the financing choices of young firms · 03-11-2012 · business credit cards business credit line...
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The Financing Choices of Young Firms
David T. Robinson
Duke University
National Bureau of Economic Research
Institute for Financial Research, Stockholm
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Myths from the Classroom
OpaqueStartups
-Debt is
Unavailable
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CreditCards
Reliance onVenture Capital
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Friends &Family
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Myths from the Classroom
OpaqueStartups -
Debt isUnavailable
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CreditCards
Reliance onVenture Capital
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Friends &Family
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Myths from the Classroom
OpaqueStartups -
Debt isUnavailable
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CreditCards
Reliance onVenture Capital
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Friends &Family
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Myths from the Classroom
OpaqueStartups -
Debt isUnavailable
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CreditCards
Reliance onVenture Capital
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Friends &Family
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Myths from the Classroom
OpaqueStartups -
Debt isUnavailable
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CreditCards
Reliance onVenture Capital
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Friends &Family
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A more accurate picture?
VC Informal Capital
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Formal BankLending
Startup Capital
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Overview
Evidence on the role of debt in funding startups
Distinct from the role of banks in small business activity
The importance of housing as a source of collateral
Policy conclusions
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The Role of Debt in Startups
The Kauffman Firm SurveyOverview
Multi-year panel on roughly 5,000 firms that were formed in 2004. ‘Formation’means that for the first time in 2004, they:
Paid state unemployment taxes, or FICA tax;
Established a legal status for the business or used a tax id number;
Used a Schedule C on a personal tax return.
This generates a heterogeneous panel in terms of owner and businesscharacteristics at founding
Highly detailed data on business relationships, financial structure, founderbackground information.
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The Role of Debt in Startups
Kauffman Firm SurveyKey Survey Statistics
Founder Demographics
Overwhelmingly white, non-hispanic, males
Median age is 35-44; over 13 are over 45
The median respondent has > 10 yrs. industry experience
More than 40% of respondents have had at least one prior startup
About 12 have at least a Bachelor’s degree
Operating Statistics
About 13 are pre-revenue; but around 1
6 have revenues that exceed $100K
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The Role of Debt in Startups
Kauffman Firm Survey 2004All Firms
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All Firms High Credit Low Credit
Owner Equity Owner Debt Insider Equity
Insider Debt Outsider Equity Outsider Debt
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The Role of Debt in Startups
Kauffman Firm Survey 2004High Tech Firms
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All Hi-tech High Credit Low Credit
Owner Equity Owner Debt Insider Equity
Insider Debt Outsider Equity Outsider Debt
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The Role of Debt in Startups
A Closer Look at Debt
39%
30%
8%
10%
7%6%
Personal loans for business Business bank loans
Business Credit Cards Business Credit Line
Non-bank loans Other loans
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The Role of Debt in Startups
Kauffman Firm Survey 2004The Difference: Total Capital
0
50000
100000
150000
200000
250000
300000
All Firms High
Credit
Low
Credit
All Hi-
tech
High
Credit
Low
Credit
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The Role of Debt in Startups
What about Garage businesses?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Non Home Pre Pre Survived Closed
Employer Based Revenue Profits thru 2006 by 2006
Outside Debt
Outside Equity
Insider Debt
Insider Equity
Owner Debt
Owner Equity
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The Role of Debt in Startups
What about Garage businesses?Garage businesses vary by size
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Non Home
Pre Pre
Survived
Closed
Employer Based
Revenue Profits
thru 2006
by 2006
17,269 20,035 31,201 35,433
31,784 31,609
2,774 4,731
16,268
21,530
18,753 8,841
19,353
26,960
44,839
54,536
50,087
42,208 Outside Debt
Outside Equity
Insider Debt
Insider Equity
Owner Debt
Owner Equity
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The Role of Debt in Startups
What about Equity-backed Businesses?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Angel VC Corporate Govt-‐Other
Outside Debt
Inside Debt
Owner Debt
Outside Equity
Inside Equity
Owner Equity
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The Role of Debt in Startups
What about Equity-backed Businesses?Again, Size Varies
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Angel VC
Corporate
Govt-‐Other
328,999
1,499,644
515,051
171,145
164,891
628,398
75,156
96,030
Outside Debt
Inside Debt
Owner Debt
Outside Equity
Inside Equity
Owner Equity
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The Role of Debt in Startups
To summarize
Startups access bank debt even at their earliest stages of life.
This is an extremely robust fact:
Robust across firm types.
Robust over time: debt continues to be the primary source of fundingthroughout the first four years of the firm’s life.
Complementarity of debt/equity demonstrates that financing constraints arepresent.
Variation in firm characteristics has a first order effect on startup size, but only asecond order effect on the mix of debt/equity.
Evidence that the variation in supply of debt is partly responsible for findings.
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The Role of Debt in Startups
To summarize
Startups access bank debt even at their earliest stages of life.
This is an extremely robust fact:
Robust across firm types.
Robust over time: debt continues to be the primary source of fundingthroughout the first four years of the firm’s life.
Complementarity of debt/equity demonstrates that financing constraints arepresent.
Variation in firm characteristics has a first order effect on startup size, but only asecond order effect on the mix of debt/equity.
Evidence that the variation in supply of debt is partly responsible for findings.
Brookings (Robinson) Promoting Innovative Growth 15 / 20
The Role of Debt in Startups
To summarize
Startups access bank debt even at their earliest stages of life.
This is an extremely robust fact:
Robust across firm types.
Robust over time: debt continues to be the primary source of fundingthroughout the first four years of the firm’s life.
Complementarity of debt/equity demonstrates that financing constraints arepresent.
Variation in firm characteristics has a first order effect on startup size, but only asecond order effect on the mix of debt/equity.
Evidence that the variation in supply of debt is partly responsible for findings.
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Housing as a Source of Collateral
Capital Structure and Housing
Access to outside debt is greater when homes are more pledgable as collateral.
(1) (2) (3) (4) (5) (6) (7)
Home supply elasticity 0.0163*** 0.0156*** 0.0153*** 0.0149** 0.0150*** 0.0163***(0.0058) (0.0058) (0.0059) (0.0058) (0.0058) (0.0058)
State bankruptcy exemption -1.92 -2.52*(1.33) (1.48)
Industry dummies No Yes No Yes Yes Yes Yes
Owner characteristics No No Yes Yes Yes Yes Yes
Credit score dummies No No No No No Yes Yes
Observations 2,564 2,564 2,466 2,466 3,389 2,466 2,466R2 0.004 0.029 0.040 0.058 0.048 0.061 0.062
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Housing as a Source of Collateral
The Home Equity / Entrepreneurship ChannelAdelino, Schoar and Severino, 2012
Between 2002-2007, areas with strong exogenous home price growth saw strongeremployment growth
This employment growth was strongest among the smallest firms
Effect for 1-4 employee firms is ∼ 3x that of > 20-person firms
And among firms with lower capital requirements
Effect for small firms: 3 times larger in low capital-intensive sectors than highintensive ones
There is generally no housing effect on “large" establishments in capitalintensive industries
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Housing as a Source of Collateral
The Small Business Employment MythHaltiwanger, Jarmin, Miranda, 2012
Controlling for age, there is no systematic relationship between firm size andemployment
“Small firms" are not job creators.
Young firms are job creators.
They typically start small.
The good ones grow, the bad ones die, destroying jobs.
On net, creation outweighs destruction.
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Policy Implications
What Do These Facts Say About Policy?
To me, they point to three policy challenges associated with promotingentrepreneurship:
We need to be careful to decouple policy towards business starts from policytowards small business.
We need to embrace the fact that promoting innovative growth almost surelymeans rethinking the way we provide access to debt.
We need to understand that the housing crisis is also an entrepreneurship crisis.
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Policy Implications
In Conclusion
Most “small business employment growth" is actually “young businessemployment growth"
Startups access bank debt even at their earliest stages of life.
Variation in firm characteristics has a first order effect on startup size, but only asecond order effect on the mix of debt/equity.
Home equity is an important source of collateral for startups.
This means that in terms of policy, we need to embrace creative solutions to debtaccess for small firms
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