A longitudinal study on the relationship between financial bootstrapping and new venture growth

Abstract

While bootstrap finance is widely used in entrepreneurial ventures, both scholars and practitioners have presented conflicting views on the relation between financial bootstrapping and venture growth. This article empirically investigates the association between bootstrap strategies used at startup and subsequent venture growth. For this purpose, we use a longitudinal database comprising data from both questionnaires and financial accounts of 214 new ventures. Findings demonstrate that the association between financial bootstrapping and venture growth is either nonexistent or positive. More specifically, new ventures that use more owner funds, employ more interim personnel, encourage customers to pay more quickly, and apply for more subsidy programs exhibit higher growth over time. We discuss the managerial and policy implications of these results and suggest avenues for future research.

Keywords:

• entrepreneurial finance
• financial bootstrapping
• startups
• growth
• bootstrap strategies
• venture development

Acknowledgements

We thank David Helleboogh, Eddy Laveren, and the two anonymous reviewers for helpful comments. We further appreciate the constructive feedback of Andy Van de Ven throughout the design of this study and thank Wenling Wang, Linzhen Yang, and Frederik Boterdaele for excellent research assistance. Earlier versions of the article benefited from presentations at the 2009 Babson College Entrepreneurship Research Conference (Babson College), the 2009 Corporate Finance Day (Antwerp University), and St. Petersburg State University. The financial support provided by the Flanders District of Creativity and Herculesfund are gratefully acknowledged.

Notes

Notes

1. A disadvantage of looking at individual bootstrap variables is that we might be less able to generalize. Moreover, prior research has generally grouped bootstrap variables in more general categories to avoid multicollinearity concerns. We thank a reviewer for these important insights. Yet, we already use a more limited number of more general bootstrap variables as opposed to prior studies and this because we focus on the actual use of financial bootstrapping which requires a different approach from previous research.

2. We thank a reviewer for pointing out that the gender of the founder may influence both venture growth (Cooper, Gimeno-Gascon, and Woo 1994) and the use of financial bootstrapping (Neeley and Van Auken 2010). For seven ventures, we lack data on the gender of the lead founder. In the venture with gender data, some 11% of new ventures are female-run businesses (i.e., lead founder is female). We reran our models including a gender dummy variable. This dummy was not significant and findings remain robust. Given the smaller sample size due to some missing data, we prefer to report the models where we do not control for gender.

3. Unreported analyses confirm that ventures which indicated they were likely to invest further after startup also demonstrated higher growth in value added compared to those ventures which indicated they had no such plans. This demonstrates the validity of our measure, although it is an imperfect measure. We thank a reviewer for pointing out that the intention to further invest may also suggest the need to have (external) finance available. Nevertheless, we control for the existence of cash flow problems, which should capture the need for (external) finance. Interestingly, about half of the ventures with the ambition to invest further after startup reported to have experienced cash flow problems while the other half indicated they experienced no such problems. Moreover, about half of ventures without intentions to invest further after startup experienced cash flow problems while the other half did not experience such problems. This provides further confidence in our measure for growth ambition.

4. Note that when the interaction term between a particular bootstrap variable and time is significant, we leave the main effect in the model regardless of its significance. This is necessary for an efficient estimation of the interaction effect (Peixoto 1987).

5. The use of owner's own finance is not necessarily a bootstrapping strategy, but may be a prior step to raising external finance. We thank a reviewer for this valuable insight. In order to address this concern, we reran our models in the new ventures that are 100% financed through the owner, family, or friends. Within the group of new ventures that did not raise external finance within the startup year, the positive effect of the amount of own funds on venture growth remains statistically significant.

6. The details of the robustness checks are not presented but available from the authors upon simple request.

7. The effect of applying for more subsidy finance on growth in total assets was positive as well, but not statistically significant.