2005・46

External Equity at Start-up and Post-entry Performance:
Evidence from Japan
Kenji Kutsuna
Yuji Honjo

External Equity at Start-up and Post-entry Performance:
Evidence from Japan

Kenji Kutsuna
Graduate School of Business Administration, Kobe University
Address: 2-1 Rokkodai, Nada, Kobe 657-8501, Japan
E-mail: kutsuna@kobe-u.ac.jp

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

Abstract
This paper investigates whether post-entry performance differs between start-up firms,
according to the source of finance. In particular, the relationship between the use of
external equity and performance is focused upon. Using an original data set of start-up
firms in Japan, we examine the impact of start-up financing on firm growth. It is foundthat start-up firms financed by business angels are more likely to increase sales. On theother hand, it is not found that those financed by banks tend to grow. Also, the use ofentrepreneurs’ own savings and external financing from founding members and family
does not influence post-entry performance.

11. 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 and stimulating innovation (e.g. Birch, 1979; Ace and Audretsch, 1990). Whenstarting businesses, however, entrepreneurs (or firm founders) indeed face difficulty inreceiving finance from financial and capital markets, because of the limited operating
history (Walker, 1989). Berger and Udell (1998) argued that start-up firms are the mostinformationally opaque and, therefore, experience great difficulty in obtaining
intermediated external finance. Even though start-up firms have high growth potential,
external sources of finance often do not provide sufficient funds, because of theinformation asymmetries between the entrepreneurs and finance providers. This results
in severe financial constraints being placed on the start-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
small firms. However, as is often argued, they may be reluctant to provide funds tostart-up firms due to risk aversion behaviour. In their place, it is expected that venture
capitalists are more willing to provide risk capital. However, the venture capital (VC)
industry in some developed countries, including Japan, is not yet fully developed forseed and start-up financing (Jeng and Wells, 2000; Venture Enterprise Center, 2004).1
1

Jeng and Wells (2000) argued that venture capital firms in Japan and Germany are not as actively

involved in managing their investments as those in the United States. They also provided evidence
that venture capital investment normalized by average gross domestic product (GDP) in Japan ismuch less than in the United States and Western Europe.
2For these reasons, entrepreneurs often depend on informal investors, such as family,
friends and business angels, at the very earliest stage for developing business plans or
products (Harrison and Mason, 1997; Benjamin and Margulis, 2000; Van Osnabrugge
and Robinson, 2000). Under the presence of information asymmetries, informal
investors play a more important role as external capital providers of initial funds, as
opposed to banks (Peterson and Shulman, 1987; Storey, 1994b).
According to the pecking order approach developed by Donaldson (1961) and
Myers (1984), firms use internal money first (personal savings and retained earnings),
access external debt next, and lastly seek external equity. Furthermore, many small
business owner-managers are strongly opposed to sharing ownership, either withfinancial institutions or with other individuals, and so depend on founders’ own capitalor debt financing (Hamilton and Fox, 1998). This may constitute a constraint upon thegrowth of the business. Previous literature indicates that fast-growth small businesses
are willing to share equity (Storey, 1994b). Regarding the relationship between the useof external equity and the effect it has on post-entry performance, there are massive
amounts of research on venture capital-backed firms. However, there is little research
related to whether angel-backed firms perform well.2
This paper explores the impact of start-up financing on post-entry performance. In
particular, the paper highlights the difference between start-up firms, according to thesource of finance. Using data obtained from the original questionnaire survey, we
examine whether start-up financing significantly affects firm growth. The results
suggest that start-up firms financed by business angels are more likely to increase sales,2

For example, according to Kutsuna and Harada (2004) analysing Japanese start-up firms, noevidence was shown that start-up financial and non-financial support by small businessowner-managers tended to enhance the post-entry performance.
3while those financed by banks are not found to achieve firm growth. Also, the use ofentrepreneurs’ own savings and external financing from founding members and family
does not influence post-entry performance.
As already mentioned, the emergence of start-up firms is often expected torevitalise the stagnated economy, but indeed, entrepreneurs have various motives forstarting up. While some firms pursue high growth at start-up, others do not have any
interest in firm growth. From the viewpoint of macroeconomic growth, start-up firms
with growth potential play a more important role in stimulating the economy.
Understanding what type of start-ups pursues firm growth, therefore, would be a matterof increasing interest for future economic growth.
The remainder of the paper is organized as follows. Section 2 reviews literature on
start-up financing and post-entry performance. Section 3 explains data used in this paper.
Section 4 shows the estimated results. Finally, concluding remarks are presented.

2. Literature review

Berger and Udell (1998) examine the economics of financing small business in private
equity and debt markets and show how capital structure varies with firm size and age.
Regarding the ‘existing’ small firms, a large amount of research empirically examines
how the financial behaviour of small firms is influenced by size, age, firm type, andbusiness sector, and how financial behaviour influences small firm performance (e.g.
Keasey and McGuinness, 1990; Van der Wijst and Thurik, 1991; Hutchinson, 1993;
Chaganti, DeCarolis and Deeds, 1995; Chittenden, Hall and Hutchinson, 1996; Reid,
1996, 2003; Michaelas, Chittenden and Poutziouris, 1999; Winker, 1999; Lopez-Gracia

4and Aybar-Arias, 2000; Romano, Tanewski and Smyrnios, 2000; Giudici and Paleari,2000).
On the other hand, investigations of financial constraints at start-up and thedeterminants of post-entry performance have been relatively few. Among them,
however, a line of Cressy’s works provide important insights (Cressy, 1995, 1996a,
1996b, 1996c). Using a large random sample of UK start-ups, Cressy (1996b) indicatesthat business income targets in practice constitute significant motivation for start-up
growth, and that human capital represented by age plays no additional role. Cressy(1996c) demonstrates that human capital is the ‘true’ determinant of survival and thatthe correlation between financial capital and survival is spurious.
Furthermore, other studies examine the effects of start-up financing on firm
characteristics (e.g. start-up size) and on post-entry performance. Scherr, Sugrue andWard (1993) examine how the characteristics of both owner and firm affect the debt use
at start-up. They found that the percentage of the owner’s income expected to be
derived from the business to be positively associated with external financing (debt use),
and the owner’s age negatively associated with debt use. Colombo and Grilli (2005)
examined the role of external financing in influencing firms’ start-up size, and foundthat bank debt-financed firms are not larger than firms created only through founders’personal savings. Regarding post-entry performance, Storey (1994a), for example,
pointed out that the current employment size of new firms strongly related to thepersonal characteristics of the founder more than whether or not the firm uses bankfinance. Åstebro and Bernhardt (2003) examined the survival of new small businesses
and bank loans, and argued that there is a positive correlation between having a
non-bank loan and business survival. These aforementioned studies, however, have5

tended to estimate the effects of bank financing or non-bank financing on post-entry
performance. In other words, there is little attention paid to the effects of informal
capital, such as business angels.
As discussed, because of the presence of information asymmetries, informal
investors play a more important role as external capital providers of initial funds, andfinance structure may affect the post-entry performance of start-up firms. Fenn andLiang (1998) pointed out that private equity for rapidly growing small businesses israised primarily from the organized VC market and the informal market, comprised ofhigh net worth individuals or business angels. That is, the source of finance may be a
key determinant for the growth of start-up firms. Following Modigliani and Miller(1958), in a frictionless capital market, the source of finance has no influence on theperformance of start-ups. However, the cost of external finance, such as bank financing,often exceeds the opportunity cost of internal finance, such as personal savings ofentrepreneurs, and their family and friends.3 Fu, Ke and Huang (2002) examine therelationship 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 relationship between profitability and equity financing, but a significantly
negative relationship between profitability and debt financing.
As mentioned before, many small business owner-managers are strongly opposed
to sharing ownership. Furthermore, business angels and venture capitalists have a strict
screening process. Thus, angel and VC financing represent relatively small portions ofsmall business finance. Berger and Udell (1998) show that the percentages of angel and3

Fazzari, Hubbard and Petersen (1998) proposed the ‘financial hierarchy’ hypothesis, which

demonstrates that the cost of external finance exceeds the opportunity cost of internal finance.
6

VC finance of total finance are 3.59% and 1.85%, respectively. However, as Cressy andOlofsson (1997) pointed out, owners of younger firms find the added expertise of newequity holders favourable. This result suggests that growth-oriented founders with lessmanagement skill (e.g. younger founders, founders with low level of education, andoriginal founders) tend to use external equity.

3. Data

In practice, there are several data sources available to obtain data on start-ups inJapanese industries. Firstly, Nikkei Venture Business Annual Report (Nikkei Venture
Business Nenkan) compiled by a major Japanese newspaper, Nihon Keizai Shimbun,
Inc. (Nikkei) provides data on new ventures. The data source, however, does not report
the financial sources of initial funds. In addition, the source includes not only start-ups
but also small-sized firms with a long history, which are unable to be regarded as
start-ups. Secondly, Survey on Business Start-ups in Japan (Shinki Kaigyo Jittai Chosa)compiled by a government financial institute, the National Life Finance Corporation(NLFC), provides data on start-ups annually.4 Although the data source reports thefinancial sources of initial funds, data on employment or sales growth are not constantly
obtainable. In addition, the source is restricted to data only on firms financed by the
NLFC. The data sources needed to implement our approach are not generally available,
and, hence, 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).
4

For example, Harada (2003, 2004) and Honjo (2005) investigated new ventures using Survey on
Business Start-ups in Japan.
7

Using Survey on the Management of Start-ups in Japan, we constructed asample to estimate the post-entry performance of start-up firms.5 In the survey, firms
founded in the manufacturing and information service industries during 1995-1997 aretargeted as start-ups. As a measure for the performance of firms, the growth rates of
employment and sales are used.6 In the survey, we inquired about the numbers of
employees and board members both at that time and start-up, respectively. In this paper,
employment size is measured by the number of employees plus board members. Somefirms do not have any employees, and instead board members often play a role asemployees. In the case of firms with no employees (only with board members acting as
employees), the growth rate cannot be defined. Therefore, it was necessary to measureemployment growth by both employees and 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 thepreceding three years. The growth rate of sales is defined as the difference of thelogarithms between the two years, divided by two. Table 1 shows the growth rates of
employment sizes and sales, respectively. On average, the employment growth rate is5

For more details on the survey, see Honjo and Kutsuna (2003). The data set of Survey on theManagement of Start-ups in Japan is composed of 1045 firms, which are joint-stock corporations
and privately-limited companies in the manufacturing and information service industries of Japan.
However, since some firms 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 other than the manufacturing and information service industries were excluded.
As a result, the number of observations is 848. Furthermore, since all the firms did not necessarily
answer all the questions, the number of observations depends on the question.
6

Although profitability is also used as a measure for performance, in general, questions about

profitability tend to be avoided in answering. Thus, we did not inquire about profitability in thesurvey.
8

about 7%. Even when deflation has occurred during the period, the sales growth rate ismaintained at about 10%.7[Table 1 and Table 2 here]

Table 2 shows which source is used as initial funds in the sample. In Table 2,
about 80% of the start-up firms have utilised personal savings. On the other hand, about
10% have used private banks in start-up financing, and the rate of funds financed byprivate banks is approximately 6% among the initial funds. Among the start-up firms,
6% have utilised business angels, and only 0.8% has used VC firms. As alreadymentioned, the VC industry in some developed countries, such as Japan, is not fully
developed, and the results also imply that VC financing is rare in start-up financing.

4. Empirical results

4.1. Difference in firm growth

We show the difference in firm growth, according to the source of finance. Tables 3 and4 present the employment and sales growth, respectively, and provide t-statistics toshow the difference of the source of finance. In Table 3, the employment growth ofstart-up firms financed by business angels significantly differs from that of the others,
indicating that those financed by business angels are more likely to grow. This tendency

7

There remains, however, the upward bias in the estimation, since exits have been excluded fromthe sample. Although it was important to control the bias, the survey could not cover exits.
9

is also found in the sales growth at the 1% significance level. On the other hand, theaverage and median growth rates of start-up firms financed by venture capitalists arelarger than the others, but the difference is not significant, partly because the number ofstart-up firms financed by venture capitalists is not notably large. When VC financing is
included in angel financing, it is found that firms financed by business angels or venture
capitalists 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 when financing from the board members and employees or family ofentrepreneurs is included. Furthermore, it is not found that bank financing or public
support financing significantly affects firm growth.

[Table 3 and Table 4 here]

In Tables 3 and 4, 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 toincrease employment and sales. The results also support the positive relationshipbetween firm growth and angel financing. However, the firms financed only by venture
capitalists 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 toan insufficient sample size. As a result of our findings, business angels providing initialfunds to start-up firms play a significant role in achieving high firm growth. The
findings imply that business angels pay more attention to monitoring the growth10potential of start-up firms compared to other individuals.

[Table 5 here]

Moreover, Table 5 presents firms with growth rates in the top 5% or 10%. Table 5
indicates that angel financing contributes to start-up firms with the fastest growth.
Angel-backed firms constitute 6.1-6.2% of our sample firms, and also, angel- or
VC-backed firms constitute 6.7-6.8% of our sample firms. With respect to the
proportion of angel-backed firms and angel- or VC-backed firms among all fastest
growing firms, firms financed by business angels constitute a relatively higher
proportion among the fastest growth firms. As shown in Table 5, the percentage ofangel-backed firms with employment growth in the top 5% and 10% is 5.7% and 8.5%,
respectively, and the percentage of angel- or VC-backed firms with employment growthin the top 5% and 10% is 8.6% and 11.3%, respectively. Similarly, the percentage ofangel-backed firms with sales growth in the top 5% and 10% is 12.5% and 10.8%,
respectively, and the percentage of angel- or VC-backed firms with sales growth in the
top 5% and 10% is 12.5% and 13.8%, respectively. Thus, angel financing at start-ups
contributes to the creation of fast growth firms, particularly in sales growth.

4.2. Use and Impact of angel financing

In this section, we firstly examine what type of firms and entrepreneurs utilise
angel financing, including VC financing. As shown in Table 6, independent firms tend
to use angel financing more than others such as spin-offs and family businesses.

11

Similarly, joint-stock corporations tend to use angel financing more than private limited
companies. Regarding entrepreneur-specific characteristics, the age of entrepreneurs
seems to be negatively related to the use of angel financing in line with Cressy andOlofsson (1997). In addition, highly educated entrepreneurs, such as those who have
graduated from university, and original founders of start-up firms may actively useangel financing. Moreover, entrepreneurs who wish to go public tend to use angel
financing.

[Table 6 here]

As shown in Tables 3, 4 and 5, the positive relationship between firm growth andangel financing is seen. Business angels and venture capitalists appear to invest in
growing industries, such as information technology. On the other hand, post-entry
performance, including firm growth, is affected not only by firm-specific characteristics
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, we estimate the relationship between firm growth and angel
financing, by controlling the effects of industry growth, and firm-specific andentrepreneur-specific characteristics.
Angel is a dummy variable for firms which are financed by business angels
whereas, Angel&VC is a dummy variable for firms which are financed by businessangels or venture capitalists. Regarding firm-specific characteristics, Independent is adummy variable for independent firms, and Corporation is a dummy variable forjoint-stock corporations. Regarding entrepreneur-specific characteristics, Ln_Fage is12the logarithm of the entrepreneur’s age at start-up. University is a dummy variable forentrepreneurs who have graduated from university or post-graduate school. Founder is adummy variable for the entrepreneur who is an original founder of the firm.
IPO-oriented is a dummy variable for entrepreneurs who wish to go public.
In addition to firm-specific and entrepreneur-specific characteristics, the variable
Industry growth, measured by both employment growth and sales growth, is included in
the regression model.8 Industry growth measured by employment growth is used in the
regression analysis of employment growth, while Industry growth measured by sales
growth is used in the regression analysis of sales growth. Each variable is defined as thedifference between the logarithms of employment figures and sales during 1998-2000,
using the Census of Manufactures and Survey on Specified Service Industries:
Information Services. Finally, two year dummy variables Cohort 1995 and Cohort 1996
are included to control macro-economic conditions.

[Table 7 here]

Table 7 shows the relationship between firm growth and angel financing, by using
OLS regression models. In order to take into account the heterogeneity of variances,White’s (1980) heteroschedasticity-consistent estimator is employed. The descriptive
statistics of the variables and the correlation matrix of the independent variables are

8

While the Census of Manufactures covers establishments with 4 or more persons employed, it isconducted 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 withdata for 1998-2000.
13

indicated in Appendix. As shown in Table 7, angel financing has a positive impact onsales 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.
Regardingemployment

growth,

it

is

found

that

firm-specificandentrepreneur-specific characteristics influence firm growth. Independent firms tend toincrease employment. The results also show that joint-stock corporations achieve higher
employment growth than private limited companies. The legal form of a privately
limited company in Japan presumably is introduced under the premise that a privately
limited company is not publicly traded but privately held. As expected, the behaviourand 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. The coefficient of Ln_Fage is negatively significant, which indicates thatyoung entrepreneurs increase employment. This result is consistent with recent
empirical studies showing the negative relationship between firm growth and age (e.g.,
Heshmati, 2001; Yasuda, 2005). Furthermore, entrepreneurs who have graduated fromuniversity or post-graduate school increase employment, and similarly entrepreneurs
who wish to go public increase employment. In line with suggestions by Cressy (1996b),
the intention to go public (IPO intention) may constitute significant motivation forstart-up growth. It is also found that industry growth has a positive impact on
employment growth. Regarding sales growth, entrepreneurs with the IPO intention
increase sales as well. However, it is found that firm-specific and entrepreneur-specificcharacteristics apart from the IPO intention do not influence post-entry performance.
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

14

of each financing method is due to the difference of ‘priority’ in their screening andmonitoring process. As it is necessary for business angels to harvest their own
investment, business angels tend to pay more attention to the growth potential ofstart-up firms. On the other hand, as it is not necessary for banks to harvest their own
investment when making loans, banks seem to be more concerned with the stability ofstart-up firms, rather than growth potential.
Another possibility is that the difference in impact of each financing method isdue to the difference of ‘ability’ in their screening and monitoring process. As previous
literature has pointed out, business angels have high abilities in screening andmonitoring start-up firms (e.g. Harrison and Mason, 1997; Benjamin and Margulis,
2000; Van Osnabrugge and Robinson, 2000). On the other hand, banks, in particular
Japanese banks have been negative toward start-up financing, and thus banks do nothave high abilities in screening and monitoring start-up firms. Furthermore, regarding
the difference in impact on employment and sales growth, sales revenue can be seen as
a direct measurement of growth for both entrepreneurs and providers of funds, where aschanges in employment is a less direct measurement of growth.

5. Concluding remarks

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 the impact of start-up financing on firm growth. As a result, it was foundthat start-up firms financed by business angels are more likely to increase sales. Angelfinancing at start-ups positively contributed to a small number of the fastest growth15

firms (firms with growth rates in the top 5% or 10%), particularly in sales growth.
Based on the analysis regarding the use of angel financing, independent firms,
joint-stock corporations, original founders, and entrepreneurs with the IPO intention
tend to use angel financing. On the other hand, it was not found that start-up firms
financed by banks tend to grow. Furthermore, the use of entrepreneurs’ own savings andexternal financing from founding members and family does not influence post-entry
performance. These results are consistent with previous studies such as Storey (1994b),
Fenn and Liang (1998), Fu, Ke and Huang (2002) that the use of external equity plays
an important role in assisting small firms to achieve high performance.
When we estimate the relationship between firm growth and angel financing, bycontrolling the effects of industry growth, and firm-specific and entrepreneur-specificcharacteristics, angel financing has a positive impact on sales growth. However, therelationship is not found in employment growth. Furthermore, it is found thatfirm-specific and entrepreneur-specific characteristics influence employment growth,
while these characteristics apart from the IPO intention do not influence sales growth.
The difference in impact on employment and sales growth in addition to accurate
measurements of performance as investigated by Murphy, Trailer and Hill (1996) needs
to be further examined.

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.
[2005.12.1 736]

16

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Determinants of Debt Use’, Journal of Small Business Finance 3, 17-36.

20

Storey, D.J., 1994a, ‘New Firm Growth and Bank Financing’, Small BusinessEconomics 6, 139-150.
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21

Table 1 Descriptive statistics of firm growth
Obs.
Mean
MedianGrowth rate (per year)
Employment
796
0.073
0.041
Sales
705
0.099
0.064

S.D.
0.124
0.307

Min.
-0.389-1.301

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 familyof the entrepreneur
Loans and investments from businessangelsLoans and investments from privatecompanies
Loans and investments from venture
capitalists
Loans and investments from commercial
banks
Loans and investments from publicfinancial institutes
Subsidies from the government and local
governments
Leases, loans and bills for investment
Others

Ratio

Usage
Mean
0.809

Mean
0.518

S.D.
0.384

0.373

0.143

0.24

0.148

0.052

0.158

0.059

0.021

0.113

0.114

0.068

0.224

0.008

0.004

0.048

0.125

0.066

0.202

0.059

0.026

0.12

0.032

0.009

0.064

0.042
0.096

0.014
0.079

0.082
0.026

Note: The number of observations is 761. ‘Usage’ indicates the rate of the firms using
the financial source to the sample firms. ‘ Financial ratio ’ indicates that the rate offunds financed by the source to all the funds in the sample.

22

Max.
0.816
1.488

Table 3 Comparison of the employment growth rate
Source
Usage
No.
Mean
Mediant-stat.
z-stat.
no
139
0.08
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-0.452(a) Entrepreneur + (c) Family
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
0.1
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-2.343-3.010
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
0.02
no
607
0.079
0.048
(g) Bank + (h) Public finance
1.04
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. 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,
Welch’s formula is used, which is indicated by w. Z-stat. indicates the Mann-Whitney two-sample
statistic. *** and ** indicate the 1% and 5% significance level, respectively.

23

Table 4 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
0.74
yes
540
0.101
0.065
(a) Entrepreneur + (b) Founding
no
101
0.105
0.056
0.022
0.36
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
652
0.104
0.064 -0.165(f) VC-1.613
w
yes
5
0.15
0.323
no
612
0.095
0.058
(d) Angel + (f) VC-2.772*** -4.340***
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 finance0.37-0.184
yes
41
0.087
0.064
no
554
0.103
0.067
(g) Bank + (h) Public finance-0.214
0.44
yes
103
0.11
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. 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,
Welch’s formula is used, which is indicated by w. Z-stat. indicates the Mann-Whitney two-sample
statistic. *** indicates the 1% significance level.

24

Table 5 High growth firms and angel financing(a) Employment Growth
Top 5%
Top 10%Total(b) Sales Growth
Top 5%
Top 10%Total

Growth
Rate
41.1%
33.8%
7.7%
Growth
Rate
96.6%
74.1%
10.4%

Angelbacked
Firms

No. of
Firms
35
71
719

2
6
44
Angelbacked
Firms

No. of
Firms
32
65
657

Angel or%VC-backed
Firms
5.7%
3
8.5%
8
6.1%
48
Angel orVC-backed
Firms
12.5%
4
10.8%
9
6.2%
45

%
4
7
41

%
8.6%
11.3%
6.7%

%
12.5%
13.8%
6.8%

Table 6 Firm and entrepreneur charactersitics and the use of angel financing
All firms
Angel-backed firms
Angel- and VC-backed
No. of firms%
No. of firms%
Independent
419
36
8.60%
37
8.80%
Others
342
9
2.63%
13
3.80%
Total
761
45
6.00%
50
6.60%
Joint-stock corporation
506
36
7.10%
39
7.70%
253
9
3.60%
11
4.30%
Private limited company
Total
759
45
5.90%
50
6.60%
Age < 30
173
13
7.50%
14
8.10%
40 <= Age < 50
229
15
6.60%
16
7.00%
50 <= Age < 60
231
13
5.60%
15
6.50%
Age >= 60
80
2
2.50%
2
2.50%
Total
713
43
6.00%
47
6.60%
High-school/college
368
17
4.60%
19
5.20%
University
321
25
7.80%
27
8.40%
Post-graduate
25
1
4.00%
1
4.00%
Total
714
43
6.00%
47
6.60%
Founder
598
43
7.20%
48
8.00%
Successor
152
2
1.30%
2
1.30%
Total
750
45
6.00%
50
6.70%
With the IPO intention
15
9.04%
17
10.24%
166
Without the IPO intention
571
30
5.25%
33
5.78%
Total
737
45
6.11%
50
6.78%

25

Table 7 Determinants of firm growth (OLS regression)
Variables
Employment
Sales
0.275*** 0.274***
0.088
0.090
Constant term
(0.082)(0.082)(0.258)(0.259)0.012
0.121***
Angel(0.015)(0.041)0.018
0.110**Angel&VC(0.016)(0.050)0.028*** 0.028***
0.028
0.030
Independent(0.010)(0.010)(0.029)(0.030)0.056*** 0.056***
0.033
0.035
Corporation(0.010)(0.010)(0.029)(0.028)-0.060*** -0.060***-0.000-0.001
Ln_Fage(0.020)(0.020)(0.064)(0.064)0.019** 0.019**
0.035
0.036
University(0.010)(0.010)(0.026)(0.026)0.005
0.005-0.024-0.025
Founder(0.014)(0.014)(0.033)(0.032)
0.056*** 0.055*** 0.068**
0.066*
IPO-oriented(0.012)(0.012)(0.034)(0.034)0.833*** 0.836***
0.320
0.325
Industry growth(0.190)(0.190)(0.242)(0.243)-0.025** -0.025** -0.078** -0.078**
Cohort 1995
(0.012)(0.012)(0.032)(0.031)-0.030*** -0.031***-0.039-0.038
Cohort 1996
(0.012)(0.012)(0.032)(0.032)
647
647
600
600
Number of observations
0.185
0.185
0.049
0.049
R-squared
Note: Figures in parentheses are standard errors. ***, ** and * indicate
the 1%, 5% and 10% significance level, respectively.

26

Appendix Descriptive statistics and the correlation matrix of the independent variables
Max
(1)
(2)
(3)
(4)
Variable
Obs Mean Std. Dev Min(1) Angel
647 0.065 0.247
011(2) Angel&VC
647 0.071 0.257
01 0.9521(3) Independent
647 0.555 0.497
01 0.122 0.103
1(4) Corporation
647 0.692 0.462
0
1 0.067 0.054 -0.152
1(5) Ln_Fage647 3.829 0.235 3.045 4.317 -0.065 -0.063 -0.253 0.129(6) University
647 0.490 0.500
01 0.056 0.054 -0.124 0.191(7) Founder
647 0.794 0.404
01 0.103 0.111 0.383 -0.107(8) IPO-oriented
647 0.229 0.420
0
1 0.066 0.078 0.118 0.243(9) Industry growth647 -0.033 0.023 -0.114 -0.004 -0.027 -0.022 0.066 0.029(10) Cohort 1995
647 0.314 0.464
01 -0.070 -0.070 0.049 -0.011(11) Cohort 1996
647 0.345 0.476
0
1 0.047 0.040 -0.018 0.075

27

(5)

(6)

(7)

(8)

(9)

(10)

1
0.017
1
0.284 -0.091
1
0.121 0.173 0.113
1
0.093 0.042 0.111 0.107
1
0.018 -0.030 -0.043 0.005 0.021
1
0.012 0.018 0.015 0.000 -0.029 -0.490(11)1