Abstract
This paper aims to shed new light on start-up financing of new technology-based firms (NTBFs) and the existence of credit constraints that may negatively affect their activity. For this purpose, we analyze the different sources of start-up financing used by NTBFs and investigate several characteristics that may influence the extent of recourse to bank loans. In the empirical section, we consider a sample composed of 386 Italian NTBFs that operate both in manufacturing and services. We estimate double-censored tobit and bivariate tobit models so as to highlight the determinants of (i) the financial leverage, measured by the ratio of bank debt to total capital, and (ii) the amounts of personal capital and bank loans of firms at start-up, respectively. Our findings support the view that the credit market is imperfect and there exists a financing hierarchy. In fact, only a minority of firms resorts to outside financing, and especially to bank debt. In addition, the level of financial leverage is not random; it increases with an increase of the predicted amount of firms’ total initial capital, while it decreases with variables such as the number of owners and the work experience of founders that are indicative of greater personal wealth available to finance firms’ start-up. Lastly, the size of the bank loans obtained by firms generally is small and it is quite insensitive to demand-side factors that instead determine the amount of personal and total capital, with the notable exception of scale economies in the industry of the start-up. In other words, in accordance with the argument that credit to NTBFs is rationed, the loan supply curve is highly inelastic, even though not perfectly so.
Similar content being viewed by others
References
Acs, Z.J., 2004, ‘The value of entrepreneurial start-ups to an economy’, Seminar Discussion Paper, Diebold Institute for Public Policy Studies.
Ade, B., T. Heimer, F. Loch, T. Lehmann and V. Steimle, 2003, ‘The new framework for capital adequacy (Basel II): Consequences for small and medium sized enterprises (SME) and presentation of political options for implementation’, Background paper for European Parliament.
Alsos G.A. and Kolvereid L. (1998). The business gestation process of novice, serial and parallel business founders. Entrepreneurship Theory and Practice 22: 101–144 .
Asquith P. and Mullins D.W. (1986). Equity issues and offering dilution. Journal of Financial Economics 15: 61–89 .
Åstebro, T., 2002, ‘Self-selection and bank loan screening on entrepreneurial ventures’, University of Waterloo, Working Paper.
Åstebro, T. and I. Bernhardt, 1999, ‘The winner’s curse of human capital’, Center for Economic Studies, Working Paper CES 99–5, U.S. Department of Commerce.
Åstebro T. and Bernhardt I. (2003). Start-up financing, owner characteristics and survival. Journal of Economics and Business 55: 303–320 .
Audretsch D.B. (1995). Innovation and industry evolution. MIT Press, Cambridge, MA .
Audretsch D.B. (2003). Standing on the shoulders of midgets: The U.S. Small Business Innovation Research Program (SBIR). Small Business Economics 20: 129–135 .
Audretsch D.B. and Lehmann E.E. (2004). Financing high-tech growth: The role of banks and venture capitalists. Schmalenbach Business Review 56: 340–357 .
Becker G.S. (1975). Human capital. National Bureau of Economic Research, New York .
Berger A.N. and Udell G.F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking and Finance 22: 613–673 .
Bertoni, F., M.G. Colombo, E. Piva, 2005, ‘Country report on the venture capital industry: Italy, the false departure’, Prime NoE, Venture Fun project, Working Paper.
Beugelsdijk S. and Cornet M. (2002). A far friend is worth more than a good neighbour: Proximity and innovation in a small country. Journal of Management and Governance 6: 169–188 .
Black J. and Jeffreys D. (1996). House pricing, the supply of collateral and the enterprise economy. Economic Journal 106: 60–75 .
Blanchflower D. and Oswald A. (1998). What makes an entrepreneur. Journal of Labor Economics 16: 26–60 .
Bottazzi L. and Da Rin M. (2002). Venture capital in Europe and the financing of innovative companies. Economic Policy 17: 229–269 .
Brealey R. and S. Myers, 2003, Principles of Corporate Finance, 7th edn., New York: Graw-Hill.
Bruno A.V. and Tyebjee T.T. (1985). The entrepreneur’s search for capital. Journal of Business Venturing 1: 61–74 .
Cabral L. (1995). Sunk costs, firm size and firm growth. Journal of Industrial Economics 43: 161–172 .
Cabral L. and Mata J. (2003). On the evolution of firm size distribution: Facts and theory. American Economic Review 93: 1075–1090 .
Carpenter R.E. and Petersen B.C. (2002a). Capital market imperfections, high-tech investment and new equity financing. Economic Journal 112: F54–F72 .
Carpenter R.E. and Petersen B.C. (2002b). Is the growth of small firms constrained by internal finance?. The Review of Economics and Statistics 84: 298–309 .
Carter N.M., Gartner W.B. and Reynold P.D. (1996). Exploring start-up event sequences. Journal of Business Venturing 11: 151–166 .
Cassar G. (2004). The financing of business start-ups. Journal of Business Venturing 19: 261–283 .
Caves R.E., Khalilzadeh-Shirazi J. and Porter M.E. (1975). Scale economies in statistical analyses of market power. Review of Economics and Statistics 57: 133–140 .
Chittenden, F., G. Hall, and P. Hutchinson, 1996, ‘Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation’, Small Business Economics, 8, 59–67.
Cole R.A. and Walken J.D. (1995). Financial services used by small businesses: Evidence from the 1993 nationl survey of small business finances. Federal Reserve Bulletin 81: 629–667 .
Colombo M.G. and Delmastro M. (1999). Some stylized facts on organization and its evolution. Journal of Economic Behavior & Organization 40: 252–274 .
Colombo M.G., Delmastro M. and Grilli L. (2004). Entrepreneurs’ human capital and the start-up size of new technology-based firms. International Journal of Industrial Organization 22: 1183–1211 .
Colombo M.G. and Grilli L. (2005a). Start-up size: the role of external financing. Economics Letters 88: 243–250 .
Colombo M.G. and Grilli L. (2005b). Founders’ human capital and the growth of new technology-based firms: A competence-based view. Research Policy 34: 795–816 .
(1991). Indicatori Economici Provinciali . Collana Industria e Territorio, SIPI, Roma .
Cooper R.S. (2003). Purpose and performance of the Small Business Innovation Research (SBIR) Program. Small Business Economics 20: 137–151 .
Cressy R. (1996). Are business start-ups debt-rationed?. Economic Journal 106: 1253–1270 .
Cressy R. (2000). Credit rationing or entrepreneurial risk aversion? An alternative explanation for the Evans and Jovanovic finding. Economics Letters 66: 235–240 .
Cressy R. and Toivanen O. (2001). Is there adverse selection in the credit market?. Venture Capital: An International Journal of Entrepreneurial Finance 3: 215–238 .
Czarnitzki, D., 2002, ‘Research and development: Financial constraints and the role of public funding for small and medium enterprises’, ZEW Discussion Paper no. 02–74.
Da Rin, M., G. Nicodano and A. Sembenelli, 2005, ‘Public policy and the creation of active venture capital markets’, European Central Bank, Working Paper Series no. 430.
Masulis R. (1980). Optimal capital structure and corporate and personal taxation. Journal of Financial Economics 8: 3–29 .
(2002). Overlending. Economic Journal 112: F17–31 .
Denis D.J. (2004). Entrepreneurial finance: An overview. Journal of Corporate Finance 10: 301–326 .
Dixit A.K. and Pindyck R.S. (1994). Investment under uncertainty. Princeton University Press, Princeton, NJ .
Egeln J., Licht G. and Steil F. (1997). Firm foundations and the role of financial constraints. Small Business Economics 9: 137–150 .
Evans D. and Jovanovic B. (1989). An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy 97: 808–827 .
Evans D. and Leighton L. (1989). Some empirical aspects of entrepreneurship. American Economic Review 79: 519–535 .
Fazzari S.M., Hubbard R.G. and Petersen B.C. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity 2: 141–206 .
Feldman M.P. and Kelley M.R. (2003). Leveraging research and development: Assessing the impact of the U.S. Advanced Technology Program. Small Business Economics 20: 153–165 .
Freear J. (1990). Who bankrolls high-tech entrepreneurs?. Journal of Business Venturing 5: 77–89 .
Giudici G. and Paleari S. (2000). The provision of finance to innovation: A survey conducted among Italian technology-based small firms. Small Business Economics 14: 37–53 .
Giudici, G. and P. Roosenboom, 2002, Pricing initial public offerings on European ‘new’ stock markets, XIII Tor Vergata Financial Conference, Rome Italy.
Goldsmith R.W. (1969). Financial structure and development. Yale University Press, New Haven, CT .
Gompers P. and Lerner J. (2001). The venture capital revolution. Journal of Economic Perspectives 15: 145–168 .
Görg H., Strobl E. and Ruane F. (2000). Determinants of firm start-up size: An application of quantile regression for Ireland. Small Business Economics 14: 211–222 .
Greene, W.H., 2000, Econometric Analysis, 4th edn., Englewood Cliffs, NJ: Prentice Hall.
Harris M. and Raviv A. (1991). The theory of capital structure. Journal of Finance 46: 297–355 .
Heron R. and Lie E. (2002). Operating performance and the method of payments in takeovers. Journal of Financial and Quantitative Analysis 37: 137–155 .
Holtz-Eakin D., Joulfaian D. and Rosen H.S. (1994a). Entrepreneurial decisions and liquidity constraints. Rand Journal of Economics 25: 334–347 .
Holtz-Eakin D., Joulfaian D. and Rosen H.S. (1994b). Sticking it out: Entrepreneurial survival and liquidity constraints. Journal of Political Economy 102: 53–75 .
Hubbard R.G. (1998). Capital market imperfections and investment. Journal of Economic Literature 36: 193–225 .
Huyghebaert, N. 2004, The capital structure of business start-ups: Policy implications, Department of Applied Economics, Katholieke Universiteit Leuven, Working Paper.
Huyghebaert, N. and L. Van de Gucht, 2004, The determinants of financial structure: new insights from business start-ups, Department of Applied Economics, Katholieke Universiteit Leuven, Working Paper.
Istituto G. Tagliacarne, 1998, Sistema Starter, 1998 Edition, Rome.
Jaffee D. and Russell T. (1976). Imperfect information, uncertainty and credit rationing. Quarterly Journal of Economics 90: 651–666 .
King R.G. and Levine R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108: 713–737 .
Kon Y. and Storey D. (2003). A theory of discouraged borrowers. Small Business Economics 21: 37–49 .
Kortum, S. and J. Lerner, 1998, ‘Does venture capital spur innovation?’, NBER Working Paper no. 6846.
Laursen, K. and A. Salter, 2005, ‘Open for innovation: The role of openness in explaining innovative performance among U.K. manufacturing firms’, Strategic Management Journal, forthcoming.
Lee I., Lochhead S., Ritter J. and Zhao Q. (1996). The costs of raising capital. Journal of Financial Research 19: 59–74 .
Lerner J. (1999). The Government as venture capitalist: The long-run impact of the SBIR Program. Journal of Business 72: 285–318 .
Lerner J. (2002). When bureaucrats meet entrepreneurs: The design of effective ‘public venture capital’ programmes. Economic Journal 112: F73–84 .
Levenson A.R. and Willard K.L. (2000). Do firms get the financing they want? Measuring credit rationing experienced by small businesses in the U.S. Small Business Economics 14: 83–94 .
Lindh T. and Ohlsson H. (1996). Self-employment and windfall gains: Evidence from the Swedish lottery. Economic Journal 106: 1515–1526 .
Lyons B. (1980). A new measure of minimum efficient plant size. Economica 47: 19–34 .
Maddala G.S. (1983). Limited-dependent and qualitative variables in econometrics. Cambridge University Press, Cambridge .
Manigart S. and Struyf C. (1997). Financing high-technology start-ups in Belgium: An explorative study. Small Business Economics 9: 125–135 .
Marshall A. and Paley Marshall M. (1879). The Economics of Industry. Macmillan and Co, London .
Mata J. (1996). Market, entrepreneurs and the size of new firms. Economic Letters 52: 89–94 .
Mata J. and Machado J.A.F. (1996). Firm start-up size: A conditional quantile approach. European Economic Review 40: 1305–1323 .
Meyer, B.D., 1990, Why are there so few black entrepreneurs?, NBER Working Paper no. 3537, Cambridge, MA.
Michaelas N., Chittenden F. and Poutziouris P. (1999). Financial policy and capital structure choice in U.K. SMEs Empirical evidence from company panel data. Small Business Economics 12: 113–130 .
Modigliani F. and Miller M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review 48: 261–297 .
Monck C.S.P., Porter R.B., Quintas P.R. and Storey D.J. (1988). Science Parks and the Growth of High Technology Firms. Croom Helm, London .
Moore B. (1994). Financial constraints to the growth and development of small high-technology firms. In: Hughes, A. and Storey, D.J. (eds) Finance and the Small Firm, pp. Routledge, London .
Myers S.C. (1977). Determinants of corporate borrowing. Journal of Financial Economics 5: 147–175 .
Myers S.C. (1984). The capital structure puzzle. Journal of Finance 34: 575–592 .
Oakey, R. 1995, High-Technology New Firms: Variable Barriers to Growth, New York: Chapman & Hall.
Pindyck R.S. (1991). Irreversibility, uncertainty and investment. Journal of Economic Literature 29: 1110–1148 .
Rajan R. and Zingales L. (1995). Is there an optimal capital structure? Some evidence from international data. Journal of Finance 50: 1421–1460 .
Rajan R. and Zingales L. (1998). Financial dependence and growth. American Economic Review 88: 559–586 .
Rajan R. and Zingales L. (2003). The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics 69: 5–50 .
Reynolds P. and Miller B. (1992). New firm gestation: conception, birth and implications for research. Journal of Business Venturing 7: 405–417 .
Sahlman W.A. (1990). The structure and governance of venture capital organizations. Journal of Financial Economics 27: 473–524 .
Santarelli E. and Vivarelli M. (2002). Is subsidizing entry an optimal policy?. Industrial and Corporate Change 11: 39–52 .
Schertler A. (2001). Venture Capital in Europe’s Common Market A Quantitative Description. The United Nations University, Institute for New Technologies, Maastrict, The Netherlands .
Schumpeter J.A. (1911). A Theory of Economic Development. Harvard University Press, Cambridge, MA .
Stiglitz J.E. and Weiss A. (1981). Credit rationing in markets with imperfect information. American Economic Review 71: 393–410 .
Storey D.J. (1994a). New firm growth and bank financing. Small Business Economics 6: 139–150 .
Storey D.J. (1994b). Understanding the Small Business Sector. Thomson Learning, London .
Westhead P. and Storey D. J. (1997). Financial constraints on the growth of high technology small firms in the United Kingdom. Applied Financial Economics 7: 197–201 .
Xu B. (1998). A reestimation of the Evans-Jovanovic entrepreneurial choice model. Economics Letters 58: 91–95.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Colombo, M.G., Grilli, L. Funding Gaps? Access To Bank Loans By High-Tech Start-Ups. Small Bus Econ 29, 25–46 (2007). https://doi.org/10.1007/s11187-005-4067-0
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11187-005-4067-0