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Draft research proposal in entrepreneurial finance

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Mälardalen University – project proposal

Draft research project proposal in

entrepreneurial finance
Preuss, Björna
08/03/2015
a
School of Business, Society and Engineering, Mälardalen University – Sweden,
School of Business, University of Applied Sciences Kiel – Germany
b.preuss@outlook.com

Abstract

This paper presents a research project in the field of empirical entrepreneurial finance. The project
aims to explain the effects that different financing options have on the performance of private owned
business for example startups. It is using network theory in order to explain differences in the per-
formance or the drive of innovations by having different finance options (e.g. venture capital). The
stronger the outcomes like financial performance, innovation etc. is linked to financing options and
with that to potential network effects, the easier it is for actors (e.g. investors or government) to eval-
uate a venture and make their decisions.

Keywords: Entrepreneurship; Finance; Corporate; Venture; Capital; Network

1. Introduction store data about business, their financial situa-

tion as well as their innovative actions and
Some years ago research started to study net-
employment situation (e.g. Danish register
works in entrepreneurship. However for the
data).
development of networks in entrepreneurship,
there is till now less empirical confirmation. This research project wants to show the net-
(Hoang & Antoncic, 2003) This paper will work effects that different financing options of
give an overview of a research project in the private businesses have and how that influence
field of empirical entrepreneurial finance. In their economic performance (e.g. innovations),
the Nordic countries most economic activity their risk and returns.
takes place in small and medium sized firms
who are private owned. This leads to data According to Hakansson and Snehota (2006)
limitations which made it for past research networks have an effect on the performance of
difficult to deal with those kind of businesses. businesses. Their research has shown that
(Chemmanur, Krishnan, & Nandy, 2011) Due multiple organizations act in networks. In
to development of information technology addition to the fact that vanure capital firms
there is now a bigger set of data available to have according to Spiegel & Tookes (2008) a
address these limitation. Governmental bodies

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Mälardalen University – project proposal

positiv effect on various parts of the business, network of the venture capitalists. (Spiegel &
this leads to the following research question: Tookes, 2008) Practitioners argue that in addi-
tion to providing funding such investment
 How do networks between financial
firms have also an impact in other ways for
actors and other organizations influ-
example hiring, contracts to suppliers, cus-
ence the performance of private owned
tomers, etc. (Chemmanur, Krishnan, & Nandy,
businesses?
2011) Academics also argue that high reputa-
And the following sup-questions: tion venture capitalists (VC) perform better in
providing additional services in order to im-
o Do they profit from the influ- prove the performance of the company they
ence of VC’s or angel investors are invested in. This can also be seen in the
in the way of being more inno- statement of Bygrave and Timmons (1992)
vative? who said that it is more important from whom
o Do they get better access you get the money then how much. However
through suppliers or customers empirical evidence on whether VC firms cre-
by having access to a network ate significant value in addition to the money
though their investors for their clients were done barely in the past.
o Is there a difference in the per- According to Chemmanur, Krishnan, & Nandy
formance between companies (2011) the reason for this could be because a
who are financed by active- in- limit in access to data on private firms.
stead of non- active investors?
The outcome of this study can adress the
This research question focuses on a business problems that government or policy makers
phenomenon. It is supposed to give a better have when facing the question on how to
understanding and should be able to be gener- stimulate employment, investments in small or
alized. (Fisher, 2010, p.36) medium sized firms or how to drive
innovations. Furthermore investors can profit
2. Background from the outcome in the way that they can
During the last 15 years approximately 70 assess their risk and return by looking at the
papers related to network theory in entrepre- relationships of the target company to other
neurship were published. Indeed only partial organizations.
empirical evidence was given that network
3. Conceptual Framework
effects have an impact on entrepreneurship.
(Hoang & Antoncic, 2003) Especially when it This section deals with the conceptual frame-
comes to financing, networks plays an im- work of this study and will present theory and
portant role in order to get financing through related literature to the research question.
for example venture capital. (Freeman, 1999)
3.1. Network Theory
Previous research has shown that the financing Network theory sees the business as a part of a
through venture capital can drive innovations network of multiple institutions that work to-
and that the companies can profit from the gether with each other in order to create value.

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Mälardalen University – project proposal

This contains suppliers, customers, competi- network even when it comes to inter-
tors. (Hakansson & Snehota, 2006) In this set dependencies among third parties.
up investors can also be seen as suppliers since (Hakansson & Snehota, 2006)
they supply capital to the target firm. The ap-
It can be said that the network theory wants to
proach of network theory is based on cultural
show the interdependencies between organiza-
observations that showed that companies often
tions and the result of this interactions on the
operate in an environment with only a limited
corporate performance.
number of actors. Studies have shown that this
is more the rule then an exception. (Hakansson 3.2. Influence of Financing
& Snehota, 2006) When it comes to inter or-
Research stated that financial institutions like
ganizational relationships, a set of interde-
venture capital firms have an influence on
pendencies evolves. Activities of both actors
their targets beyond the financing. (Bygrave &
are connected to each other and will influence
Timmons, 1992) Financial resources are cru-
each other. (Ford, Hakansson, & Johanson,
cial for the success of businesses especially to
1986) The network model can be summarized
withstand sustained losses. This vulnerability
with the following points:
that especially small privately owned firms
 Businesses operate often in environ- have, is known as liability of newness. (Baum,
ments where their actions are influ- 1996) In order to reduce this uncertainty and
enced by a limited number of actors risk, privately owned firms such as startups try
which act in a unique way with own to reduce this uncertainty by getting support
goals. from well-known organizations in order to
 These actors in the network engage in increase knowledge, financial stability and
continues relationships and interact reputation. (Zimmerman & Zeitz, 2002) This
with each other over time. This relates enables small companies to access resources
in multiple exchange processes which that are needed to survive or to grow. En-
makes it possible to access and exploit dorsements by respectable venture capital
the resources from the counterparts. firms signals the quality of a startup and cre-
Furthermore the activities of the parties ates confidence among other stakeholders in
can be linked together. the company.
 The capabilities of a company devel-
(Zimmerman & Zeitz, 2002) This leads to the
ops with its interactions and relation-
behavior that stakeholders look at the venture
ships with other parties in the network.
capital firm when deciding whether to engage
By maintaining these relationships that
in an action with the small firm. (Deeds,
interactions create the identity of the
Mang, & Frandsen, 1997)
organization.
 Because of the situation that all com- While venture capital investments play an ac-
panies of the network act under the tive role and may influence the company be-
similar conditions, the organization’s yond providing financial resources, bank loans
performance is conditioned by the and other non-active investment provides the

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Mälardalen University – project proposal

company with financial resources in order to For connecting this concept to the other theo-
reduce bankruptcy and support growth. Ac- ries and in order to answer the research ques-
cording to Myers and Majluf (1984) compa- tion the instrumental approach fits the best
nies would, by applying the pecking-order since it focuses on how to reach the objectives
theory of capital structure choice, prefer debt that the company has (e.g. profitability) by
financing over equity in order to have lower using stakeholder management. This theory
costs of capital. The reason for that is the in- can explain the relationships that a company
formation asymmetry between the company gets throughout the financing partner.
and the investors which is in private owned
business high due to less transparency and 4. Expected Results
would lead to higher expected returns on capi- It is likely that the results of this study will
tal by the investors. show that financing through active investors
(e.g. venture capital, private equity or angel
3.3. Stakeholder Theory
investors) will have a positive influence of the
According to the stakeholder theory, organiza- firm’s performance due to its active involve-
tions should take the interests of other stake- ment and the usage of network effects. This
holder into consideration when making strate- access to networks in terms of access to re-
gic decisions. (Freeman R. , 1984) This can be sources like employees, more capital, custom-
seen by implication that the company is de- ers and suppliers will give these companies the
pendent on other stakeholder while creating potential for a faster growth as its competitors
value. However the stakeholder approach is who are financed through non active investors
not clear defined and literature contains vari- such as banks.
ous different concepts for the term “Stakhole-
der” (Wagner, Alves, & Raposo, 2011) It is expected that the results of this study will
have an impact on how institutional investors
According to Donaldson and Preston (1995) evaluate business ventures when it comes to
the stakeholder theory cannot be seen as a sin- investment decisions as well as how the gov-
gle theory rather than multiple theories for the ernment supports business ventures. The
management of stakeholders. In their frame- learned effects of the relationships between the
work they divided three approaches: actors in the network and the influence on the
(Friedman & Miles, 2006) company’s performance can also be used for
public policies to stimulate employment, in-
 Descriptive (how does a company op-
vestment and innovation.
erates in terms of stakeholder man-
agement) References
 Instrumental (how to reach organiza-
Baum, J. (1996). Organizational ecology. In S.
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Clegg, C. Hardy, & W. Nord,
management)
Handbook of organizational studies
 Normative (how should a firm operate)
(pp. 77-114). London: Sage
Publications.

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 Mälardalen University – project proposal

Bygrave, W. D., & Timmons, J. A. (1992). Hakansson, H., & Snehota, I. (2006). No
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