Journal Article, Economics of Innovation and New Technology, issue 1&2, volume 17
Using an original survey sample of 103 unquoted Belgian technology-based small firms (TBSFs), we examine the capital structure of start-up companies during their consecutive development stages. We find that internal funds, either alone as personal savings or in combination with family and friends, to be the primary source of financing. Personal funds of the founders are used to finance the start of 82% of TBSFs. Commercial bank and government funds are the most important sources of external finance for TBSFs subsequent to start-up. Most founders agreed that business angels and venture capitalists play a greater role at later stages. However, once granted, more substantial amounts of funding come from venture capitalists. There is also evidence that suggests a change in the mix of internal and external sources of finance. Finally, our findings based on founders' scores in raising external funds suggest a call for urgent policy action to improve access to and availability of early-stage entrepreneurial finance in Belgium. We discuss our findings in light of the capital structure of small firms relating to TBSFs.
The evidence accumulated in this paper is consistent with the theoretical arguments that start-up companies face crucial difficulties in accessing external finance at early stages. We find that personal funds of the founders are the primary source of seed financing in 82 percent of the cases. Government subsidies of all kind and commercial bank loans are the primary external source of capital during early stages while business angels and venture capitalists play a greater role in later stages of development. There is also evidence that suggests an evolution of the mix of internal and external sources of capital. We find that the proportion of funds from internal sources declines while the proportion from external debt and equity sources increases with firms' age. Our findings based on entrepreneurs' scores in raising external sources of capital signal an equity gap rather than a management gap.