The Determinants of External Financing: Empirical Evidence from European Entrepreneurial Companies

Abstract

Objectives

This thesis contributes to the empirical debate on the determinants of an entrepreneurial company’s external financing choices. Combining the fundamental basis set in existing academic literature on entrepreneurial financing with recent phenomenal changes in impact investing, this paper’s objective is to shed more light on the determining factors in external entrepreneurial financing by constructing and testing four hypotheses.

Data and Methodology

This empirical research paper utilized self-collected questionnaire data retrieved from entrepreneurial companies residing all over Europe. The questionnaire contained questions regarding the characteristics of the company and its management as well as questions regarding the amount of external financing raised and about the financing source that was used. Consequently, the questionnaire results from 103 companies were transformed into categorical variables that were analysed using binomial and multinomial regressions.

Findings

Findings firstly imply that impact companies have raised less financing compared to non-impact companies plausibly suggesting prevalent agency problems between entrepreneurs and investors. Secondly, entrepreneurial companies backed by governmental support programs have raised more other forms external financing, thus supporting previous findings on the role of governments as a supporting external party in filling the financing gap between very early stage companies requiring financing and lack of financing supply from private side due to risks of moral hazard and agency problems. Thirdly, the findings further support previous findings that suggest that the education level in an entrepreneurial company’s management is correlated with the amount of received external financing. Last finding similarly to hypothesis two and three, supports the previous findings on the subject, as it suggests that the more intense innovation a company exercises, the more risky financing sources are used.