FEATURE PAPER

Sources of Financing for New Technology Firms: Evidence from the Kauffman Firm Survey

The following paper was written by Susan Coleman from the Barney School from the University of Hartford and Alicia M. Robb from the University of California, Santa Cruz and was presented at the 2010 United States Association of Small Business and Entrepreneurship Conference in Nashville, TN.

Abstract

This article uses data from the Kauffman Firm Survey to explore the financing sources and strategies of new technology-based firms. Findings reveal that technology-based firms, and particularly high tech firms, raise larger amounts of capital at startup than firms on average. These findings also suggest that, contrary to the Pecking Order and Life Cycle theories, owners of high tech firms are both willing and able to use external equity as a financing source.

Executive Summary

This research examines the sources and amounts of financing used by startup firms included in the Kauffman Firm Survey data. In particular, it was our intent to focus on the financing strategies of new technology-based firms. Our findings seem to disprove the Pecking Order and Life Cycle theories, at least in the case of high tech firms. The Pecking Order theory (Myers, 1984; Myers & Majluf, 1984) states that firm owners prefer to use inside equity and outside debt to avoid diluting their ownership position and giving up control. Our results reveal, however, that high tech firms had a significantly higher probability of using both outside debt and outsider equity than medium tech firms. Further, high tech firms used a significantly higher ratio of outsider equity than medium tech firms. These results suggest that the owners of high tech firms are more open to using a number of different sources of financing to ensure firm survival, development, and growth. It appears that the owners of high tech firms are willing to trade off their concerns regarding dilution and control in return for larger amounts of external capital that will help them to achieve firm goals. By the same token, these results seem to refute the Life Cycle theory (Berger & Udell, 1998) which states that newer firms are forced to rely on internal rather than external sources of capital. Our findings reveal that technology based firms raised substantial amounts of both external debt and equity, even in their startup year.

(Read Entire Paper)

TIP OF THE WEEK

How to Write Your Elevator Pitch

Elevator pitches have four success factors: the hook, the purpose, the what and where, and the delivery.

First, find a hook-something about your product or service that people would remember and take to heart. "We tutor kids others call too difficult." "When government or industry wants to find the newest businesses, they come to us." "We are one of the nation's biggest suppliers of parts for old Corvettes."

Stan Mandel supervises Wake Forest University's Elevator Pitch Competition, so he knows pitches. He suggests using analogies. If you're planning a large, discount pen store, you might say "We will be a Walmart for pens." For CellTunes, it might be the Home Shopping Network for music." It helps people quickly understand your firm. Great pitches or concepts aim to get the listener to ask questions or take some other form of "next step." Stan suggest different pitches for different sorts of audiences-investors, customers, suppliers, and so forth.

Second, focus on the purpose your product or service serves for the customer. Do not talk skills ("I produce designs that sell books!").

Third, tell the listener the business's situation: where the business "is at"-if it's a start-up, state what the business is seeking (funding, partners, distributors, etc.). If it is operating, tell the listener where he or she can buy the product or service.

Once your elevator pitch is written, you need to become conversationally perfect in your delivery. You want to be able to give the pitch or concept dozens, even hundreds, of times. Yet it is important that the pitch does not sound memorized. IT needs to sound like regular conversation, preferably a conversation whose topic excites you. To achieve this, you must master the material, and then keep working on it so that it becomes a natural part of what you say to others. Have family and friends listen to it. Consider using a video camera to see how natural you seem when making the pitch. Remember, the elevator pitch is often the first real insight people have about your business, so it is essential to have a pitch that flows and sells for you.

ANNOUNCEMENTS

ICSB

International Council for Small Business will be holding its International World Conference during June 10-13, 2012 in Wellington, New Zealand. The submission deadline for this conference is FEB. 15. For more information,click here.

Hawaii International Conference

The 12th Annual Hawaii International Conference on Business will be held from May 24-27, 2012 at the Waikiki Beach Marriott Resort & Spa in Honolulu, Hawaii. The submission deadline for papers has been extended to Feb. 17, 2012. For more information,click here.

Allied Academies

The Allied Academies will hold its Spring 2012 international meeting in New Orleans, Louisiana. Presentation dates will be Wednesday April 4 through Friday April 6, 2012. Conference Paper Submissions and Registration are due by March 5. Base registration, on or before March 5, is $300, late registration after that date will be $350. For more information,click here.

North American Research Symposium

You are invited to attend The 22nd Annual North American Research Symposium on Purchasing and Supply Chain Management March 15-15, 2012 in Hilton Phonix/Chandlery, Arizona. For more information,click here.

Small Business Institute

The Small Business Institute will be holding its 2012 Annual Conference during February 16, 2012 in San Antonio, TX. For more information,click here.

CONFERENCES

CALLS FOR PAPERS

SBANC STAFF

Main Office Phone:(501) 450-5300

Don B. Bradley III, Executive Director of SBANC & Professor of Marketing - Direct Phone:(501) 450-5345

Matt Yancey, Development Intern

Raven Ambers, Development Intern