The Evolution of Entrepreneurs’ Fund-Raising Intentions: A Multiple Case Study of Financing Processes in New Ventures

380 Pages·2008·1.131 MB·English

by  Marc Grünhagen (auth.)

Marc Grünhagen
The Evolution of Entrepreneurs’ Fund-Raising Intentions
GABLER EDITION WISSENSCHAFT
Entrepreneurship
Herausgegeben von
Professor Dr. Malte Brettel, RWTH Aachen,
Professor Dr. Lambert T. Koch, Universität Wuppertal,
Professor Dr. Tobias Kollmann, Universität Duisburg-Essen,
Campus Essen,
Professor Dr. Peter Witt, WHU – Otto Beisheim School
of Management, Vallendar
„Entrepreneurship“ ist ein noch relativ junger Forschungszweig, der
jedoch in Wissenschaft und Praxis stetig an Bedeutung gewinnt.
Denn Unternehmensgründungen und deren Promotoren nehmen für
die wirtschaftliche Entwicklung einen zentralen Stellenwert ein, so
dass es nur folgerichtig ist, dem auch in Forschung und Lehre Rech-
nung zu tragen.
Die Schriftenreihe bietet ein Forum für wissenschaftliche Beiträge
zur Entrepreneurship-Thematik. Ziel ist der Transfer von aktuellen
Forschungsergebnissen und deren Diskussion aus der Wissenschaft
in die Unternehmenspraxis.
Marc Grünhagen
The Evolution of
Entrepreneurs’
Fund-Raising Intentions
A Multiple Case Study of
Financing Processes in New Ventures
With a foreword by Prof. Dr. Lambert T. Koch
GABLER EDITION WISSENSCHAFT
Bibliographic information published by the Deutsche Nationalbibliothek
The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;
detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.
Dissertation Universität Wuppertal, 2008
1stEdition 2008
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Foreword
Recent entrepreneurship research discusses numerous potential obstacles on the path
towardsbusinessformation.Theacquisitionofresources,especiallyexternalfinance,
constitutesaformidablechallengefoundershavetomeet.Substantialrejectionratesof
potential investors create external selection pressures on new ventures in that they
contributetofailuresorinfluencethegrowthofsurvivingyoungcompanies.However,
the founders themselves take an active role in the search for financial resources by
addressing various potential financiers and taking decisions on the direction and
continuation of their search for investors. Similarly, the results of the large US Panel
StudyofEntrepreneurialDynamicspointattheimportanceofadjustmentsinfounders’
fund-raising intentions in the course of early stage financial development of new
ventures.
Theworkathandfocusesonthisprocessofsolvingproblemsduringthesearchfor
external funding in emerging new ventures. The author explicitly does not analyze
which factors of success will allow to convince potential investors with certainty.
Regarding the search for funding as an open-ended process for epistemological
reasons,heratheraimsatthereconstructionofsearchprocessesandthederivationof
explanatorypatternsfortheactionsofventurefoundersinsearchofexternalfunding.
The central question for the factors which may influence “entrepreneurial fund-
raising intentions” is answered through the analysis of the discrepancy between
founders’initialfinancingpreferencesandtheirevolutioninthecontextofselection
feedback of potential investors demanding for new venture legitimacy. This work
can therefore take the credit for integrating current research on new venture
legitimacy into the framework of evolutionary economics and at the same time for
discarding rather mechanistic firm-life-cycle concepts. The author shows
systematically how perceived barriers to legitimizing with potential investors and
their selection feedback may function as possible antecedents of evolving fund-
raisingintentions.
Both the development of a conceptual model of fund-raising intentions and the in-
depthcasestudiesofelevennewventuresareverymuchworthreadingbecausethey
combine high analytical standards with a great practical relevance. Marc Grünhagen
VI Foreword
verysuccessfullydrawsontheresultsofhisinternationalentrepreneurshipresearchas
well as his expert knowledge as a former corporate finance and venture capital
professional.
May this book find many willing readers and contribute to the scientific discussion in
thefieldtoasignificantextent.
Prof.Dr.LambertT.Koch
Preface
This book explores the emergence and development of new ventures. In a way, the
writing process itself also seemed like a kind of “venture”. And like founding a new
firm,itrequiredsubstantialmaterialsupportandencouragementfromothers.
First of all, I would like to thank my parents, who have wholeheartedly supported my
“academic endeavours” over many years. I would also like to thank Wolfgang Kuhn,
who inspired me to write a thesis and introduced me to the idea of joining the
EntrepreneurshipTeamattheUniversityofWuppertal.Mycolleagueswithinthisteam
havesupportedthedissertationprojectinmanyways,andforthissupportIamgrateful.
I would also like to express my gratitude to Prof. Dr. Lambert T. Koch, my thesis
supervisor,forhisconstructiveadvicethroughouttheprojectandtoProf.Dr.MichaelJ.
Fallgatter,whoagreedtosecond-markthisthesisonwhathasbeenveryshortcall.
InthefinalstageIhavebeenthankfulfortheindispensablesupportofJohannesLeicht,
who has helped me with the typeset of this work. Along with this, I also thank Heidi
HeinandAndreasDornforadvisingandencouragingmeonthispath,whichtrulywas
therightonetochoose.DuringtheendgameoftheprojectDirkSchmidt’sinterestinthe
results of my work gave me encouragement. Last but not least I would like to thank
Finn, who – in the final weeks before completion – has showed me that there is life
outsidethestudyroom.
MarcGrünhagen
Contents
Figures ............................................................ XIII
Abbreviations ....................................................... XV
1. Outlineofproblemandoverview ............................. 1
1.1. Focusofthestudy ........................................... 2
1.2. Researchissuesandobjectives ................................. 4
1.3. Conceptualapproach ......................................... 6
1.4. Empiricalstudyandpotentialcontributions ...................... 10
1.5. Outline ................................................... 14
2. Epistemologicalconcept:entrepreneursashumanagents ........ 17
2.1. Newventurefailureasanepistemologicalissue .................. 17
2.2. Epistemologicalimplicationsofhumancognition ................. 17
2.2.1. Unitofanalysis ............................................ 18
2.2.2. Individualperceptionandcognitiveconstructionofreality .......... 21
2.2.2.1. Objectiveperceptionandtheindividualisticalternative ............. 21
2.2.2.2. Sense-makingoftheenvironmentandindividualmemory .......... 26
2.2.3. Thefallibilityofknowledgeandtheviabilityrequirement .......... 29
2.3. Subjectivelyrationalactionandinter-subjectiveinteraction ......... 32
2.3.1. Subjectivelyrationalactionanditscognitiveantecedents ........... 32
2.3.1.1. Cognitiveantecedentsunderlyingentrepreneurialaction ............ 34
2.3.1.2. Aconceptofcreativesubjectively-rationalaction ................. 36
2.3.2. Socialinter-subjectivityandagentinteraction .................... 40
2.3.2.1. Alignmentofrealityconstructionsininteractionprocesses .......... 41
2.3.2.2. Socialconstructionandsocialacceptanceofbehaviour ............ 42
3. Newventures:definition,financingneeds,andlegitimacy ........ 47
3.1. Definitionsandcharacteristicsofnewventures ................... 47
3.1.1. Thegeneralthemeofentrepreneurship .......................... 47
3.1.2. Newventuresversusestablishedfirms(definitionI) ............... 49
3.1.2.1. Principalchallengesindefiningnewentrepreneurialventures ....... 49
X Contents
3.1.2.2. Definitionaldimensionsofnewventuresinthisstudy ............. 50
3.1.3. Characteristicsofnewventuresincontrasttoestablishedfirms ...... 54
3.1.4. Infantventuresversusemergingventures(definitionII) ............ 57
3.2. Externalfinancingneedsofnewventures ....................... 62
3.2.1. Resourceneedsofnewventuresingeneral ...................... 62
3.2.2. Financingneedsandtheirimplicationsfortheempiricalstudy ...... 64
3.2.2.1. Exogenousdeterminantsofexternalfinancingneeds ............... 65
3.2.2.2. Financingsourceandcapitalstructurepreferences ................ 67
3.2.3. Financialresourcesandthedevelopmentofnewventures .......... 68
3.2.3.1. Implicationsoffinancialresourceavailability .................... 68
3.2.3.2. Impactsoffinancingconstraints ............................... 69
3.3. Legitimacyofnewventuresandtheacquisitionofresources ........ 72
3.3.1. Legitimizingchallengesinnewventures ........................ 75
3.3.1.1. Definitionandcharacterizationoforganizationallegitimacy ......... 75
3.3.1.2. Differenttypesoflegitimacy .................................. 77
3.3.1.3. Theneedfornewventurestogainlegitimacy .................... 80
3.3.2. Optionsforlegitimzingactionandpotentialsourcesoflegitimacy .... 83
3.3.2.1. Characterizinglegitimizingaction .............................. 83
3.3.2.2. Principallegitimizingoptions ................................. 85
3.3.2.3. Gaininglegitimacybysignallingconformance ................... 91
3.3.3. Possibledifferentiationsinthechallengetogainlegitimacy ......... 95
3.3.4. Summary ................................................. 100
4. Financiers’legitimacydemandsandtheevolutionofentrepre-
neurs’fund-raisingintentions ............................... 101
4.1. Understandingfinancialresourceacquisitionasaprocess ......... 102
4.1.1. Inquiringintothefund-raisingstruggleofnewventures ........... 102
4.1.2. Possibleprocess-orientedperspectives ......................... 104
4.1.2.1. Life-cycleconceptsinnewventuredevelopmentandfinancing ..... 104
4.1.2.2. TheuniversalDarwinianprincipleofBVSRasameta-concept ..... 106
4.1.3. Patternexplorationinthecontextofinvariantrestrictions ......... 116
4.2. Therestrictionsandfinancialselectionenvironment .............. 119
4.2.1. Overviewoftherestrictionsenvironment ....................... 119
4.2.2. Potentialfinanciersandtheirlegitimacydemands ................ 125
Contents XI
4.2.2.1. Sourcesoffinanceandfinanciers’pre-investmentevaluation ....... 126
4.2.2.2. Screeningandevaluationcriteriaofexternalfinanciers ........... 132
4.2.2.3. Stabilityandinter-subjectivityoffinanciers’evaluationcriteria ..... 140
4.2.3. Pre-investmentscreeningasexternalselection ................... 144
4.2.3.1. Externalselectionpressuresonfund-raisingprocesses ............ 144
4.2.3.2. Externalfinancialselectionandinternalselectionchoices ......... 147
4.3. Entrepreneurialvariation-selectioninfund-raisingprocesses ....... 153
4.3.1. Creativevariationandselectivechoiceinentrepreneurialaction .... 154
4.3.2. Trialvariationandselectivechoiceofactionovertime ........... 157
4.4. Evolving fund-raising intentions: exploratory theoretical orienta-
tions .................................................... 163
4.4.1. Generalentrepreneurialintentionsmodelsasareference .......... 164
4.4.2. Overview:exploratoryframeworkoffund-raisingintentions ....... 169
4.4.3. Conceptualorientationsforempiricalexploration ................ 172
4.4.3.1. Perceivedfeasibilityofacquiringfunding(TO1aand1b) ......... 174
4.4.3.2. Changesinfund-raisingintentions(TO2a-c) .................... 182
4.4.3.3. Selectionfeedbackfrompotentialfinanciers(TO3) .............. 192
5. Multiple case studies of fund-raising processes in new ven-
tures .................................................... 197
5.1. Casestudydesignanddatacollection ......................... 197
5.1.1. Multiplecasedesign ....................................... 197
5.1.1.1. Exploringfund-raisingprocesseswithcasestudies ............... 197
5.1.1.2. Definitionofthemultiplecasedesign ......................... 200
5.1.2. Datacollection ............................................ 204
5.1.2.1. Caseselectionframeworkandprocedure ....................... 204
5.1.2.2. Timeframeofdatacollectionandcaseinterviews ............... 208
5.2. Casestudyresults:preliminarypatternsinfund-raisingprocesses ... 217
5.2.1. Approachtoanalyzingmultiplecaseevidence ................... 217
5.2.2. Casevignettes:descriptionofventuresandtheirfundingattempts ... 221
5.2.3. Entrepreneurs’sense-makingoftheirfinancialenvironment ........ 226
5.2.3.1. Fundingsourcesandscreeningchallenges:financialmunificence ... 228
5.2.3.2. Venturecharacteristicsandfundingflexibility:fund-raisingcapa-
bilities ................................................... 243