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Multistage Selection and the Financing of New Ventures

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Author Info

  • Jonathan T. Eckhardt

    ()
    (The Weinert Center for Entrepreneurship, University of Wisconsin, 5252 Grainger Hall, 975 University Avenue, Madison, Wisconsin 53706)

  • Scott Shane

    ()
    (Weatherhead School of Management, Department of Economics, Case Western Reserve University, 11119 Bellflower Road, Room 282, Cleveland, Ohio 44106)

  • Frédéric Delmar

    ()
    (Strategy and Organization, EM Lyon, 23 Avenue Guy de Collongue, Ecully Cedex, F-69134, France)

Abstract

Using a random sample of 221 new Swedish ventures initiated in 1998, we examine why some new ventures are more likely than others to successfully be awarded capital from external sources. We examine venture financing as a staged selection process in which two sequential selection events systematically winnow the population of ventures and influence which ventures receive financing. For a venture to receive external financing its founders must first select it as a candidate for external funding, and then a financier must fund it. We find evidence that founders select ventures as candidates for external finance based on their perceptions of market competition, market growth, and employment growth, while financiers base funding decisions on objective verifiable indicators of venture development, such as the completion of organizing activities, marketing activities, and the level of sales of the venture. Our findings have implications for venture financing and evolutionary theories of social processes.

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File URL: http://dx.doi.org/10.1287/mnsc.1050.0478
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 52 (2006)
Issue (Month): 2 (February)
Pages: 220-232

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Handle: RePEc:inm:ormnsc:v:52:y:2006:i:2:p:220-232

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Keywords: venture financing; entrepreneurship; evolutionary theory;

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Cited by:
  1. Fryges, Helmut & Kohn, Karsten & Ullrich, Katrin, 2011. "The Interdependence of R&D Activity and Debt Financing of Young Firms," IZA Discussion Papers 6217, Institute for the Study of Labor (IZA).
  2. Liliana Doganova & Marie Eyquem-Renault, 2009. "What do business models do? Narratives, calculation and market exploration," Post-Print halshs-00347615, HAL.
  3. Guido Buenstorf & Matthias Geissler, 2012. "Not invented here: technology licensing, knowledge transfer and innovation based on public research," Journal of Evolutionary Economics, Springer, vol. 22(3), pages 481-511, July.
  4. Massimo Colombo & Annalisa Croce & Samuele Murtinu, 2014. "Ownership structure, horizontal agency costs and the performance of high-tech entrepreneurial firms," Small Business Economics, Springer, vol. 42(2), pages 265-282, February.
  5. Per Davidsson & Scott Gordon, 2012. "Panel studies of new venture creation: a methods-focused review and suggestions for future research," Small Business Economics, Springer, vol. 39(4), pages 853-876, November.
  6. Fabio Bertoni & Annalisa Croce & Diego D'Adda, 2009. "Venture capital investments and patenting activity of high-tech start-ups: a micro-econometric firm-level analysis," Venture Capital, Taylor & Francis Journals, vol. 12(4), pages 307-326, November.
  7. David Devigne & Tom Vanacker & Sophie Manigart & Ine Paeleman, 2013. "The role of domestic and cross-border venture capital investors in the growth of portfolio companies," Small Business Economics, Springer, vol. 40(3), pages 553-573, April.
  8. Arvind Ashta & Glòria Estapé-Dubreuil & Jean-Pierre Hédou & Stéphan Bourcieu, 2012. "Leçons d'innovation sociale des micro-angels," Working Papers hal-00726112, HAL.
  9. Dimo Dimov & Pablo Martin de Holan & Hana Milanov, 2012. "Learning patterns in venture capital investing in new industries," Industrial and Corporate Change, Oxford University Press, vol. 21(6), pages 1389-1426, December.
  10. Colombo, Massimo G. & Croce, Annalisa & Guerini, Massimiliano, 2013. "The effect of public subsidies on firms’ investment–cash flow sensitivity: Transient or persistent?," Research Policy, Elsevier, vol. 42(9), pages 1605-1623.
  11. Hoewer, Daniel & Schmidt, Tobias & Sofka, Wolfgang, 2011. "An information economics perspective on main bank relationships and firm R&D," Discussion Paper Series 1: Economic Studies 2011,19, Deutsche Bundesbank, Research Centre.
  12. Fabio Bertoni & Massimo Colombo & Luca Grilli, 2013. "Venture capital investor type and the growth mode of new technology-based firms," Small Business Economics, Springer, vol. 40(3), pages 527-552, April.
  13. Tom Vanacker & Sophie Manigart, 2010. "Pecking order and debt capacity considerations for high-growth companies seeking financing," Small Business Economics, Springer, vol. 35(1), pages 53-69, July.
  14. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-044, Tilburg University, Tilburg Law and Economic Center.
  15. A. Heughebaert & T. Vanacker & S. Manigart, 2012. "Institutional Frameworks, Venture Capital and the Financing of European New Technology-Based Firms," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/809, Ghent University, Faculty of Economics and Business Administration.
  16. Per Davidsson & Johan Wiklund, 2009. "Scott A. Shane: winner of the Global Award for Entrepreneurship Research," Small Business Economics, Springer, vol. 33(2), pages 131-140, August.
  17. Mathur, Aparna, 2013. "Beyond bankruptcy: Does the US bankruptcy code provide a fresh start to entrepreneurs?," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4198-4216.
  18. Bertoni, Fabio & Colombo, Massimo G. & Grilli, Luca, 2011. "Venture capital financing and the growth of high-tech start-ups: Disentangling treatment from selection effects," Research Policy, Elsevier, vol. 40(7), pages 1028-1043, September.
  19. Colombo, Massimo G. & Piva, Evila, 2012. "Firms’ genetic characteristics and competence-enlarging strategies: A comparison between academic and non-academic high-tech start-ups," Research Policy, Elsevier, vol. 41(1), pages 79-92.

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