Institutional Change and Early-Stage Startup Selection: Evidence from Applicants to Venture Accelerators

Abstract

Existing research at the nexus of institutional theory and entrepreneurship suggests that lowering institutional barriers to forming, growing, and exiting new firms through legal and regulatory reforms can affect the types of startups that entrepreneurs found in a region. These institutional changes could affect entrepreneurs' willingness to partner with organizational sponsors to develop high-growth startups and potentially enhance these sponsors' ability to select high-growth startups to fund and develop. This study evaluates these ideas by developing and testing three hypotheses, that institutional reforms (a) improve entrepreneurs' perceived benefits of the resources that organizational sponsors provide, (b) increase the number, quality, and diversity of applicants for these resources within sponsors' local ecosystems, and (c) enhance sponsors' capacity to select high-growth startups into their cohorts. To evaluate these hypotheses, I analyze data from 13,770 applicants to venture accelerators over multiple application cycles between 2016-2018 in 170 countries, using a difference-in-differences design that exploits institutional reforms that aimed to reduce the time and procedures to start new firms, obtain credit, and resolve bankruptcy for entrepreneurs. The findings have important implications for how institutional reforms affect early-stage entrepreneurship and the capacity of organizational sponsors to select high-growth early-stage startups to fund and develop within their local ecosystems.