Sources of finance for tech startups over its lifecycle: what determines their approach of sources and its success?

Abstract

PurposeThe purpose of this paper is to ascertain the factors determining the choice of sources of finance for a tech startup over its lifecycle.Design/methodology/approachThis study adopts simple random sampling technique to choose 93 sample tech startups in Bangalore. Further, this study employs the primary data collection from the sampled startups under study through a semi-structured questionnaire and in-depth interviews with the founders/CEOs of these startups. Furthermore, it carries out binary logistic regression analysis to primarily examine the likelihood of a tech startup to approach and access a particular source of finance over its lifecycle.FindingsOur results indicate that a tech startup's choice for a financial source varies with its lifecycle stage and financial requirements. We find that while in its early stage, a tech startup's choice of a financial source is limited to business angels (BA), in the growth stage, it approaches the institutional sources, viz. Venture Capital (VC), Corporate Venture Capital (CVC), Banks and Private Equity (PE) firms alternatively. Out of the three major categories of financial requirements: Human Capital (HC), Research Capital (RC) and Social Capital (SC), the requirement for HC and SC is predominantly funded by VCs, while the acquisition of RC is facilitated by early stage investors (BAs) as well as growth stage investors (CVC and PEs).Research limitations/implicationsThe research implication of the study lies in bringing out the need to understand both the nature and the quantum of financial requirements of tech startups would influence the sources of finance it would approach and obtain finance for its operations and growth.Practical implicationsThe major policy implication of the study refers to the need to promote the diverse sources of finance to meet the diverse needs of finance in different stages of a tech startup's lifecycle. Particularly in an emerging economy, where we do not see the emergence and growth of highly innovative tech startups, the need to promote adequate availability of RC is especially important.Originality/valueThis study makes a key contribution to the entrepreneurial finance literature by empirically investigating the factors determining a tech startup's propensity to approach and access a particular source of finance over its lifecycle.