De Gruyter Handbook of Entrepreneurial Finance

David Lingelbach

• Publisher: De Gruyter
• Year: 2022
• eBook ISBN: 9783110726350
• Edition: 1
• Topic: Commerce
• Subtopic: Finance

As of early 2022, seven of the ten largest firms in the world by market capitalization had been funded through various types of entrepreneurial finance. This handbook provides an up-to-date survey of what we know about this significant phenomenon in all its forms, and where our knowledge about it needs to head from here. The handbook embraces a wide range of established and emerging academic and practitioner voices across the globe to explore the theoretical and practical flux and tension in the field.

Until recently, most studies have taken a supply side perspective, focusing on the perspective of those who provide funding to new ventures. This book takes a different, demand side perspective, beginning with the entrepreneur and gradually broadening our view to include close by and then more distant funding sources. Following this approach, it is organized into four parts detailing the individual level (founders' resources, bricolage and bootstrapping, effectuation and portfolio entrepreneurship); the inner circle (informal financing, business groups, incubators and accelerators); the wider world (formal debt, microfinance, venture capital, corporate venture capital, business angels, government funding and family offices); and emerging perspectives (non-Western perspectives, gender, indigenous perspectives, post-conflict and disaster zones and ethics).

The introduction considers the general state of the field, while the conclusion takes on additional topics relevant to entrepreneurial finance, such as decentralized finance, big data, behavioral economics, financial innovation and COVID-19, as well as possible ways in which entrepreneurial finance can have a greater impact on other disciplines.

This handbook will be a core reference work for researchers, practitioners, and policy makers seeking an up-to-date academic survey of entrepreneurial finance. It can also be used as a primary text in Ph.D. seminars in entrepreneurship, entrepreneurial finance, and finance. Instructors in Master's level courses in entrepreneurial finance and venture capital will also find the book of benefit.

Part I: The individual level

The contributions in Part I consider the most under-researched part of the field: the individual level. Most startups around the world and over time are financed primarily from their founders’ resources. What those resources may be and how they are gathered are the subject of this part’s four chapters.

In Chapter 1 Jan Warhuus takes on the role of founders’ financial resources in the startup process. He finds that our knowledge about this important topic is constrained somewhat by the theoretical frameworks from corporate finance and data collection challenges in part imposed by editors and reviewers.

In Chapter 2 Matthew Rutherford, Duygu Phillips, and Jorge Arteaga-Fonseca examine two leading theoretical perspectives of relevance to the individual level of entrepreneurial finance: bricolage and bootstrapping. They suggest that the nexus of these perspectives may be a useful focus for future research.

Chapter 3 by Sussie Morrish looks at another individual level theoretical perspective – effectuation – and considers how it may influence a startup’s financing decisions.

Finally, in Chapter 4 Antonio Malfense Fierro and Peter Rosa discuss how entrepreneurs construct portfolios of businesses to manage risk.

Taken together, these four chapters help to rebalance the entrepreneurial finance field.

1 The role of founders’ tangible resources in founding new ventures

Jan P. Warhuus

Department of Management and Entrepreneurship, St. Mary’s College of California

Acknowledgements: Many thanks to editor David C. Lingelbach and to my colleagues and dear friends Casey J. Frid, Claus Thrane, and William B. Gartner for great conversations, insightful comments, and moral support in drafting this manuscript. Without their valuable contributions during different parts of the process, this chapter would not have been what you have in front of you today.

Abstract

This chapter explores our knowledge and lack thereof about the role of founders’ resources in new venture emergence. We focus on early-stages entrepreneurship because it is here that the founders’ resources play the most important role as the venture typically does not yet have assets of interest to investors. We know that is the situation for most founders and because of the raw number of founders, their resource commitment is likely to be sizable and thus important. However, we know little about the actual size or the role these resources play in the process or in acquiring outside resources and financing. This lack of knowledge is in part because early-stage new ventures do not lend themselves well to corporate finance frameworks and partly because the micro-foundational actions of interest are hard to investigate based on the positivist stance that the field of finance and its reviewers and editors typically favor.

Keywords: founders’ resources, insider financing, early-stage entrepreneurship, micro-foundational actions, context,

Introduction

Driving over the San Francisco Bay Bridge towards Oakland on her way home from work at a leading medical trials center, Chanel, age 33, had tears in her eyes – tears of anger, frustration, and disappointment. That same afternoon she had cheerfully gone to her boss’ office with an idea for a medical trial that could potentially lead to a cure of one of the cancers they were working on combatting; only to be lectured on that “we are part of the pharmaceutical industry” and, as such, “not really interested in cures.” Rather, her boss wanted to focus on treatments that required the purchase of drugs. Three years earlier, Chanel had been diagnosed with Crohn’s disease. In the period since, she had experienced the limitations of pharmaceuticals and the benefits of supplementary alternatives. Combining traditional treatments with detoxing body and mind through yoga, meditation, dieting, breath work, and other tools had been her only narrow path to remission. In the process, not only had she earned an MBA and become a certified yoga teacher and wellness coach; she had also been telling her story to her family, friends, and her broad and active network within the volunteering community in Oakland and helping those of them interested in healing alternatives. She knew, firsthand, that aiming for the singular approach of providing pharmaceuticals to people was rarely the right solution to complex illness and trauma.

Over dinner that night at their house in the Laural district of Oakland, Chanel shared her frustration with her boyfriend and their two friends and roommates. After a while, her two roommates, Kimi and Jacob, looked at each other, smiled and Jacob said “do you want to, or shall I?” to Kimi. Kimi replied “Let me give it a go” and turned to Chanel: “This is not the first time. You clearly do not see yourself in that line of work forever. Why don’t you take the yoga and wellness clients that you already have on the side and team up with Jill and Char? They need a place for their breathwork and meditation clients as well. You could get a studio together. There is nothing affordable like that in Oakland for the 99%. I saw this great place today down on 33^rd Avenue next to my chiropractor, it’s for rent. You can totally do it!” Now it was Chanel’s turn to smile. She could see that she had subconsciously been begging her friends to tell her just that for quite some time.

“If you are in, I’m signing the lease!” she texted Jill and Char after the three of them had toured the space on 33^rd Ave. and met a very enthusiastic chiropractor earlier the same Saturday morning. She instantly got more happy emojis back from both than anyone would ever need. After three low-key years focused on recovery and school, combined with a very well-paid job, she had about $40k in the bank, and Chanel was thinking that with the space already booked by the three of them about 30–40%, the risk was limited to the remaining capacity, and she could always cover part of that with her savings. She figured that she would need about $5k for equipment and materials – they could paint it themselves, but the space needed some TLC to work out right – and probably the same for a website with a reservation system. Even if it would take a bit of time for business to pick up and more practitioners to join them, with her current living situation and existing clients, she would be able to make the one-year lease payments, cover the startup costs, and live within the means of her savings. “What better way to spend the money?” she thought. “If it doesn’t work out, I can always go back and get a six-figure pharma-job” she said out loud to herself as she took a deep breath and opened the DocuSign lease agreement.

Today, four years later, 33&Rising is a striving wellness center for the 99% with about 20 participating practitioners, a large and growing loyal following and a business model that has allowed the venture to establish itself and to grow without external financing.

The subject of this chapter is important because practically all entrepreneurs are likely to use their own personal financial and other tangible resources in the attempt to start their new venture (Gartner et al., 2012). In addition to the immediate effect of injecting funds and other resources into the startup, the ability and willingness of founders to commit resources to their startups has been shown to affect new ventures’ trajectories in a number of other short- and long-term ways, including survival, growth, and the ability to get buy-in from stakeholders such as potential team members and outside financiers (Ang, 1991; Bhidé, 2000; Frid et al., 2015; Hechavarría et al., 2016).

This chapter will focus on the early stages of new venture emergence, because it is during these stages that other sources are not typically readily available and thus it is here that founder resources play the most important role (Winborg & Landström, 2001). As the firm establishes itself and grows, informal and formal sources of external financing become more readily available and both the founder’s ability to match the needs of the firm and the importance of their own resourc...

Table of contents

• Title Page
• Copyright
• Contents
• Editor and contributor biographies
• Introduction
• Part I: The individual level
• Part II: The inner circle
• Part III: The wider world
• Part IV: Emerging perspectives
• Index