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CAPITAL STRUCTURES IN NEW VENTURES: CHARACTERISTICS AND RELATIONSHIPS TO PERFORMANCE
Patricia G. Greene
Terrence E. Brown
Boston University School of Management
621 Commonwealth Avenue
Boston, MA 02215
Telephone/Fax: (617)353-3146 / (617)353-2564
Candida G. Brush
Faculty of Management
81 New Street
Newark, NJ 07102
Telephone/Fax: (201)648-1152 / (201)648-1664
Considerable research in Entrepreneurship is organized around questions of the process of acquiring and allocating resources to exploit opportunities(Stevenson & Gumpert, 1985). However, while much theory has been proposed concerning at process and opportunity identification, the discussion of the resources themselves has been far less theoretical and systematic. This situation differs from Strategic Management where a theory of the firm has been suggested based on resources as the determinant of a firm92s reason for existing, size, and scope (Penrose, 1959; Connor, 1991). For new ventures, resources in general are comparatively more scarce, and decisions about acquisition and/or allocation can be critical to survival (Cooper & Dunkelberg, 1986). Therefore the increased understanding of the resource configurations of new ventures is necessary in order to enhance their ability to compete effectively.
This paper proposes that resources are specific types of capital, and that the configuration of these types of capital have a direct impact on the resultant performance of a new venture. Using capital categories of human, social, physical, organizational, and financial, we analyze whether the relationships between capital configurations and performance differ based on characteristics of the new venture and the new venture owner/founder. Previous studies have bundled resources into types of capital and tested realationships between those bundles and some measure of venture performance (Bates, 1985). While many of these studies implicitly recognize the relationships between resources (Dollinger, 1985; Robinson, 1994), Cooper, Gimeno-Gascon, and Woo (1991) make these relationships more explicit by proposing the use of a resource profile to predict firm failure, survival and growth. these works can be connected and made more systematic through a more comprehensive, theoretically based framework for capital structure which can then be used to explore relationships of the capital structure to characteristics of the new venture owner as ell as characteristics of the new venture. In addition, we explore the relationship between capital structure and measures of new venture performance.
A sample of new ventures (less than 10 years old) were identified from 7 publicly available directories. Companies were selected according to three different industry categories; primary, secondary and tertiary (Buckley & Brooke, 1992). This stratification insured that possible industry effects could be controlled and analyzed. Companies were identified by SIC within each industry stratification, and 3 SIC codes were considered in each category. Male and female owners were sampled equally. Measures of capital were used similar to those used by Greene (1995) in earlier work on this topic. Measures of performance were those identified as most frequently employed by Entrepreneurship researchers (Brush & Vanderwerf, 1992), while characteristics of new ventures and owner/founder similarly followed previous research (Cooper & Gimeno-Gascon, 1992). Statistical analysis for this exploratory study included descriptive statistics, chi square, and correlation.
From a sample of 410 business owners we received 76 usable responses for a response rate of 19%. The responding business owners were 36.7% female with 67.1% of the respondents having at least a college degree. The businesses were concentrated in the following product/service areas: 28.6% computer of telecommunications, 14.3% medical, and 12.9% oil or gas. The mean sales figure for 1994 was slightly over $10.5 million and the mean number of full time equivalent employees was 30.8. Family members were employed in 61.5% of the businesses. In addition, 13.9% of the respondents had received venture capital funding.
We found human capital resources to be highest in the medical sector businesses. Financial resources were split, with businesses in the oil an gas sector reporting more favorable access to debt financing, while the computer/telecommunication businesses reported more favorable access to equity financing. Social capital, operationalized as personal networks, was reported as highest in the computer/telecommunications sector. Gender of the business owner was found to be negatively correlated with access to both debt and equity capital.
This research provides descriptive information about configurations of various resources, or capital structures in new ventures. A systematic examination of this topic has not been done before in new ventures. Our study builds on earlier work by expanding the measures of types of capital and describing their composite configurations. The specification of capital structures and the extent to which these vary depending on organization and/or individual characteristic provides insights as to the vases for decisions about resource allocations. Further, observed relationships between capital structure and performance suggest prescriptions for configurations of resources that lead to better or poorer performance. For managers, a better understanding of how to configure resources would be of great value given the constrained nature of resources in a small business which requires more effective management techniques.