2006・33
Start-up Financing Choice and Post-entry Performance
Kenji Kutsuna
Yuji Honjo

Start-up Financing Choice and Post-entry Performance
Dr. Kenji Kutsuna (Corresponding author)
Professor of Entrepreneurial Finance
Graduate School of Business Administration, Kobe University
Address: 2-1 Rokkodai, Nada, Kobe 657-8501, Japan
E-mail: kutsuna@kobe-u.ac.jp

Visiting scholar at Peter F. Drucker and Masatoshi Ito Graduate School of Management, Claremont
Graduate University
1021 N. Dartmouth Avenue
Claremont, CA 91711

Dr. Yuji Honjo
Associate Professor of Business Economics
Faculty of Commerce, Chuo University
Address: 742-1 Higashinakano, Hachioji, Tokyo 192-0393, Japan
E-mail: yhonjo@tamacc.chuo-u.ac.jp

Acknowledgement
This study is in part financially supported by Grant-in-Aid for Exploratory Research 15653022 for the
first author, and by Grant-in-Aid for Scientific Research (C)17530191 for the second author,
respectively.

Start-up Financing Choice and Post-entry Performance
Abstract
Using an original data set of start-up firms in Japan, this paper investigates whether post-entry
performance differs between start-up firms, according to the source of finance. In particular, thedifference among firms that used entrepreneur’s own savings (insider finance), bank borrowing, and risk
capital from business angels or venture capital firms is focused upon. It is found that start-up firms
financed by business angels are more likely to increase sales even after controlling entrepreneur, firm,
and industry characteristics. On the other hand, the use of entrepreneurs’ own savings and financing
from founding members and family (quasi-insider finance) negatively influence post-entry performance.
In addition, it is not found that those financed by banks tend to grow.
Introduction
Start-up firms are expected to play an important role in promoting economic growth. The
emergence of high-growth firms boosts the stagnated economy by enhancing job creation andstimulating innovation (e.g. Birch, 1979; Acs & Audretsch, 1990). When starting businesses, however,entrepreneurs face significant difficulty in receiving finance from financial and capital markets, becauseof the limited operating history of the business. Berger & Udell (1998) argued that start-up firms are themost informationally opaque and, therefore, experience great difficulty in obtaining intermediatedexternal finance. Even though start-up firms have high growth potential, external sources of financeoften do not provide sufficient funds, because of the information asymmetries between theentrepreneurs and finance providers. This results in severe financial constraints being placed on thestart-up. Under the presence of information asymmetries, how firms are financed at start-up is the key
to ensuring sustainable firm growth.
Needless to say, banks play a major role as the source of finance for conventional (existing) small

1firms. However, as is often argued, they may be reluctant to provide funds to start-up firms due to risk
aversion behavior. In their place, it is expected that venture capitalists provide risk capital. However,venture capital (VC) firms, which are funded by large scale investments from institutional investors (e.g.
pension funds), are essentially negative toward small scale investment such as seed and start-up
financing (Bygrave & Timmons, 1992). In addition, the VC industry in some developed countries,
including Japan, is not yet fully developed for seed and start-up financing. Jeng & Wells (2000), forexample, argued that VC firms in Japan and Germany are not as actively involved in managing theirinvestments as those in the United States. They also provided evidence that VC investment normalizedby average gross domestic product (GDP) in Japan is much less than in the United States and Western
Europe.
For these reasons, in addition to entrepreneurs’ personal savings (insider finance), entrepreneurs
often depend on financing from founding members and family (quasi-insider finance), and informal
investors such as business angels, at the very earliest stage for developing business plans or products(Harrison & Mason, 1997; Benjamin & Margulis, 2000; Van Osnabrugge & Robinson, 2000). Under thepresence of information asymmetries, informal investors play a more important role as external capitalproviders of initial funds, as opposed to banks (Peterson & Shulman, 1987; Berger & Udell, 1998).
However, many small business owner-managers are opposed to sharing ownership, either with financial
institutions or with other individuals, and so depend on founders’ own capital or debt financing

2

(Hamilton & Fox, 1998). This may constitute a constraint upon the growth of the business. Previous
literature indicates that fast-growth small businesses are willing to share equity (Storey, 1994b).
This paper explores the impact of start-up financing on post-entry performance. In particular, thepaper highlights the difference between start-up firms, according to the source of finance. Using dataobtained from an original questionnaire survey, we examine whether start-up financing choicesignificantly affects firm growth. The results suggest that start-up firms financed by business angels are
more likely to increase sales, while those financed by banks are not found to achieve firm growth. Also,
the use of entrepreneurs’ own savings (insider finance) and financing from founding members andfamily (quasi-insider finance) negatively influence post-entry performance. We begin with a literature
review on start-up financing and post-entry performance, and present hypotheses we test.
Literature Review and Hypotheses
Berger & Udell’s (1998) financial growth cycle model, the most widely accepted view of small
business capital structure, contended that changes in optimal capital structure are a function of firm size,
age, and information availability. Although the differences among firms in these three factors are
relatively negligible at the start-up stage, start-up capital structures and post-entry performance are very
different among firms.
Regarding “existing” small firms, a large amount of research empirically examines how thefinancial behavior of small firms is influenced by size, age, firm type, business sector, etc., and how

3financial behavior influences small firm performance (e.g. Van der Wijst & Thurik, 1991; Hutchinson,
1993; Chaganti et al., 1995; Chittenden et al., 1996; Michaelas et al., 1999; Lopez-Gracia & Aybar-Arias,
2000; Romano et al., 2000; Reid, 2003). On the other hand, there have been relatively few investigationsof the relationship between start-up financing choice and post-entry performance. Although Brophy &Shulman (1992) pointed out that the determination of appropriate capital structure for entrepreneurial
firms is one of the potentially useful areas related between finance theory and entrepreneurship,
empirical research regarding “start-up capital structure” has not been advanced. In addition, mostresearch regarding start-up financing has concentrated on the investigation of the determinants ofcapital structure and types of financing used at start-up (e.g. recent work, Cassar, 2004). The main
purpose of this paper is to advance start-up financing research by examining how the start-up financing
choice influences post-entry performance.
Star-up Financing Choice and Performance
Previous literature has discussed the relationship between the proportion of the value of a firm
retained by insiders (e.g. managers) and the insiders’ perception of the likelihood of success. Leland &Pyle (1977) assumed that entrepreneurs know the likelihood of success of their firms and that potential
investors do not. In their theoretical model, entrepreneurs retain a significant ownership interest only if
the future cash flows of their firms are expected to be high relative to current firm value. Based on theirmodel, the following hypothesis is introduced, where the greater the proportion of the value of a firm4

retained by entrepreneurs, the greater the entrepreneurs’ perception of the likelihood of it success.
Carter & Van Auken (1990) empirically examined this hypothesis by analyzing the relationship between
entrepreneur’s personal equity and their small business first year’s financial difficulties. Their results
show a significant negative relationship between first year financial difficulties and the percentage ofstart-up capital represented by the entrepreneur’s personal funds.
Hypothesis 1a: The use of entrepreneur’s own saving (insider financing) at start-up is positively related to post-entry
performance.
Hypothesis 1b: The use of external financing from founding members and family (quasi-insider finance) is positively related
to post-entry performance.

Regarding the effects of bank financing on post-entry performance, Åstebro & Bernhardt (2003)
pointed out that there are three reasons to be expected as a positive predictor of performance. First,
securing a bank loan relaxes financial constraints on investment. Second, securing a bank loan may
increase a company’s credibility with suppliers and customers. Third, the existence of a bank loan may
indicate the qualities of the owners and the company. They examined the survival of new small
businesses and bank loans, and found that there is a “negative” correlation between having a bank loan
and business survival. However, having a bank loan is, ceteris paribus, a significant “positive” predictor of
the survival of start-up firms. On the other hand, Storey (1994a) pointed out that the current

5employment size of new firms is not related to whether or not the firm uses bank finance at start-up.
Although these empirical results are somewhat mixed, we introduce the following hypothesis based onreasons and empirical results indicated by Åstebro and Bernhardt (2003).
Hypothesis 2: The use of bank loan at start-up is positively related to post-entry performance.

According to Modigliani & Miller (1958), in a frictionless capital market, the source of finance(debt-equity capital structure) has no influence on the performance of start-up firms. However, heavy
usage of debt by start-up firms may deter them from growth, because their cash flows are unstable andthe cost of debt financing is high. Davidson & Dutia (1991) indicated that the heavy usage of debt is an
important factor explaining the lower profitability of small firms. In addition, Fu et al. (2002) examine
the relationship between profitability and financial capital for small firms in Taiwan. When financial
capital is further divided into debt and equity, the results show a significantly positive relationshipbetween profitability and equity financing, but a significantly negative relationship between profitability
and debt financing. Based on these empirical results (although these are focused not on start-up firms
but on existing small firms), the following hypothesis is introduced.
Hypothesis 3: The ratio of debt financing to total money raised at start-up is negatively related to post-entry performance.

As discussed, because of the presence of information asymmetries, informal investors play a more

6

important role as external capital providers of initial funds, and finance structure may affect the
post-entry performance of start-up firms. Fenn & Liang (1998) pointed out that private equity for
rapidly growing small businesses is raised primarily from the organized VC market and the informal
market, which is comprised of high net worth individuals or business angels. Furthermore, Davila et al.
(2003) examine the association between the presence of VC and the employment growth of start-ups.
They indicated that the number of employees increases in the months prior to the VC funding roundand further increases during the months afterwards.
Hypothesis 4: The use of angel and VC financing at start-up is positively related to post-entry performance.
Data and Methodology
Data Collection
We attempted to construct an original data set through a questionnaire survey named Survey on
the Management of Start-ups in Japan (Wagakuni Start-up Kigyo no Keiei Jittai ni Kansuru Chosa). Using thissurvey, we constructed a sample to estimate the post-entry performance of start-up firms. The name andaddress list for the survey was obtained from Tokyo Shoko Research, Ltd., a major credit investigationcompany in Japan, in December 2001. The list consists of 5684 firms founded in the manufacturing andinformation service industries during 1995-1997. However, 223 questionnaires were returned to us
because the address was unknown (thus questionnaires were sent to 5461 start-up firms). The data set of
this survey comprised of 1045 firms, which are joint-stock corporations or private limited companies in7the Japanese manufacturing and information service industries (response rate was 19.1%). Since somefirms had been founded before or after the observation period, 1995-1997, or could not be regarded as
founded during the period, they were excluded from the sample. In addition, firms from industries otherthan the manufacturing and information service industries were excluded. As a result, the number ofobservations is 848. Furthermore, since all the firms did not necessarily answer all the questions, thenumber of observations depends on the question.1
To conduct the empirical examination of the four aforementioned hypotheses, we employ amultiple regression model on the determinants of post-entry performance based on start-up financing.
Dependent Variables
As a measure for the performance of firms, the growth rates of employment and sales areused. In the survey, we inquired about the numbers of employees and board members both at that timeand at start-up, respectively. Some small firms do not have any employees, and instead board members
often play a role as employees. In this case, board members may be able to be counted as employees. In
the case of firms with no employees (only with board members acting as employees), the growth ratecannot be defined. In this paper, therefore, employment size is measured by the number of employees

1

Although we could not conduct a strict response bias check, we checked whether there are biases inthe distribution of industrial sectors (two-digit Standard Industrial Classification Codes) or locations(prefectures), based on the comparison between our sample, and the Census of Manufactures and Survey onSpecified Service Industries: Information Services data. As a result, there seemed to be bias in the distribution ofseveral sectors (e.g. printing and chemical) and locations (e.g. Hiroshima prefecture).

8

plus board members. The growth rate of employment is defined as the difference of the logarithms of
employment sizes between the periods, divided by firm age. On the other hand, we inquired about sales
for the preceding three years. The growth rate of sales is defined as the difference of the logarithms
between the two years (i.e. sales 3 years prior and 1 year prior to the survey year), divided by two. Table
1 shows the growth rates of employment sizes and sales, respectively. On average, the employment
growth rate is 7.3% (median is 4.1%).2[Table 1 here]
Independent Variables
Table 2 shows which source was used for initial funds in the sample. In Table 2, about 80% of
the start-up firms have utilized personal savings of the entrepreneur. Approximately 37% and 15% of
the start-up firms have utilized financing from founding members and the family of the entrepreneur,respectively. On the other hand, 12.5% have used commercial banks in start-up financing, and the rateof funds financed by commercial banks is approximately 7% of initial funds. In addition, about 6% haveused public financial institutions in start-up financing, and the rate of funds financed by public financial
institutions is approximately 3% of initial funds. Furthermore, about 11% of the start-up firms have
utilized financing from private companies, and the rate of funds financed by them is at the relatively
2

Even when deflation has occurred during the period, the average sales growth rate is maintained at

9.9% (median is 6.4%). There remains, however, the upward bias in the following estimation, since exits
have been excluded from the sample. Although it was important to control the bias, the survey could
not cover exits.

9high level of 6.8% of initial funds.
Among the start-up firms, 6% have utilized business angels, and only 0.8% have used VC firms.
As mentioned before, many small business owner-managers are negative toward sharing ownership.
Furthermore, business angels and venture capitalists have a strict screening process. Thus, angel and VC
financing represent relatively small portions of small business finance. This is consistent with Berger &Udell (1998), which showed that the percentages of angel and VC finance of total finance are 3.59% and1.85%, respectively.
[Table 2 here]
Regarding start-up financing choice, eight dummy variables are included in the regression model.
Entsaving, Fmember, and Family are dummy variables for firms which are financed by personal savings ofthe entrepreneur, founding members, and family of the entrepreneur, respectively. Bank, Pubfinance, andCompany are dummy variables for firms which are financed by commercial banks, public financial
institutions, and private companies, respectively. Furthermore, Angel and VC are dummy variables forfirms which are financed by business angels and VC firms, respectively.
Regarding the debt financing ratio at start-up, we cannot obtain accurate data from our survey.
However, main debt financing for Japanese start-up firms consists of financing from private commercial
banks and public financial institutions (these private and public banks seldom share equity with start-up
firms). Thus, in our analysis, the ratio of borrowing from private commercial banks plus public financial

10

institutions to total money raised at start-up (Ratio_Bank&Pub) is used to measure the debt financing
ratio at start-up.
Control Variables
Previous studies have examined the effects of entrepreneur, firm, and industry characteristics on
start-up financing and post-entry performance. Thus, we examine the relationship between start-up
financing choice and post-entry performance by controlling these characteristics.

Entrepreneur Characteristics
Scherr et al. (1993) found that the percentage of the owner’s income expected to be derived fromthe business is positively associated with external financing (debt use), and the owner’s age is negatively
associated with debt use. Furthermore, using a large sample of UK start-ups, Cressy (1996a) indicatesthat business income targets in practice constitute significant motivation for start-up growth, and thathuman capital represented by age plays no additional role. Cressy (1996b) demonstrates that humancapital is the ‘true’ determinant of survival and that the correlation between financial capital and survival
is spurious. Although we cannot obtain data on business income targets from our survey, it is possible
for us to use data regarding the entrepreneur’s IPO intention as motivation for firm growth. The
entrepreneur’s IPO intention might be also regarded as a business income target.
Regarding entrepreneur-specific characteristics, Ln_Fage is the logarithm of the entrepreneur’s age
at start-up. IPO-oriented is a dummy variable for entrepreneurs who wish to go public. In addition to11

these two variables, two variables are included in the regression model to control differences ofentrepreneurs’ characteristics. University is a dummy variable for entrepreneurs who have graduated fromuniversity or post-graduate school. Strictly speaking, entrepreneurs who dropped out during their
university or post-graduate degree are included, and are regarded as having graduated from where they
last enrolled. Founder is a dummy variable for the entrepreneur who is an original founder of the firm. In
our sample, both an original founder of the firm and a successor of the firm are included.3

Firm Characteristics
Regarding firm-specific characteristics, Colombo & Grilli (2005) examined the role of externalfinancing in influencing start-up size, and found that bank debt-financed firms are not larger than firms
created only through founders’ personal savings. Regarding the relationship between start-up size andpost-entry performance, Audretsch (1995) and Audretsch et al. (1999) indicated growth rates arenegatively related to start-up size. In order to investigate this relationship, Ln_Startsize_emp is defined as
the logarithm of the number of employees plus board members at start-up in the regression analysis of
employment growth. On the other hand, we inquired about sales only for the last accounting year andits preceding two years, and Ln_Startsize_sales is defined as the logarithm of sales two years prior in the
regression analysis of sales growth.
3Some previous researches examine the differences of performance between male and female

entrepreneurs (e.g. Watson, 2002), and between novice and serial entrepreneurs (e.g. Westhead &Wright, 1998). However, female and serial entrepreneurs represent only small percentages of our sample.
Thus, we do not examine these effects on performance in the following analysis.

12In addition, independent firms and non-independent firms such as spin-offs and familybusinesses are included. Independent is a dummy variable for independent firms. Similarly, our sample
firms are legally classified into joint-stock corporations or private limited companies. Corporation is adummy variable for joint-stock corporations.

Industry Characteristics
Regarding the relationship between industry characteristics and performance, Robinson (1998)
found that the stage of the life cycle of the venture’s entered industry was the most important
determinant of new venture performance among the four industry structural elements examined. The
other three elements, i.e. industrial concentration, entry barriers, and product differentiation did nothave a statistically significant relationship with performance.
Thus, in addition to entrepreneur-specific and firm-specific characteristics, the variable Industry
growth, measured by both employment growth and sales growth, is included in the regression model.
While the Census of Manufactures covers establishments with 4 or more persons employed, it is conducted
on all sized establishments only in 1998, 2000, and 2003 after their foundation years, 1995-1997. Since
the effects of small-sized establishments on industry growth cannot be ignored when the post-entry
performance of start-up firms are examined, industry growth is measured with data from 1998-2000.
Industry growth_emp measured by employment growth is used in the regression analysis of employment
growth, while Industry growth_sales measured by sales growth is used in the regression analysis of sales

13

growth. Each variable is defined as the difference between the logarithms of employment figures andsales during 1998-2000, using the Census of Manufactures and Survey on Specified Service Industries: Information
Services. For industry growth control, 25 industry groupings based mainly on two-digit SIC Codes,
including medical preparations, computer software products, and information services were created, andthe growth rates of employment and sales in each industry were computed. Finally, two year dummy
variables Cohort 1995 and Cohort 1996 are included to control macro-economic conditions.
[Table 3 here]
The descriptive statistics and the correlation matrix of the independent and control variables on
employment growth are indicated in Table 3 (not shown on sales growth). As expected, the correlation
between Bank and Ratio_Bank&Pub and Pubfinance and Ratio_Bank&Pub are at the high level of 0.797
and 0.519, respectively. Thus, we estimate different models to control the possibility of multicollinearity
between these variables in the following regressions.
Empirical Results on Performance
Univariate Analysis
We show the difference in firm growth, according to the source of finance. Tables 4 and 5
present the employment and sales growth, respectively, and provide t-statistics to show the difference ofthe source of finance. In Table 4, the employment growth of start-up firms financed by business angels
significantly differs from that of the others, indicating that those financed by business angels are more

14

likely to grow. This tendency is also found in the sales growth at the 1% significance level in Table 5. On
the other hand, the average and median growth rates of start-up firms financed by VC firms are larger
than the others, but the difference is not significant, partly because the number of start-up firms
financed by VC firms is not notably large. When VC financing is included in angel financing, it is foundthat firms financed by business angels or VC firms are more likely to increase employment and sales
compared to firms that do not receive such financing, and the difference is fairly significant.
Moreover, financing through entrepreneurs’ own savings does not affect firm growth, even whenfinancing from the board members and employees or family of entrepreneurs is included. Furthermore,
it is not found that bank financing or public support financing significantly affects firm growth.
[Table 4 and Table 5 here]
In Tables 4 and 5, we also provide the results with the Mann-Whitney z-statistics to take into
account a non-parametric test. Even when the non-parametric test is employed, it is found that start-up
firms financed by business angels are more likely to increase employment and sales. The results also
support the positive relationship between firm growth and angel financing. However, the firms financed
only by VC firms are not found to grow significantly. As discussed, the ratio of the VC-backed firms is
low, and, hence, there is the possibility that the results are brought about due to an insufficient sample
size. As a result of our findings, business angels providing initial funds to start-up firms play a significant
role in achieving high firm growth. The findings imply that business angels pay more attention to15

monitoring the growth potential of start-up firms compared to other individuals.
Multivariate Analysis: OLS Regressions
As shown in Tables 4 and 5, the positive relationship between firm growth and angel financing isseen. Business angels and VC firms appear to invest in growing industries, such as information
technology. On the other hand, post-entry performance is affected not only by firm-specificcharacteristics but also by entrepreneur-specific characteristics, since start-up firms tend to be small. In
addition, industry-specific characteristics may have an impact on post-entry performance. Therefore, weestimate the relationship between firm growth and angel financing, by controlling the effects of industry
growth, and entrepreneur-specific and firm-specific characteristics.
[Table 6 here]
Table 6 shows the relationship between firm growth and financing choice at start-up, by using
OLS regression models. Although we only show results by using financing choice dummies, empiricalresults are stable even if financing percentages (i.e. the ratio of funds financed by each source to allfunds) are used. In order to take into account the heterogeneity of variances, White’s (1980)
heteroschedasticity-consistent estimator is employed. As shown in Table 6, angel financing has apositive impact on sales growth, which indicates that start-up firms financed by business angels are more
likely to increase sales. However, the relationship is not found in employment growth. In addition, there
is a tendency that entrepreneurs’ own savings (insider finance) and financing from founding members

16and family (quasi-insider finance) negatively affect post-entry performance. In particular, financing fromfounding members and family negatively affect post-entry employment growth. The use of bankborrowing and debt financing does not affect performance. Interestingly, financing by privatecompanies positively affect post-entry performance for both employment and sales growth.
Regarding entrepreneur-specific characteristics, the coefficient of IPO-oriented is positively
significant, which indicates that entrepreneurs who wish to go public increase employment and sales. Inline with suggestions by Cressy (1996a), the intention to go public (IPO intention) may constitutesignificant motivation for start-up growth. Other variables such as Ln_Fage, University, and Founder are
not statistically significant, although there is a tendency that young entrepreneurs, entrepreneurs who
have graduated from university or post-graduate school, and successors of start-up firms (not original
founders) increase employment and sales.
Regarding firm-specific characteristics, start-up size negatively affects post-entry employment andsales growth. Furthermore, independent firms and spin-off firms tend to increase employment. The
results also show that joint-stock corporations achieve higher employment growth than private limited
companies. The legal form of a private limited company in Japan presumably is introduced under thepremise that a private limited company is not publicly traded but privately held. As expected, thebehavior and strategies of start-up firms are different between the two legal forms, and joint-stock
corporations have more intention to achieve growth than those of privately limited companies. This17

result is consistent with Storey (1994a). Finally, regarding industry-specific characteristics, it is found thatindustry growth has a positive impact on performance, in particular employment growth.
Conclusion, Discussion, and Limitations
This paper investigated whether post-entry performance differs between start-up firms,
according to the source of finance. Using an original data set of start-up firms in Japan, we examined theimpact of start-up financing choice on firm growth. As a result, it was found that angel financing has apositive impact on sales growth, when we estimate the relationship between firm growth and start-up
financing choice by controlling the effects of industry growth, and entrepreneur-specific andfirm-specific characteristics (H4 is accepted). On the other hand, the use of entrepreneurs’ own savingsand financing from founding members and family “negatively” influences post-entry performance,
opposed to our expectation (H1 is not accepted). Our empirical results may suggest that Leland & Pyle’s
theoretical model, which assumes that entrepreneurs know the likelihood of success of their firms andthat potential investors do not, is not applicable to start-up financing. Furthermore, it was not foundthat start-up firms financed by banks tend to grow (H2 is not accepted). The ratio of debt financing
from private banks and public financial institutions is not related to the performance (H3 is not
accepted).
With respect to the different impact of bank financing and angel financing on firm performance,
there are two possibilities. One possibility is that the difference in impact of each financing method is18due to the difference of “priority” in their screening and monitoring process. As it is necessary forbusiness angels to harvest their own investment, business angels tend to pay more attention to thegrowth potential of start-up firms. On the other hand, as it is not necessary for banks to harvest theirown investment when making loans, banks seem to be more concerned with the stability of start-up
firms, rather than growth potential.
Another possibility is that the difference in impact of each financing method is due to thedifference of “ability” in their screening and monitoring process. As previous literature has pointed out,business angels have high abilities in screening and monitoring start-up firms (e.g. Harrison & Mason,
1997; Benjamin & Margulis, 2000; Van Osnabrugge & Robinson, 2000). On the other hand, banks, andin particular Japanese, banks have been negative toward start-up financing, and thus banks do not havehigh abilities in screening and monitoring start-up firms.
Although this paper has important implications for researchers, entrepreneurs, and policy makers,
it does have a number of limitations and needs to be further researched. First, in our questionnaire
survey, debt and equity for each financing method are not differentiated to avoid the complexity of thequestionnaire. In addition, exits during the observation period are not included in the survey. Previous
literature has pointed out that the sample selection bias occurs without exits, but we cannot take into
account the issue of the sample selection bias, because the survey does not provide data on exits.4
4

However, even if we obtain data on exits, we encounter another difficulty in estimating regression

equations for firm growth and survival with the sample selection correction method. As Leung & Yu

19

Second, regarding the difference in impact on employment and sales growth, sales can be seen as adirect measurement of growth for both entrepreneurs and providers of funds, whereas a change in
employment is a less direct measurement of growth. The difference in impact on employment and sales
growth in addition to accurate measurements of performance as investigated by Murphy et al. (1996)
needs to be further examined.

［2006.7.20 773］

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25

Table 1 Descriptive statistics of firm growth
Growth rate (per year)
Obs.
Mean
Median
S.D.
Min.
Max.
Employment
796
0.073
0.041
0.124
-0.389
0.816
Sales
705
0.099
0.064
0.307
-1.301
1.488
In the survey, we inquired about the numbers of employees and board members both at thattime and start-up, respectively. In this paper, employment size is measured by the number of
employees plus board members. The growth rate of employment is defined as the difference ofthe logarithms of employment sizes between the periods, divided by firm age. On the other
hand, we inquired about sales for the preceding three years. The growth rate of sales is definedas the difference of the logarithms between the two years (i.e. sales 3 years prior and 1 year prior
to the survey year), divided by two.

Table 2 Descriptive statistics of start-up financing
Source of finance
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)

Personal savings of the entrepreneur
Loans and investments from founding
members who are directors or employees
apart from the entrepreneur
Loans and investments from the family ofthe entrepreneur
Loans and investments from business angels
Loans and investments from privatecompanies
Loans and investments from venture capital
firms
Loans and investments from commercial
banks
Loans and investments from public financial
institutions
Subsidies from the government and local
governments
Leases, loans and bills for investment
Others

Usage
Mean
0.809

Ratio
Mean
S.D.
0.518
0.384

0.373

0.143

0.240

0.148

0.052

0.158

0.059

0.022

0.113

0.114

0.068

0.224

0.008

0.004

0.048

0.125

0.066

0.202

0.059

0.026

0.120

0.032

0.009

0.064

0.042
0.096

0.014
0.079

0.082
0.260

Note: The number of observations is 761. ‘Usage’ indicates the rate of the firms using thefinancial source to the sample firms. ‘Ratio’ indicates that the rate of funds financed by thesource to all the funds in the sample.

26

Table 3 Descriptive statistics and the correlation matrix of the independent and control variables
Variables
Obs Mean S.D.
Min
Max
(1)
(2)
(3)
(4)
(1) Entsaving
647 0.810 0.393
0
1 1.000(2) Fmember
647 0.389 0.488
01 0.258 1.000(3) Family
647 0.147 0.354
01 0.101 0.000 1.000(4) Bank
647 0.114 0.319
01 -0.185 -0.098 -0.026 1.000(5) Pubfinance
647 0.059 0.235
01 -0.013 -0.011 -0.011 0.220(6) Company
647 0.121 0.326
01 -0.341 -0.033 -0.020 0.091(7) Angel
647 0.065 0.247
0
1 0.064 0.073 0.103 -0.055(8) VC647 0.008 0.088
01 -0.092 -0.071 0.063 -0.032(9) Ratio_Bank&Pub
647 0.088 0.233
01 -0.208 -0.091 -0.055 0.797(10) Ln_Fage647 3.829 0.235 3.045 4.317 -0.155 0.033 -0.102 0.086(11) IPO-oriented
647 0.229 0.420
0
1 0.067 0.123 0.003 -0.057(12) University
647 0.490 0.500
01 -0.069 -0.060 -0.031 -0.003(13) Founder
647 0.794 0.404
01 0.387 0.140 0.092 -0.070(14) Ln_Startsize_emp
647 1.990 0.902
0 6.428 -0.325 -0.027 -0.105 0.117(15) Independent
647 0.555 0.497
01 0.335 0.154 0.090 -0.049(16) Corporation
647 0.692 0.462
01 -0.161 0.127 -0.140 0.040(17) Industry growth_emp
647 -0.033 0.023 -0.114 -0.004 0.061 0.071 -0.074 0.003(18) Cohort 1995
647 0.314 0.464
0
1 0.005 -0.035 -0.008 0.050(19) Cohort 1996
647 0.345 0.476
01 -0.022 0.021 0.021 0.087

(5)

(6)

(7)

(8)

(9)

1.000
-0.052 1.000-0.039 0.037 1.000-0.022 0.076 0.048 1.000
0.519 0.043 -0.071 -0.033 1.000
0.064 0.148 -0.065 -0.005 0.072-0.042 0.024 0.066 0.078 -0.088-0.034 0.159 0.056 0.019 -0.035
0.013 -0.188 0.103 0.045 -0.033-0.050 0.267 -0.038 0.016 0.066
0.052 -0.213 0.122 -0.063 -0.012
0.010 0.216 0.067 -0.018 0.007
0.001 0.037 -0.027 0.001 -0.009
0.044 -0.025 -0.070 -0.022 0.060
0.040 0.021 0.047 -0.027 0.061

27

(10)

(11)

(12)

(13)

(14)

(15)

(16)

(17)

(18)

(19)

1.000
-0.121 1.000-0.017 0.173 1.000-0.284 0.113 -0.091 1.000
0.351 -0.044 0.032 -0.357 1.000-0.253 0.118 -0.124 0.383 -0.443 1.000
0.129 0.243 0.191 -0.107 0.336 -0.152 1.000-0.093 0.107 0.042 0.111 -0.109 0.066 0.029 1.000
0.018 0.005 -0.030 -0.043 -0.026 0.049 -0.011 0.021 1.000
0.012 0.000 0.018 0.015 0.080 -0.018 0.075 -0.029 -0.490 1.000

Table 4 Comparison of the employment growth rate
Source
Usage
No.
Mean
Mediant-stat.
z-stat.
no
139
0.080
0.035
0.254w-0.736(a) Entrepreneur
yes
580
0.076
0.048
(a) Entrepreneur + (b) Founding
no
121
0.085
0.048
0.648w-0.316members
yes
598
0.075
0.048
no
130
0.083
0.042
0.518w(a) Entrepreneur + (c) Family-0.452
yes
589
0.076
0.048
(a) Entrepreneur + (b) Founding
no
114
0.088
0.052
0.885w-0.006members + (c) Family
yes
605
0.075
0.048
no
675
0.075
0.045
**
***
(d) Angel-2.017-2.720
yes
44
0.114
0.100
no
636
0.073
0.042
**
***
(e) Private company-2.644-2.236
yes
83
0.111
0.073
no
714
0.077
0.048
(f) VC-1.013-1.065
yes
5
0.134
0.231
no
671
0.074
0.044
**
***
(d) Angel + (f) VC-3.010-2.343
yes
48
0.118
0.108
no
630
0.078
0.048
(g) Bank
0.639
0.398
yes
89
0.069
0.052
no
678
0.078
0.048
(h) Public finance
0.825
0.929
yes
41
0.061
0.020
no
607
0.079
0.048
(g) Bank + (h) Public finance
1.040
0.798
yes
112
0.066
0.045
no
657
0.078
0.048
(h) Public finance + (i) Subsidy
0.559
0.741
yes
62
0.068
0.024
Note: No. indicates the number of observations, and the total number of observations is 719. T-stat.
indicates a statistic for the two-comparison mean test. When the hypothesis that the variances are equal
between the two samples is rejected at the 1% significance level, Welch’s formula is used, which isindicated by w. Z-stat. indicates the Mann-Whitney two-sample statistic. *** and ** indicate the 1% and
5% significance level, respectively.

28

Table 5 Comparison of the sales growth rate
Source
Usage
No.
Mean
Mediant-stat.
z-stat.
no
125
0.125
0.074
(a) Entrepreneur
0.858
1.078
yes
532
0.099
0.064
(a) Entrepreneur + (b) Founding
no
107
0.113
0.064
0.343
0.742
members
yes
550
0.102
0.065
no
117
0.119
0.064
(a) Entrepreneur + (c) Family
0.592
0.740
yes
540
0.101
0.065
(a) Entrepreneur + (b) Founding
no
101
0.105
0.056
0.022
0.360
members + (c) Family
yes
556
0.104
0.067
no
616
0.095
0.059
***
***
(d) Angel-2.891-4.150
yes
41
0.238
0.207
no
577
0.091
0.060
***
***
(e) Private company-2.757-2.892
yes
80
0.197
0.117
no
652
0.104
0.064
-0.165w(f) VC-1.613
yes
5
0.150
0.323
no
612
0.095
0.058
***
***
(d) Angel + (f) VC-4.340-2.772
yes
45
0.226
0.211
no
579
0.103
0.071
(g) Bank-0.243
0.766
yes
78
0.112
0.044
no
616
0.105
0.065
(h) Public finance
0.370-0.184
yes
41
0.087
0.064
no
554
0.103
0.067
(g) Bank + (h) Public finance-0.214
0.44
yes
103
0.110
0.056
no
596
0.102
0.064
(h) Public finance + (i) Subsidy-0.539-0.671
yes
61
0.124
0.072
Note: No. indicates the number of observations, and the total number of observations is 657. T-stat.
indicates a statistic for the two-comparison mean test. When the hypothesis that the variances are equal
between the two samples is rejected at the 1% significance level, Welch’s formula is used, which isindicated by w. Z-stat. indicates the Mann-Whitney two-sample statistic. *** and ** indicate the 1% and
5% significance level, respectively.

29

Table 6 Determinants of firm growth (OLS regression)
Variables
Employment Growth
Sales Growth
Model 1Model 2Model 3Model 4
Constant term
0.267 *** 0.265 *** 0.560 **
0.560 **
0.075
0.075
0.274
0.273
Independent Variables
Entsaving-0.026 *-0.025 *-0.027-0.028
0.015
0.015
0.041
0.040
Fmember-0.017 *-0.017 *-0.013-0.014
0.009
0.009
0.026
0.026
Family-0.020 *-0.019 *-0.017-0.017
0.011
0.011
0.035
0.035
Bank
0.024
0.016
0.021
0.048
Pubfinance0.000-0.0240.020
0.053
Company
0.043 **
0.044 **
0.104 **
0.106 **
0.017
0.017
0.040
0.041
Angel
0.014
0.014
0.110 *** 0.110 ***
0.013
0.013
0.041
0.041
VC
0.017
0.016
-0.019-0.020
0.080
0.080
0.273
0.273
Ratio_Bank&Pub-0.043-0.017
0.034
0.037
0.031
0.018
0.089
0.051
Control Variables
Ln_Fage-0.023-0.023-0.005-0.006
0.018
0.018
0.061
0.060
IPO-oriented
0.055 *** 0.056 *** 0.072 **0.072 **
0.012
0.011
0.032
0.032
University
0.009
0.009
0.021
0.022
0.009
0.009
0.025
0.025
Founder-0.001-0.001-0.020-0.020
0.013
0.013
0.034
0.034
Ln_Startsize_emp-0.055 *** -0.054 ***
0.006
0.006
Ln_Startsize_sales-0.048 *** -0.048 ***
0.014
0.014
Independent
0.009
0.009
0.011
0.011
0.010
0.010
0.029
0.029
Corporation
0.077 *** 0.078 *** 0.066 *0.065 *
0.011
0.011
0.034
0.034
Industry growth_emp
0.678 *** 0.684 ***
0.178
0.177
Industry growth_sales
0.222
0.218
0.247
0.218
Cohort 1995
-0.023 ** -0.023 ** -0.069 ** -0.069 **
0.011
0.011
0.031
0.031
Cohort 1996
-0.024 ** -0.024 ** -0.028-0.027
0.011
0.011
0.030
0.030
Number of observations
647
647
600
600
R-squared
0.295
0.294
0.102
0.102
Note: Upper and lower (italicized) figures indicate coefficients and standard
errors, respectively. ***, ** and * indicate the 1%, 5% and 10% significance level,
respectively.

30