An examination of the substitutability of founders human and financial capital in emerging business ventures

Abstract Undoubtedly, access to financial capital and other resources is an important antecedent of new venture performance. Indeed, inadequate financial resources often are cited as a primary reason why emerging businesses fail (Barren 1989; McQueen 1989; Otterbourg 1989; Rujoub, Cook, and Hay 1995). Yet, there is some feeling among scholars that competent founders will find a way of coming up with necessary resources and capital Chandler and Hanks 1994 , Timmons 1990 , Thorne 1989 . In this study, we seek to better understand and provide insight into the factors that determine the amount of money needed to start a business, and the factors that drive the decisions of whether such funding should come from founder savings or from outside sources. We explore two questions: (1) What factors are associated with the amount of initial capital raised? and (2) What factors determine the mix of founder savings versus financial capital from outside sources that create the initial capital structure? We seek to answer these questions using a sample of 102 manufacturing and service firms between 3 and 7 years of age. These firms were categorized as manufacturing, retail, wholesale, and business services. In general, the evidence supports our hypotheses. The amount of financial capital at start-up varies by industry. Of key importance in this study, human and financial capital appear to be substitutable. The analysis shows that, on average, firms with high levels of founder human capital and low levels of initial financial capital perform similarly to firms that have low levels of founder human capital and high levels of financial capital. Subgroup analysis provides insights into the degree of substitutability. This finding suggests that founders with strong background experience may be able to start businesses that survive and thrive with less financial capital than their less experienced counterparts. The proportion of initial capital provided by the founder differs significantly across industry types. In more capital intensive industries, founders provide a smaller proportion of the start-up capital. Interestingly, the amount of initial capital provided by the founder does not vary significantly across industry types. This suggests that the amount of initial capital provided by the founder may result from contributing all they can give to the business, which appears to be similar across business types. Finally, founders’ perceptions of their ability to recognize and take advantage of opportunity are positively related to the proportion of initial capital provided by the founder. This research provides insights into the factors that appear to drive the initial capital intensity and structure. To provide better understanding of this phenomenon, future research could investigate such practices as bootstrapping, asset sharing, or other techniques that allow founders to control resources without requiring ownership.