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Multistage Selection and the Financing of New Ventures

  • 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)

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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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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