The Effect of Financial Factors on the Performance of New Venture Companies in High Tech and Knowledge-Intensive Industries: An Empirical Study in Denmark

By Bollingtoft, Anne; Ulhoi, John Parm et al. | International Journal of Management, December 2003 | Go to article overview

The Effect of Financial Factors on the Performance of New Venture Companies in High Tech and Knowledge-Intensive Industries: An Empirical Study in Denmark


Bollingtoft, Anne, Ulhoi, John Parm, Madsen, Henning, Neergaard, Helle, International Journal of Management


This paper addresses important financial aspects during the formation of knowledge-intensive entrepreneurship. A number of ex ante derived hypotheses are submitted to an empirical test to identify and explain some of the key financial factors affecting the survival and first preliminary growth of new ventures in high-tech and knowledge-intensive sectors. The paper builds in part upon existing literature on venture capital, theory on risk and trust. The results document that high variation on several dimensions can be found across the two sectors investigated (IT and life sciences).

1. Introduction

Recently there has been a growing interest of academics from various disciplines who have begun to address the topic from within their own areas of expertise, such as strategic management and international business (Coviello, 1992; Oviatt, 1994). A number of researchers have documented that various factors, such as social, human and financial capital, as well as the characteristics of the market, contribute to the growth potential and success of a new venture (Chandler, 1998; Burt, 2000). To establish a new venture the entrepreneur needs to have access to different types of capital (i) human capital; (ii) social capital; and (iii) financial capital, each playing different, but equally important, roles during the life cycle of a new business venture.

Contrary to social and human capital, financial capital is indeed tangible. It is a critical strategic asset, which is needed for the establishment, growth and future survival of any new business venture. Often it is tied to a single individual or an entrepreneurial team. The search for external capital (investors) is likely to be one of the activities that take up most of the time of new as well as established entrepreneurs. This means that while financial capital is an important factor in the entrepreneurial process, it is also an activity which takes up a lot of time and efforts from the entrepreneurs. The paper is organized as follows: section 2 addresses financial capital, highlighting different aspects and the importance of this issue and including the research propositions. section 3 outlines the research design and section 4 focuses on the analysis and results.

2. Financial capital

Financial capital consists of personal and general funds. Personal funds can be an entrepreneur's own funds, help from family and friends, as well as bank loans based on personal collateral. If the entrepreneurs have already invested their personal capital and time (i.e. "sweat equity") in a venture, this might smooth away the risk perception of potential investors. General funds include seed funding from a development agency, government-based loans, and funds from a venture capital (VC) firm (Shepherd, 1999). Other researchers argue that the initial capital structure in general can be classified as internal capital provided by the founder or founding team and external capital provided by investors or lending institutions (Deakins, 1996). This means that capital structure, as used in the above context, refers to the relative mix of capital provided by the founder(s) versus the capital obtained from external sources.

New technology- or knowledge-intensive firms have distinctive financial needs during their various evolutionary stages. The pre-company stage, where laboratory and other facilities of a "source-organization", or the basement of the entrepreneur's own house, often fulfils the need for financial capital, is followed by the pre-growth or development stage. At this stage, the company often still lacks an operating prototype and has not yet worked out a particularly well-developed business plan n if it has one at all. Therefore, it sometimes may be difficult for the venture to get established unless seed funding is provided by a Technology and Business Incubator [TBI] (Bugliarello, 1998). Since the future success of new technology- or knowledge-based firms is difficult to predict and such ventures normally are more risky than traditional business, obtaining capital may be especially difficult (Alien, 1992). …

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