Emergence, Newness and Growth
Edited by Candida G. Brush, Lars Kolvereid, L. Øystein Widding and Roger Sørheim
Chapter 12: New Business Founders: Perceptions About and the Use of External Funding
Roger Sørheim and Espen J. Isaksen INTRODUCTION Throughout the last three decades there have been a number of studies indicating that small and medium-sized enterprises (SMEs) are the most important contributors of new jobs in the private sector (Birch, 1979, 1987; Davidsson et al., 1994; Storey, 1994; Cassar, 2004). This means that SMEs play a key role as a vehicle for economic growth and wealth creation. However, not all SMEs are creators of jobs; the vast majority of them (more than 90 percent) remain in the lifestyle category (Lumme et al., 1998; Van Osnabrugge and Robinson, 2000). Moreover, how business start-ups are financed is one the fundamental issues of enterprise research as financial capital is a necessity for new firms who want to compete in the marketplace (Cassar, 2004). Moreover, financial constraints are often claimed to be the reason why only a small part of new small businesses actually grow (Greene and Brown, 1997; Cassar, 2004). The rationale for this reasoning is that external financiers (that is, banks, informal investors and venture capital firms) are reluctant to finance new small firms because of the risk involved (related to information asymmetries and lack of track record) (Binks, 1996; Winborg, 2000; Sørheim, 2003). This implies a supply side view of small business finance, focusing on how external financiers evaluate new firms. This rationale has been questioned over the last decade: (1) by focusing on the heterogeneity among small firms, that many firms prefer to remain ‘lifestyle’ firms and (2) that...
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