Abstract
Entrepreneurial activity by new ventures is an important driver of economic growth. Yet obtaining sufficient and/or appropriate financial means often represents a considerable challenge to entrepreneurs. Notably, reliable empirical evidence on financing patterns of young enterprises in Germany has so far been scarce. Using data from the KfW/ZEW Start-up Panel, a new large-scale dataset of newly founded ventures, we provide a comprehensive overview of financing structures and their firm- and owner-related drivers in German start-ups within the first months of their existence. Conceptually, we find pecking-order theory to hold for new ventures in Germany, although individual motives lead to partially deviant financing patterns. Moreover, our findings indicate that the extent of financing and the choice of capital sources are both driven by a multitude of firm as well as owner characteristics.
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Notes
External funds in this classification refer to all external equity, debt capital, and subsidies that are not provided by the entrepreneurs themselves.
Discrimination in financial markets occurs when the terms of a transaction are influenced by personal characteristics of involved participants that should in fact be irrelevant to the transaction. If, for example, people with a different race or gender ceteris paribus faced different loan approval rates or interest rates even though having the same ability to repay, they would be considered discriminated (Blanchflower et al. 2003).
A referee reminded us of the fact that mezzanine capital can come in many forms, ranging between the extremes of equity on the one hand and debt capital on the other. As we are unable to observe details on the forms and special covenants of mezzanine capital in our sample, the heterogeneity of this financing source may render our pecking order theory argument conceptually less clear-cut. Hence we run a sensitivity check, dropping mezzanine amounts and only including equity capital provided by venture capital firms and business angels in our external financing source (e). The results corresponding to regressions (13–15) in Table 4 remain basically the same. For this reason, and because our principal results by definition rely on a higher number of observations, we prefer the results displayed in Table 4. The results of the sensitivity check are available from the authors upon request.
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Acknowledgements
Opinions expressed in this article reflect the personal views of the authors and not necessarily those of KfW. We thank two anonymous referees for valuable comments which led to major improvements of the paper. All errors are our sole responsibility.
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Appendices
Appendix 1 Definition of variables (Data source: KfW/ZEW start-up panel, waves 2008 and 2009)
Variables | Description |
|---|---|
Binary variables | |
Level II | |
Dummy cashflows | Initial cash flows from operations are used |
Dummy own funds | Personal funds of at least one entrepreneur are used |
Dummy external funds | Funds from external sources are used |
Level III | |
Dummy commercial loans | Loans from commercial banks are obtained |
Dummy promotional loans | Specific, subsidized loans for new ventures from public banks are used |
Dummy family and friends | Money from either family, friends or other individuals from their social network is obtained |
Dummy public subsidies | Money from the German Federal Employment Agency is received |
Dummy venture capital | Money from venture capitalists, business angels or other equity/mezzanine investors is acquired. |
Team | Start-up with more than one entrepreneur |
Employees | Start-up with at least one employee |
Industry categories | |
Cutting-edge technology manufacturing | Manufacturing industries with an average RnD-intensity of at least 8.5% |
High-technology manufacturing | Manufacturing industries with an average RnD-intensity between 3.5% and 8.5% |
Technology-intensive services | Start-up doing specialised RnD as well as architects and engineering offices |
Software | Software development, consulting, and webdesign |
Non-high-tech manufacturing | Manufacturing industries with an average RnD-intensity below 3.5% |
Skill-intensive services | Start-up needing strong human capital for doing tax counseling, auditing, marketing consulting etc. |
Other business-oriented services | Services for other businesses, e.g. leasing firm, cleaning services provider, or waste management company |
Consumer-oriented services | Services to consumers, e.g. hotel, restaurant, hairdresser, etc. |
Construction | Constructing business, e.g. building company, plumber or painter |
RnD | Start-up which undertakes own research & development |
Innovation | Start-up whose main product or service is a national or world-wide market novelty |
Necessity motive | Start-up initiated because there was no alternative employment opportunity, the previous employer forced the founder to become self-employed, or it was the only exit opportunity from unemployment |
Gender | At least one entrepreneur is female |
Migration | At least one entrepreneur has a migrational background (non-German nationality) |
Age categories | |
18–24 years | The oldest entrepreneur is aged 18–24 years |
25–34 years | The oldest entrepreneur is aged 25–34 years |
35–44 years | The oldest entrepreneur is aged 35–44 years |
45–54 years | The oldest entrepreneur is aged 45–54 years |
55 years or older | The oldest entrepreneur is aged 55 years or older |
Education categories | |
No degree | No one of the entrepreneurs holds a degree of any kind |
Professional training degree | At least one entrepreneur holds a professional training degree |
Master craftsmen, technician | At least one entrepreneur is a certified craftsmen or technician |
Tertiary degree | At least one entrepreneur has an academic background (higher institution graduates) |
Industry experience categories | |
Up to 5 years | The most experienced entrepreneurs has up to 5 years of relevant industry experience |
5–10 years | The most experienced entrepreneurs has up between 5 and 10 years of relevant industry experience |
10–20 years | The most experienced entrepreneurs has up between 10 and 20 years of relevant industry experience |
20 years and more | The most experienced entrepreneurs has more than 20 years of relevant industry experience |
Labor market status categories | |
Self-employed | At least one entrepeneur was previously self-employed |
Employed | At least one entrepeneur was previously employed |
Unemployed | At least one entrepeneur was previously unemployed |
Out of labor force | All entrepeneurs were previously out of labor force |
Entpreneurial experience categories | |
Only positive entrepreneurial experience | At least one entrepreneur has previously started a successful business (and none unsuccessfully) |
Negative entrepreneurial experience | At least one entrepreneur has previously started an unsuccessful business (insolvency/liquidation) |
Dummy year 2008 | Start-up in the year 2008 |
Continuous variables | |
Level I | |
Tangibles | Value of tangible assets brought into the company (in €) |
Investments | Capital used for investments (in €) |
Initial capital | Value of tangible assets plus capital used for investments (in €) |
Financing amount | Financing used for investments and operating costs since venture creation, excl. tangibles (in €) |
Total capital | Capital used for investments and operating costs since venture creation, incl. tangibles (in €) |
Level II | |
Cashflows | Funds from initial business operations (sales) used for investments and operating costs since venture creation (in €) |
Own funds | Personal funds from entrepreneurs used for investments and operating costs since venture creation (in €) |
External funds | Funds from external sources used for investments and operating costs since venture creation (in €) |
Level III | |
Commercial loans | Loans obtained from commercial banks (in €) |
Promotional loans | Specific loans for new ventures obtained from promotional banks (in €) |
Family and friends | Money obtained from either family, friends or other individuals from their social network (in €) |
Public subsidies | Money obtained from the German Federal Employment Agency (in €) |
Venture capital | Money obtained from venture capitalists, business angels or other equity/mezzanine investors (in €) |
Appendix 2 Nested financing structure
Appendix 3 Aggregated categories of external financing and their items
Categories of external financing | ||
|---|---|---|
(a) | Commercial loans | |
(1) | Overdraft and creditcard credits (short-term credits) | |
(2) | Middle- and long-term credits | |
(b) | Promotional Loans | |
(3) | Promotional loans by KfW Bankengruppe (Germany’s federal promotional bank) | |
(4) | Promotional loans by state-owned public funding bodies (“Landesfinanzinstitute”) | |
(c) | Family and friends | |
(5) | Grants and money donations by relatives, friends, etc. | |
(d) | Public subsidies | |
(6) | Money provided by the Federal Employment Agency (“Bundesagentur für Arbeit”) in form of start-up allowances (e.g. “Gründungszuschuss” or “Überbrückungsgeld”) | |
(e) | Venture and mezzanine capital | |
(7) | External equity provided by venture capital firms and business angels | |
(8) | Mezzanine capital (e.g. subordinated debt, participation rights, silent partnerships) | |
Appendix 4 Descriptive statistics of firm- and owner-related variables (Data source: KfW/ZEW Start-up Panel, waves 2008 and 2009)
(1) All Ventures | (2) Ventures with Financing Needs | (3) Ventures with External Financing Needs | |||||
|---|---|---|---|---|---|---|---|
Variables | Obs. | Percentage | Obs. | Percentage | Obs. | Percentage | |
(1) | Team | 3660 | 23.9 | 2117 | 25.1 | 1214 | 24.2 |
(2) | Employees | 3134 | 51.0 | 2112 | 51.8 | 1213 | 58.1 |
Industry categories | |||||||
(3) | Cutting-edge technology manufacturing | 3662 | 0.6 | 2117 | 0.6 | 1214 | 0.6 |
(4) | High-technology manufacturing | 3662 | 0.7 | 2117 | 0.6 | 1214 | 0.6 |
(5) | Technology-intensive services | 3662 | 6.8 | 2117 | 7.0 | 1214 | 4.9 |
(6) | Software | 3662 | 1.9 | 2117 | 2.1 | 1214 | 1.1 |
(7) | Non-high-tech manufacturing | 3662 | 4.4 | 2117 | 3.9 | 1214 | 4.9 |
(8) | Skill-intensive services | 3662 | 6.7 | 2117 | 7.2 | 1214 | 4.7 |
(9) | Other business-oriented services | 3662 | 10.8 | 2117 | 11.0 | 1214 | 10.7 |
(10) | Consumer-oriented services | 3662 | 33.1 | 2117 | 34.6 | 1214 | 38.1 |
(11) | Construction | 3662 | 12.1 | 2117 | 11.5 | 1214 | 13.3 |
(12) | Wholesale and retail trade | 3662 | 22.8 | 2117 | 21.6 | 1214 | 21.2 |
(13) | RnD | 3095 | 13.3 | 2094 | 14.0 | 1198 | 12.1 |
(14) | Innovation | 3643 | 8.4 | 2105 | 9.0 | 1205 | 7.1 |
(15) | Necessity motive | 3500 | 16.4 | 2047 | 16.6 | 1174 | 20.7 |
(16) | Gender | 3621 | 24.7 | 2098 | 23.5 | 1204 | 28.9 |
(17) | Migration | 3658 | 12.7 | 2116 | 12.8 | 1214 | 15.5 |
Age categories | |||||||
(18) | 18–24 years | 3627 | 4.7 | 2104 | 4.4 | 1207 | 5.8 |
(19) | 25–34 years | 3627 | 27.3 | 2104 | 26.5 | 1207 | 29.2 |
(20) | 35–44 years | 3627 | 31.5 | 2104 | 30.8 | 1207 | 33.0 |
(21) | 45–54 years | 3627 | 24.5 | 2104 | 24.8 | 1207 | 23.2 |
(22) | 55 years or older | 3627 | 11.9 | 2104 | 13.5 | 1207 | 8.8 |
Education categories | |||||||
(23) | No degree | 3649 | 5.5 | 2111 | 4.0 | 1212 | 4.6 |
(24) | Professional training degree | 3649 | 40.6 | 2111 | 38.9 | 1212 | 39.7 |
(25) | Master craftsmen, technician | 3649 | 19.5 | 2111 | 20.1 | 1212 | 24.8 |
(26) | Tertiary degree | 3649 | 34.5 | 2111 | 37.0 | 1212 | 31.0 |
Labor market status categories | |||||||
(27) | Self-employed | 3649 | 23.9 | 2111 | 24.8 | 1210 | 16.9 |
(28) | Employed | 3649 | 60.8 | 2111 | 60.7 | 1210 | 64.3 |
(29) | Unemployed | 3649 | 13.4 | 2111 | 14.1 | 1210 | 20.1 |
(30) | Out of labor force | 3649 | 8.7 | 2111 | 8.7 | 1210 | 7.3 |
Industry experience categories | |||||||
(31) | Up to 5 years | 3631 | 30.9 | 2105 | 31.1 | 1206 | 32.3 |
(32) | 5–10 years | 3631 | 20.9 | 2105 | 21.1 | 1206 | 21.2 |
(33) | 10–20 years | 3631 | 29.4 | 2105 | 28.2 | 1206 | 29.2 |
(34) | 20 years and more | 3631 | 18.8 | 2105 | 19.7 | 1206 | 17.4 |
Entpreneurial experience categories | |||||||
(35) | Only positive entrepreneurial experience | 3652 | 19.7 | 2115 | 21.9 | 1213 | 19.7 |
(36) | Negative entrepreneurial experience | 3652 | 13.0 | 2115 | 14.8 | 1213 | 10.6 |
(37) | Dummy Year 2008 | 3662 | 48.5 | 2117 | 54.9 | 1214 | 58.3 |
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Achleitner, AK., Braun, R. & Kohn, K. New venture financing in Germany: Effects of firm and owner characteristics. Z Betriebswirtsch 81, 263–294 (2011). https://doi.org/10.1007/s11573-011-0441-3
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DOI: https://doi.org/10.1007/s11573-011-0441-3