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Building upon prior research that demonstrates how the limited knowledge of
finance alternatives of entrepreneurs may cause suboptimal finance decisions, this
paper examines how entrepreneurs human and social capital influence their knowledge of finance alternatives. For this purpose, we use survey data from 103 Belgian
start-ups. Results demonstrate that entrepreneurs with a business education and
entrepreneurs with experience in accountancy or finance have a broader knowledge
of finance alternatives. Having a strong network in the financial community is
further positively associated with the knowledge of finance alternatives. However,
generic human capital, including higher education, industry experience, and management experience, is almost not related with the knowledge of finance alternatives.
Introduction
Finance is one of the necessary
resources required for new ventures to
form and subsequently operate (Ang
1992; Gilbert, McDougall, and Audretsch
2006; Van Auken 2001). Finance decisions are hence key decisions made by
entrepreneurs, which bear significant
implications for the operations, risk of
failure, performance, and future growth
potential of ventures (Cassar 2004; Van
Auken 2001). Traditional finance theory
Arnout Seghers is Research and Teaching Assistant in the Department of Accounting and
Corporate Finance at Ghent University, Gent, Belgium.
Sophie Manigart is Full Professor at Vlerick Leuven Gent Management School and at Ghent
University, Gent, Belgium.
Tom Vanacker is Assistant Professor at Ghent University, Gent, Belgium.
Address correspondence to: Sophie Manigart, Accounting and Corporate Finance, Ghent
University, Kuiperskaai 55 E, Gent 9000, Belgium. E-mail: Sophie.Manigart@ugent.be.
63
64
Theoretical Development
Numerous scholars have highlighted
the importance of taking entrepreneurial
characteristics into account to more fully
understand finance decisions in young
and small ventures (Ang 1991, 1992;
LeCornu et al. 1996; McMahon et al.
1993). We focus on the relation between
entrepreneurs human and social capital
and their knowledge of finance alternatives. This is important as prior research
demonstrates how entrepreneurs knowledge of finance alternatives influences
their finance behavior (Van Auken 2001).
Though traditional finance theories generally assume that decision-makers are
fully aware of all finance alternatives and
their characteristics, entrepreneurship
scholars argue that not all entrepreneurs
have an equally broad understanding of
the finance options that are available,
which leads to a knowledge gap (Gibson
1992; Holmes and Kent 1991; Van Auken
2001). Entrepreneurs often lack detailed
knowledge on finance alternatives,
thereby limiting the set of finance
options that they consider (Van Auken
2001). This limited knowledge of finance
alternatives further hampers entrepreneurs when negotiating and pricing
investments and may result in entrepreneurs being unsuccessful in raising
capital or raising inappropriate levels
and combinations of capital (Van Auken
2001, 2005). We draw upon human and
social capital theory to theorize about the
relationship between entrepreneurs
characteristics and their knowledge of
finance alternatives. The conceptual
framework behind the hypotheses is
summarized in Figure 1.
Prior research demonstrates how an
entrepreneurs human capital and
finance strategies are linked. First,
human capital is positively related with
the wealth of entrepreneurs. Hence,
entrepreneurs with more human capital
can use more of their personal funds
to mitigate their ventures finance
65
Figure 1
Conceptual Framework
HUMAN CAPITAL
Generic human
capital
Specific human
capital
H1
H2
KNOWLEDGE OF
FINANCE
ALTERNATIVES
Van Auken
(2001)
FINANCE
BEHAVIOR
H3
SOCIAL CAPITAL
66
67
68
Research Method
Data Collection Strategy
A random sample of 450 Flemish ventures founded between April 2008 and
September 2008 were selected from the
records of business incorporation as provided by the Flemish government.2 Given
the homogeneous sample frame, nonmeasured variance in terms of geographical location and venture age is
reduced. Moreover, survivorship and recollection biases are limited by sampling
ventures close to the period of formation
(Cassar 2004).
Between mid-November 2008 and
mid-January 2009, all ventures were telephoned in order to identify whether or
not they fulfilled the conditions of our
research. Following Chandler and Hanks
(1998), we exclude 118 subsidiaries or
companies that merely changed their
legal form from further study, as the
2
69
Table 1
Characteristics of Sample Firms (n = 103)
Characteristic
Origin of the company
Independent company
Corporate spin out
Industry
Professional, scientific, and technical activities
Wholesale and retail trade
Hotels and restaurants
Construction
Information and communication
Other
Amount of start-up capital
Less than 20,000
20,00050,000
50,001100,000
100,001250,000
Greater than 250,000
Variables
Dependent Variables. A list of finance
alternatives was composed based on the
70
Frequency
Percent
100
3
97.1
2.9
33
32
9
8
8
13
32.0
31.1
8.7
7.8
7.8
12.6
46
21
13
12
11
44.7
20.4
12.6
11.6
10.7
We thank one of our reviewers for pointing out that the use of factor analysis may also have
limitations. For instance, we lose more fine-grained information on the individual finance
alternatives. In order to test for the robustness of our findings, we also ran regressions using
each individual finance alternative as a dependent variable. These additional regressions largely
confirm the main conclusions drawn from using the broader groups of finance alternatives as
identified by the factor analysis. These more fine-grained analyses are available from the
authors upon request.
71
Table 2
Descriptive Statistics and Rotated Orthogonal Factor
Analysis for Knowledge of Finance Alternatives (n = 103)
Finance alternatives
Mean
Factor
1
0.89
0.88
0.68
0.72
0.64
0.03
0.11
0.17
0.13
0.10
0.18
0.17
0.43
0.24
0.28
-0.10
0.14
-0.15
-0.37
0.11
-0.39
1.00
1.09
1.33
1.38
1.04
1.26
-2.41
0.83
-2.76
-2.43
-2.59
-1.99
-1.31
0.79
1.23
0.91
1.37
1.13
-0.03
0.12
0.13
0.36
0.82
0.78
0.76
0.58
0.15
-0.01
0.21
0.39
-1.35
-1.05
-0.93
-1.65
-1.68
1.24
1.36
1.21
1.58
1.47
0.22
0.19
0.31
0.46
0.44
0.12
0.10
0.17
0.22
0.44
0.88
0.85
0.68
0.61
0.60
72
Standard
Deviation
73
Dependent Variables
1 Knowledge of Common Financing
Alternatives
2 Knowledge of Advanced Financing
Alternatives for the Start-Up Phase
3 Knowledge of Advanced Financing
Alternatives for the Growth Phase
Independent Variables
Human Capital
Generic Human Capital
4 Higher Education (Dummy)
5 Number of Years of Work Experience
Gained by Founders in the Same
Industry
6 Number of Years of Work Experience
Gained by Founders in Other Industries
7 Founder with a Prior Management
Position in a Large or Medium Company
(i.e., Number of Employees Greater
Than 100) (Dummy)
8 Founder with a Previous
Self-Employment Experience (Dummy)
9 Founder with Previous Start-Up
Experience (Dummy)
Variables
Experience
Self-Employment
Experience Start-Up
1.00
1.00
0.00
0.00
0.29
0.34
0.20
0.00
1.00
6.19
0.00 20.00
Experience Other
Industry
Management
Experience
0.73
9.07
0.00 1.00
0.00 40.00
1.40 -1.31
-3.00
Growth Advanced
Higher Education
Experience Same
Industry
2.00 -2.41
-3.00
Start-Up Advanced
Mean
2.00 -0.10
Max
-2.80
Min
Common
Abbreviation
0.46
0.48
0.40
6.78
0.45
7.78
1.13
0.83
1.00
Standard
Deviation
2
1.000
0.255
1.000
0.322 0.028
0.400 1.000
1.000
Correlation
Table 3
Descriptive Statistics and Correlations of the Dependent, Independent, and Control
Variables (n = 103)a
74
Min
2.28
0.47
0.47
0.27
0.30
0.149
0.242
0.086
0.044
0.024
0.126 -0.152
0.170
0.132
0.219 -0.228
0.066 -0.107
Correlation
0.026
0.066
0.043
0.044
0.157
0.066
0.204
0.166
0.190
0.153 -0.013
0.105 0.074
0.149
13.14
0.204
0.474
0.338
0.216
0.248
0.45
0.200
0.188
0.145
0.395
0.327
0.48
4.82
Variables
Table 3
Continued
75
Abbreviation
Min
Max
Variables
0.48
4.82
0.45
13.14
0.27
0.30
2.28
0.47
0.47
0.34
5.16
0.92
0.90
10.14
0.31
0.32
Standard
Deviation
0.35
1.27
Mean
Table 3
Continued
0.151
1.000
12
1.000
13
0.091
15
0.088 0.059
0.195 0.078
1.000
0.150 1.000
14
1.000
0.122
16
1.000
17
18
0.065 0.104
0.074 -0.097
0.038 -0.064
0.022
1.000
11
0.223 0.231
-0.052 -0.015
0.137
0.034
0.033
0.059
1.000
0.264
10
Correlation
76
Results
Main Findings
As the dependent variables are censored, the multivariate relationships
We used targeted turnover after five years as an alternative proxy for the expected growth rate.
Unfortunately, only 78 respondents filled in the targeted turnover after five years. The
correlation between the targeted number of employees and the targeted turnover after five
years is 0.348. Using this variable rather than the targeted number of employees leads to
qualitatively similar results.
77
78
79
0.462*
0.065*
0.480*
0.054*
0.192
0.000
-120.000
0.143
-0.003
0.039**
0.025
0.079
-0.493*
0.159
-0.003
0.032*
-0.057
0.141
-0.444
0.095
0.000
-134.300
0.013*
0.357
0.300
0.129**
-0.436*
0.030
0.013
0.251
0.415
0.128**
-0.273
0.234
0.011
0.441
0.336
0.166***
-0.149
0.499*
0.670***
0.236
0.000
-113.400
-2.608***
-2.480***
-2.657***
Where p < .1; *p < .05; **p < .01; ***p < .001 (conservative two-tailed tests).
Constant
Control Variables
Number of Employees
Financial Planning (Dummy)
External Shareholders (Dummy)
Start-up Capital
Industry Sales (Dummy)
Industry Activities (Dummy)
Independent Variables
Human Capital
Generic Human Capital
Higher Education (dummy)
Experience Same Industry
Experience Other Industry
Management Experience (Dummy)
Experience Self-Employment (Dummy)
Experience Start-Up (Dummy)
Specific Human Capital
Business Education (Dummy)
Experience in Accountancy or Finance
Social Capital
Relationships in Financial Community
McFaddens Pseudo R2
Prob > [chi symbol]2
Log likelihood
Model 3
Model 2
Model 1
Common
0.062
0.012
-123.400
0.020*
-0.002
0.535
-0.007
-0.188
0.868**
-3.556***
Model 1
0.114
0.007
-116.500
0.420
0.040
0.381
-0.007
-0.007
-0.030
0.635
-0.061
0.017
-0.063
0.248
-0.077
-0.129
0.748*
-3.082***
Model 2
0.402
0.040
0.371
-0.006
-0.003
-0.015
0.584
-0.065
0.018
0.010
0.184
-0.074
-0.189
0.665
-3.177***
Model 3
0.299
0.118
0.009
-116.000
Start-Up Advanced
Table 4
Multivariate Tobit Regression Models (n = 103)
0.082
0.000
-148.700
0.022*
0.768
0.719*
0.062
-0.373
0.601*
-3.499***
Model 1
0.177
0.000
-133.200
0.862***
0.051*
0.237
0.015
0.020
0.145
0.117
-0.143
0.019**
0.427
0.663
0.012
-0.390
0.221
-3.315***
Model 2
0.857***
0.051**
0.225
0.016
0.027
0.204
0.061
-0.174
0.019**
0.510
0.573
0.013
-0.515*
0.053
-3.431***
Model 3
0.539*
0.197
0.000
-130.000
Growth Advanced
Robustness Tests
Additional models were tested in
order to provide evidence with respect to
the robustness of our main findings.5
First, many entrepreneurs may not need
the wide range of finance alternatives
included in our study. Hence, one could
argue that the existence of a knowledge
gap is likely to be less problematic for
entrepreneurs who do not require large
amounts of finance. Entrepreneurs with
higher growth aspirations are known to
realize higher growth rates (Wiklund and
Shepherd 2003) and hence are more
likely to need multiple sources of finance
besides owner funds (Vanacker and
Manigart 2010). Nonparametric tests
comparing entrepreneurs with high
versus low growth aspirations (median
split) show no significant differences in
the knowledge of finance alternatives
between these two types of entrepreneurs: the knowledge of finance alternatives of entrepreneurs with high growth
aspirations is equally limited compared
with that of entrepreneurs with limited
growth aspirations. Hence, entrepreneurs who will likely need to raise more
finance from more diverse sources to
fulfill their growth aspirations start with
an equally low knowledge of finance
alternatives. Furthermore, in the subsample of entrepreneurs with high
growth ambitions, specific human capital
in the form of business education and
years of experience in accountancy or
finance is associated with an enhanced
knowledge of common finance alternatives and advanced finance alternatives
for the growth phase. Relationships in
the financial community are also positively associated with the knowledge of
advanced finance alternatives for the
growth phase. This indicates that the
results from a subsample of entrepreneurs with high growth aspirations are
These additional tests are not reported due to space considerations but available from the
authors upon simple request.
80
Discussion and
Conclusion
It is widely acknowledged that financial resource acquisition is a key process
in the start-up and growth of new businesses. Traditional finance theories generally emphasize wealth maximization as
an overarching goal, rational behavior of
all actors, and prefect information
(Brealey and Myers 2000). In such a theoretical setting, financial decision-making
is straightforward: all value creating
investment projects will find sufficient
finance, and finance decisions will not
influence firm value (Modigliani and
Miller 1958). In practice, however, the
process of acquiring sufficient and
adequate finance is fraught with difficulties, especially for small and new ventures. Scholars have argued that
information asymmetries between investors and entrepreneurs may constrain the
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82
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