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

Undoubtedly, access to financial capital and other resources is an important antecedent of new venture performance. Indeed inadequate financial resources often ale 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 mit 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. nle 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.