, a number of implications emerge from the current study. There is a need for ameliorating the capacity of the education system in providing top-quality support including a greater focus on entrepreneurship courses and to replicate the education delivery model from top foreign institutes. The government should take this opportunity to revive the system of education and follow the methodology of elite institutes and to develop entrepreneurship spirit in other colleges and schools.

Originality/value

Financing the investments of young startups with new business models in knowledge-based sectors may be more difficult. In this paper, this paper demonstrates that startups have to effectively use and manage their intellectual assets to achieve sustainable competitive advantage. The findings of the paper emphasize the role of intellectual capital in securing financing through venture capital.

Details

Journal of Knowledge Management, vol. 25 no. 1
Type: Research Article
ISSN: 1367-3270

Keywords

Article
Publication date: 15 June 2021

Jan P. Warhuus, Casey J. Frid and William B. Gartner

This study offers empirical evidence from a nationally representative panel dataset of nascent entrepreneurs (PSED-II) regarding when external financing is acquired and…

Abstract

Purpose

This study offers empirical evidence from a nationally representative panel dataset of nascent entrepreneurs (PSED-II) regarding when external financing is acquired and how certain factors affect this timing during the cumulative process of nascent entrepreneurs taking actions toward establishing an operational entity. By assessing the relationship between the external financing event and the cumulative set of actions that nascent entrepreneurs undertake to create new businesses, we improve our understanding of how the timing of acquiring external financing affects organizational survival and growth.

Design/methodology/approach

We apply nonparametric and semiparametric survival analysis techniques to a nationally representative panel dataset of nascent entrepreneurs. This ascertains the probability of an external financing event at any given moment in time and a set of startup conditions that we hypothesize will affect this timing. First, we use Kaplan–Meier analysis to explore when external financing occurs during new business creation. We then use discrete-time survival analysis to investigate whether certain startup conditions affect when external financing occurs. Finally, we conduct a test of independence to examine the external financing event relative to other startup activities completed during new business creation.

Findings

Nascent entrepreneurs tend to acquire external funding relatively late in the new venture startup process – on average, about two-thirds of the way from conceiving of the idea and becoming operational. They tend to take actions that are less resource-demanding early in the startup process to build their organizations to a fundable stage. Net worth tends to speed up the acquisition of external funding as wealthy entrepreneurs tend to ask for funding earlier in the process. Finally, entrepreneurs in capital-intensive industries do not seem to get outside funding before entrepreneurs in other industries.

Originality/value

This study is unique in three ways. First, we investigate the timing of the highly important external financing event. Timing is critical in unpacking and making sense of the very early stages of a new business and in guiding entrepreneurs and students about when to do what. Second, we do so in a subsample of preoperational, nascent, funded entrepreneurs derived from a nationally representative panel dataset of startup attempts. Third, our findings provide a counter-intuitive yet systematic understanding of organizational emergence and very early-stage financing.

Details

International Journal of Entrepreneurial Behavior & Research, vol. 27 no. 6
Type: Research Article
ISSN: 1355-2554

Keywords

Article
Publication date: 6 June 2016

Casey J Frid, David M Wyman, William B. Gartner and Diana H Hechavarria

The purpose of this paper is to explore the relationship between low-wealth business founders in the USA and external startup funding. Specifically, the authors test…

2530

Abstract

Purpose

The purpose of this paper is to explore the relationship between low-wealth business founders in the USA and external startup funding. Specifically, the authors test whether a founders’ low personal net worth is correlated with a lower probability of acquiring funding from outside sources during the business creation process.

Design/methodology/approach

The authors use a double-hurdle Cragg model to jointly estimate: first, the decision to acquire external financing; and second, the amount received. The sample is the US-based Panel Study of Entrepreneurial Dynamics II (PSED II). The PSED II tracks business founders attempting to start ventures from 2005 to 2012.

Findings

Receipt of outside financing during business formation is largely determined by the business founder’s personal finances (controlling for human capital, venture type and industry, and whether money was sought in the first place). A higher household net worth results in larger amounts of external funding received. Low-wealth business founders, therefore, are less likely to get external funds, and they receive lower amounts when they do. The disparity between low-and high-wealth business founders is more pronounced for formal, monitored sources of external financing such as bank loans.

Research limitations/implications

Because the study eliminates survivor bias by using a nationally representative sample of business founders who are in the venture creation process, the findings apply to both successful business founders and those who disengaged during the business creation process. The authors offer insights into the sources and amounts of external funds acquired by individuals across all levels of wealth. The authors accomplish this by disaggregating business founders into wealth quintiles. The study demonstrates the importance of personal wealth as a factor in acquiring external startup financing compared to human capital, industry, or personal characteristics.

Social implications

If the ability to acquire external funding is significantly constrained, the quality of the opportunity and the skill of the business founder may be less a determinant of success at creating a new business as prior studies have suggested. Consequently, entrepreneurship (as measured by business formation) as a path toward upward, socioeconomic mobility will be afforded only to those individuals with sufficient financial endowments at the outset.

Originality/value

Unlike prior studies, the data used are not subject to survivor bias or an underrepresentation of self-employment. The statistical model jointly estimates acquisition of financing and the amount received. This resolves selection and censoring problems. Finally, the dependent variables directly measure liquidity constraints in the context of business formation, that is, before a new venture is created. Prior research contexts have typically studied existing businesses, and are therefore not true examinations of conditions affecting business creation.

Details

International Journal of Entrepreneurial Behavior & Research, vol. 22 no. 4
Type: Research Article
ISSN: 1355-2554

Keywords

Article
Publication date: 29 June 2021

Shivalik Singh and Bala Subrahmanya Mungila Hillemane

The purpose of this paper is to ascertain the factors determining the choice of sources of finance for a tech startup over its lifecycle.

Abstract

Purpose

The purpose of this paper is to ascertain the factors determining the choice of sources of finance for a tech startup over its lifecycle.

Design/methodology/approach

This study adopts simple random sampling technique to choose 93 sample tech startups in Bangalore. Further, this study employs the primary data collection from the sampled startups under study through a semi-structured questionnaire and in-depth interviews with the founders/CEOs of these startups. Furthermore, it carries out binary logistic regression analysis to primarily examine the likelihood of a tech startup to approach and access a particular source of finance over its lifecycle.

Findings

Our results indicate that a tech startup's choice for a financial source varies with its lifecycle stage and financial requirements. We find that while in its early stage, a tech startup's choice of a financial source is limited to business angels (BA), in the growth stage, it approaches the institutional sources, viz. Venture Capital (VC), Corporate Venture Capital (CVC), Banks and Private Equity (PE) firms alternatively. Out of the three major categories of financial requirements: Human Capital (HC), Research Capital (RC) and Social Capital (SC), the requirement for HC and SC is predominantly funded by VCs, while the acquisition of RC is facilitated by early stage investors (BAs) as well as growth stage investors (CVC and PEs).

Research limitations/implications

The research implication of the study lies in bringing out the need to understand both the nature and the quantum of financial requirements of tech startups would influence the sources of finance it would approach and obtain finance for its operations and growth.

Practical implications

The major policy implication of the study refers to the need to promote the diverse sources of finance to meet the diverse needs of finance in different stages of a tech startup's lifecycle. Particularly in an emerging economy, where we do not see the emergence and growth of highly innovative tech startups, the need to promote adequate availability of RC is especially important.

Originality/value

This study makes a key contribution to the entrepreneurial finance literature by empirically investigating the factors determining a tech startup's propensity to approach and access a particular source of finance over its lifecycle.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Book part
Publication date: 26 January 2022

Maria Rio Rita, Ari Budi Kristanto, Yeterina Widi Nugrahanti and Petrus Usmanij

Limited access to capital is a classic issue in and a burden to micro, small and medium enterprises (MSMEs) in Indonesia. The existence of the problem with information…

Abstract

Limited access to capital is a classic issue in and a burden to micro, small and medium enterprises (MSMEs) in Indonesia. The existence of the problem with information asymmetry and agency conflicts that are predominant at the level of small businesses, increasingly hampers the opportunity to obtain funds from various external sources. Especially for businesses that are at the pioneering stage, entrepreneurs are required to think creatively, have the courage to take risks, and be independent in fulfilling resources to realize business opportunities. The availability of funds certainly has an impact on business performance, either directly or indirectly. Based on a literature review, business performance is categorized into financial and non-financial dimensions with various measurement proxies. However, some of the models and measurements proposed are not always suitable in assessing the performance of MSMEs, especially in the startup phase. Therefore, this chapter concurrently describes the funding patterns and the funding alternatives to measure the performance of new businesses based on the existing literature. Theoretically, this research adds a perspective in the field of entrepreneurial finance regarding funding patterns that can be implemented by startup businesses in Indonesia and provides a proposal for measuring the concept of performance that is more adaptive and comprehensive for businesses in the startup stage. The implication of this research for entrepreneurs leads to the need to adjust funding decisions according to the changing stages of the business lifecycle and to expand the funding window to support the sustainability of small businesses.

Details

Artisan Entrepreneurship
Type: Book
ISBN: 978-1-80262-078-8

Keywords

Article
Publication date: 23 December 2020

Saibal Ghosh

Using a novel monthly data set, this study aims to examine the factors affecting the funding of Indian start-ups.

Abstract

Purpose

Using a novel monthly data set, this study aims to examine the factors affecting the funding of Indian start-ups.

Design/methodology/approach

Given the panel structure of the data, the fixed effects regression technique has been used.

Findings

The findings reveal that years of operation is a key factor. Amongst others, angel investors and equity financing are the key drivers of startup financing. Government policy does not appear to have gained adequate traction, although the improvement in the business reform action by state governments has begun to exert a salutary effect.

Practical implications

From a policy standpoint, the study provides insights into what policies and practices can be exploited to streamline the funding bottlenecks affecting startups in the Indian context.

Originality/value

Notwithstanding being a country with a significant presence in the startup space, there are admittedly limited studies, which examine this issue for India. Viewed from this standpoint to the best of the knowledge, the analysis is one of the early studies to shed light on the factors driving the funding of startups in the Indian context.

Details

Journal of Entrepreneurship in Emerging Economies, vol. 13 no. 5
Type: Research Article
ISSN: 2053-4604

Keywords

Open Access
Article
Publication date: 20 June 2022

Kimberly Gleason, Yezen H. Kannan and Christian Rauch

This paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and…

1623

Abstract

Purpose

This paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and stakeholders in the context of startup corporate governance. Further, this paper uses the examples of WeWork and Zenefits to explain how a failure of stakeholders to demand an external audit from an independent accounting firm in early stages of funding led to an opportunity for fraud.

Design/methodology/approach

The methodology used is a literature review and analysis of startup valuation combined with the Fraud Triangle Theory. This paper also provides a discussion of WeWork and Zenefits, both highly visible examples of startup fraud, and explores an increased role for independent external auditors in fraud risk mitigation on behalf of stakeholders prior to an initial public offering (IPO).

Findings

This paper documents a number of fraud risks posed by the “fake it till you make it” ethos and investor behavior and pricing in the world of entrepreneurial finance and VC, which could be mitigated by a greater awareness of startup stakeholders of the value of an external audit performed by an independent accounting firm prior to an IPO.

Research limitations/implications

An implication of this paper is that regulators should consider greater oversight of the startup financing process and potentially take steps to facilitate greater independence of participants in the IPO process.

Practical implications

Given the potential conflicts of interest between VC firms, investment banks and startup founders, the investors at the time of an IPO may be exposed to the risk that the shares of the IPO firms are overvalued at offering.

Social implications

This study demonstrates how startup practices can be extended to the Fraud Triangle and issue a call to action for the accounting profession to take a greater role in protecting the public from startup fraud. This study then offers recommendations for regulators and standards entities.

Originality/value

There are few academic papers in the financial crime literature that link the valuation and culture of startup firms with fraud risk. This study provides a concise explanation of the process of valuation for startups and highlights the considerations for stakeholders in assessing fraud risk. In addition, this study documents an emerging role for auditors as stewards of proper valuation for pre-IPO firms.

Details

Journal of Financial Crime, vol. 29 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

Book part
Publication date: 29 November 2019

Daniela Rupo, Patrizia Accordino, Elvira Tiziana La Rocca and Tindara Abbate

Purpose: To explore intellectual capital (IC) in the business ecosystem perspective, the chapter examines its connection with several “enabling” factors that influence the…

Abstract

Purpose: To explore intellectual capital (IC) in the business ecosystem perspective, the chapter examines its connection with several “enabling” factors that influence the creation and development of innovative startups. The most significant of them are: institutions and organizations able to sharpen new entrepreneurship skills; the simplification of rules and granting of incentives; and the enhancement of entrepreneurship IC and accessible financing methods.

Design/methodology/approach: Based on a conceptual model, some testable research propositions are proposed, followed by a discussion on the direction of future research.

Findings: The propositions suggest that several enabling factors and their interactions are explanatory variables of if and how the business ecosystem works.

Research limitations/implications: The limitation of the chapter is its theoretical approach, requiring empirical validation of these enabling factors in connection with IC. Theoretical implications are related to the operating synergies of the four enabling factors also in connection with profitable use of IC resources.

Practical implications: Practical implications are related to managerial and political issues. Managers and policy-makers must consider and monitor the business ecosystems and the dynamics of these factors in order to define and implement efficacious strategies and provide new incentive to stimulate and support the creation of new companies and the value of IC.

Originality/value: The chapter contributes to theoretical literature thanks to its propositions: enforcing the four most important key factors while encouraging profitable use of IC resource policy-makers and new entrepreneurs who can assist in the growth and expansion of innovative startups.

Details

The Cross-Disciplinary Perspectives of Management: Challenges and Opportunities
Type: Book
ISBN: 978-1-83867-249-2

Keywords

Book part
Publication date: 27 September 2019

Mauricio Ballesteros-Ruiz and Felix Florencio Cardenas-del Castillo

The chapter provides a practical guide to identify and define different funding sources for entrepreneurial and innovation endeavors, including a methodology to describe…

Abstract

The chapter provides a practical guide to identify and define different funding sources for entrepreneurial and innovation endeavors, including a methodology to describe return on investment expectations from funding sources. Also, the authors provide recommended key performance indicators and valuation methods when pitching to potential investors.

Details

Innovation and Entrepreneurship: A New Mindset for Emerging Markets
Type: Book
ISBN: 978-1-78973-701-1

Keywords

Article
Publication date: 27 May 2021

Hanna Schachel, Maik Lachmann, Christoph Endenich and Oliver Breucker

This study aims to examine which categories of management control systems (MCSs) in startups are most important to external financiers. Furthermore, this paper…

Abstract

Purpose

This study aims to examine which categories of management control systems (MCSs) in startups are most important to external financiers. Furthermore, this paper investigates how equity and debt financiers differ in their perceptions of MCS categories and examines the relevance of MCSs for their investment decisions.

Design/methodology/approach

This study collects data through a cross-sectional survey sent to equity and debt financiers actively investing in startups. The results are based on survey responses from 73 financiers.

Findings

The results show that financial MCSs are considered most important, followed by strategic MCSs, while human resources MCSs are perceived as only moderately important. This paper finds significant differences in the perceived importance of MCS categories between equity and debt providers, which can be explained by differing risk profiles and monitoring needs. Although debt financiers consider financial and strategic MCSs to be less important for their portfolios’ startups than equity financiers do, debt financiers perceive MCSs as more important for their initial investment decisions.

Originality/value

The study sheds new light on the importance of different MCS categories in startups by analyzing external financiers’ perceptions. Overall, the empirical study provides insights that are particularly valuable for startups seeking external financing for company growth.

Details

Journal of Accounting & Organizational Change, vol. 17 no. 5
Type: Research Article
ISSN: 1832-5912

Keywords

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