Start-up Firms Research Articles

Optimal initial coin offering under speculative token trading

Initial Coin Offering (ICO) is a new form of financing instrument for start-up firms. The firm issues tokens (or coins) in the ICO phase to raise capital to build capacity for its project. If the project is successful, the firm will provide product in subsequent periods and this product can only be accessed via tokens which can be traded over an exchange market. In this paper, we propose a model to study the firm’s optimal ICO strategy and the equilibrium token price dynamics when there is a multi-period trading market for tokens. We find that the ICO will be successful if and only if the capacity-cost-to-customer-valuation ratio is low. There may also exist multiple equivalent ICO decisions that yield the same revenue for the firm. We also compared the ICO mechanism with the traditional bank-financing mechanism. We find that when the capacity cost is low, the ICO mechanism is better than the bank-financing mechanism. We also explore the impact of the speculator’s risk attitude on the firm’s profitability. In general, the firm will be better-off when the speculator (those who participates in the ICO and trades tokens) is more risk-seeking.

EDSAI Education: Start-up Valuation amidst nCOVID-19

This article is a field case on business valuation woven around the dilemma for a young EdTech firm to choose between the two opportunities that came out as collaterals to the nCOVID-19 pandemic in 2020. The selection would be based on the principle of firm value maximization, for which the opportunities needed to be valued. Students will learn the application of the venture capital (VC) model used for start-up firms. Students are challenged to apply the discounted cash flow (DCF) model and the relative valuation (RV) model, and, in the process, learn to estimate the cost of equity using the capital asset pricing model (CAPM). The case provides an opportunity to learn how to build the narrative around numbers by augmenting a discussion on the impact of a pandemic on various input variables used in the valuation exercise. The case is most suitable for the course on business valuation in management and doctoral programmes.

Investment in trade credit in small business start-ups: evidence from Spain during a financial crisis

ABSTRACT This study analyses start-up firms’ investment in trade credit during the period 2011–2014. We find that new or recently created firms had greater investments in trade credit than established firms. Moreover, the results indicate that start-up firms’ investment in trade credit did not depend on their bargaining power or access to external finance. These findings suggest that the reason start-ups invested more in accounts receivable than established firms could be due to late payments or their granting credit to low-quality customers who cannot obtain credit from established firms.

Fraud in startups: what stakeholders need to know

PurposeThis paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and stakeholders in the context of startup corporate governance. Further, this paper uses the examples of WeWork and Zenefits to explain how a failure of stakeholders to demand an external audit from an independent accounting firm in early stages of funding led to an opportunity for fraud.Design/methodology/approachThe methodology used is a literature review and analysis of startup valuation combined with the Fraud Triangle Theory. This paper also provides a discussion of WeWork and Zenefits, both highly visible examples of startup fraud, and explores an increased role for independent external auditors in fraud risk mitigation on behalf of stakeholders prior to an initial public offering (IPO).FindingsThis paper documents a number of fraud risks posed by the “fake it till you make it” ethos and investor behavior and pricing in the world of entrepreneurial finance and VC, which could be mitigated by a greater awareness of startup stakeholders of the value of an external audit performed by an independent accounting firm prior to an IPO.Research limitations/implicationsAn implication of this paper is that regulators should consider greater oversight of the startup financing process and potentially take steps to facilitate greater independence of participants in the IPO process.Practical implicationsGiven the potential conflicts of interest between VC firms, investment banks and startup founders, the investors at the time of an IPO may be exposed to the risk that the shares of the IPO firms are overvalued at offering.Social implicationsThis study demonstrates how startup practices can be extended to the Fraud Triangle and issue a call to action for the accounting profession to take a greater role in protecting the public from startup fraud. This study then offers recommendations for regulators and standards entities.Originality/valueThere are few academic papers in the financial crime literature that link the valuation and culture of startup firms with fraud risk. This study provides a concise explanation of the process of valuation for startups and highlights the considerations for stakeholders in assessing fraud risk. In addition, this study documents an emerging role for auditors as stewards of proper valuation for pre-IPO firms.

Initial funding and founders’ human capital: An empirical analysis using multiple surveys for start-up firms

This study explores the use of initial funding sources using a unique sample of various types of start-up firms in Japan obtained from multiple surveys. We provide evidence on the differences in the use of initial funding sources and their determinants across start-up firms by estimating a multivariate probit model. Our findings indicate that founders’ human capital, entrepreneurial commitment, growth orientation, innovativeness, physical capital, and the presence of predecessors or parent firms are important determinants of their choice of initial funding sources. Specifically, while start-up firms with growth orientation and those that engage in innovative activities are more likely to use subsidies and funds from private equity investors, those with physical capital are more likely to use bank borrowing.

Trait ecology of startup plants.

SummaryStartup plants include seedlings and basal and epicormic resprouts. It has long been held that startups have different strategies from adult plants, but theory for what trait differences to expect is limited and not yet quantitatively tested. Three applicable concepts are analogous to human startup firms, R‐shift, and trait‐growth theory. All three suggest startups should be built with lower construction costs than established plants. This appears to be almost always true in terms of leaf mass per area (LMA), though many comparisons are complicated by the startups growing in lower light. Trait‐growth theory predicts LMA should increase progressively with height or total leaf area, driven by higher conductive‐pathway costs associated with each unit leaf area, and by greater reward from slowing leaf turnover. Basal resprouts often have somewhat higher LMA than seedlings, but possibly this is simply because they are larger. A number of eminently testable questions are identified. Prospects are good for a theoretically cogent and field‐tested body of knowledge about plant startups.

Startup Ltd.: Tax Planning and Initial Incorporation Location

Do startup firms consider taxes when they decide where to organize? This Article analyzes the incorporation decisions of relatively new, US-based private business enterprises with global ambitions. Such startup firms generally organize as US corporations. This Article theorizes this dominant structure and its exceptions, drawing from prior literature and illustrating with informal interview results. It identifies explanatory factors including limited tax benefits of non-US incorporation, legal benefits of US incorporation, startups’ liquidity and other resource constraints, and investor preferences.Part II explains the different treatment of US- and non-US-parented multinational corporations (MNCs) under US federal income tax law. Some non-US-parented MNC structures have tax advantages compared to US-parented MNC structures. This prompts the hypothesis that US-based startup corporations may incorporate outside the United States, for example in a tax haven jurisdiction, if the non-tax costs of a non-US incorporation decision are sufficiently low.Part III reports that available empirical work shows few examples of startup corporations headquartered in the United States and incorporated in tax haven jurisdictions. Prior work and informal interviews reported here support the conclusion that venture-backed Silicon Valley startups generally organize in the United States, form corporations rather than partnerships or LLCs, and prefer the state of Delaware as an incorporation jurisdiction. Available examples, drawn in large part from initial public offering (IPO) evidence, corroborate the conclusion that Delaware incorporation is the norm. The evidence also reveals exceptions to the general rule of US incorporation concentrated in particular industries, such as insurance and marine transportation. Part III also identifies several additional examples of US-based, non-US-incorporated firms, scattered among different industries.Part IV explores several possible reasons for the dominant structure of US incorporation for startup firms. One reason is the limited relative tax advantages of non-US incorporation. For example, US-parented MNCs can often obtain low tax rates on non-US income, sometimes access offshore cash without onerous US tax results, and erode their US taxable income base to some extent. Another reason is that a US-parented structure can provide corporate governance and other non-tax legal advantages

On the tax efficiency of startup firms

We examine the choice of organizational structure for VC-backed startup firms. These firms overwhelmingly organize as C-corporations rather than as tax advantaged limited liability companies (LLCs). This results in foregone tax savings of $43.9 billion, or 4.9% of the total equity invested in the sample firms. The decision is puzzling, given plausible estimates of the direct costs involved, but appears related to “hassle” and other transition costs generated by participants implementing a new form. Firms with more employees and investors are likely to choose the C-corporation. VCs appear to prefer the C-corporation form, as receiving VC money is associated with most LLC firms switching to a C-corporation within 30 days. Greater VC preferences for C-corporations are linked to a preference for familiarity, and less attention to taxes.

Agile logic for SaaS implementation: Capitalizing on marketing automation software in a start-up

The emergence of Software-as-a-Service (SaaS) has facilitated agile technology implementation that focuses on iterative adaptations via learning by doing rather than the realization of a predesigned implementation plan. This study conceptualizes such an agile approach and explicates its operationalization via a four-year qualitative case study of a business-to-business (B2B) start-up firm’s implementation of a HubSpot marketing automation (MA) SaaS. The study shows how agile implementation continuously introduces adaptations to SaaS features and organizational routines for improving their mutual fit given the organization’s goals. The study also contributes to theory by offering a novel framework for managing agile implementation processes. The findings identify the key processes of sales lead management, content marketing, and customer intelligence through which start-up firms may capitalize on MA software.

The impact of industry 4.0 on the 2017 version of the Uppsala model

The emergence of Industry 4.0 offers firms internationalization opportunities employing digital platforms and emerging technologies. Relying upon the Uppsala model as applied in light of a firm case study, we contribute to the validity of the Uppsala model 2017. We respond to the counterpoint by Coviello, Kano, and Liesch (2017) to the Uppsala 2017 model, answering the question, What is the impact of Industry 4.0 on the validity of the 2017 version of the Uppsala model? This study builds on a qualitative research methodology through a single case study of Delivery Hero, a global service provider firm. We adopt an extensive longitudinal approach to understand a startup firm’s digital business concept and business evolution, including its internationalization paths. We conclude that the mechanisms of the Uppsala model are valid, but their characteristics have changed by digital and globalized value-adding processes. The dynamic capabilities possessed by the founding entrepreneur turn out to constitute a critical micro foundation for the firm’s international business success. Our findings explain these change mechanisms, illustrating the stepwise progression process led by entrepreneurial decision-making. Industry 4.0 technologies have changed the very manner by which firms arrange their value-adding activities with their business stakeholders in course of the firm’s internationalization. By relying on reasonable business targets, algorithms, and data management systems, real-time market monitoring enables international startup firms to learn and adopt local identities faster, thereby efficiently alleviating liabilities of foreignness.

A Study on Utilizing Social Media Advertising through “Instagram Aesthetics” to Drive Purchase Intention

Due to various factors, the number of start-up firms is constantly increasing. Social media is vital for promoting businesses, especially in this age. It helps companies to improve communication efficiency, foster creativity, and provide helpful information, among other things. Social media advertising is known for its low costs; hence it enables start-ups to launch various promotions that increase purchase intent. This study aims to know if several advertising factors, including uniqueness, clarity, and interactivity, influence a customer’s purchase intention and understand a significant relationship between these. Thus, a survey will be used through Google Forms to gather data. Indeed, online businesses continuously grow, especially as this becomes the source of income for some, unleashes one's passion towards businesses, provides more accessibility and convenience, and many more reasons, particularly during the pandemic. Using creative materials in digital marketing would help enterprises raise their brand awareness, increase overall sales, and expand businesses. Instagram Aesthetics significantly affects the purchase intention of consumers. The uniqueness of these outputs is the most important since it portrays not just originality but be able to gain a competitive advantage in the market, which reflects the operation of the business. However, it is also essential to have interactivity and clarity. The study would be important mainly for business owners, specifically those who operate solely on Instagram, to understand how creativity in advertising would help them market their business online. Moreover, this would be a powerful aid in attracting their target market and potential customers through their artistic visuals.

Designing a public-private co-investment mechanism to foster venture capital

In this paper we develop a co-investment mechanism for promoting early investment in Start-up Firms. Focusing on the (uncertain) payoffs earned by a Public Venture Capitalist (PVC) and an Independent Venture Capitalist (IVC), we model each of the alternative mechanisms as an investment timing real option and illustrate that co-investing might be the most effective mechanism to foster investment in Entrepreneurial Firms. Grounded on this theoretical framework, we list a set of both public policy and managerial implications.

Seeds of demand-side legitimacy: when do existing companies procure from B2B startups?

Purpose The purpose of this study is to investigate potential lenders of legitimacy for business-to-business (B2B) startups as reflected in the willingness of potential customers to do business with startup firms. This study theorizes the role of familiarity with B2B startups, their founding teams and their product offerings in influencing perceptions about legitimacy among potential customers. Design/methodology/approach Data are collected from key decision-makers involved in B2B procurements in large Indian companies and analyzed using conjoint analysis. Findings Results suggest that familiarity with product/service offerings from B2B startups is the most salient factor in forming favorable assessments for the venture, followed by the awareness of the startups and their founding teams, in that order. Practical implications The research makes several contributions to understanding the legitimacy of B2B startups from the customers’ perspective. The study provides a nuanced view of the factors impinging on legitimacy. The conceptualization of legitimacy as a reflection of willingness to buy (in other words, willingness to do business with) provides a useful lens with which to study the interactions between B2B startups and potential customers. Originality/value The strong empirical support the study finds for the predicted relationships in an international context, specifically India, enhances theory development, providing a solid foundation for future knowledge generation around the demand side legitimacy concept.

Practical Applications of The Role of Contracts in Venture Capital Returns

In <ext-link><underline><bold>The Role of Contracts in Venture Capital Returns</bold></underline></ext-link>, published in the Fall 2021 issue of <bold><italic>The Journal of Alternative Investments</italic></bold>, <bold>Sarina Liu</bold> of <bold>Wells Fargo</bold> creates a novel dataset to empirically test the hypothesis that traditional methods overestimate the post-money value of startup firms. Data about contract terms display four general convertible preferred stock types that are often provided to venture capitalists (VCs). After combining the data on contract terms with two additional datasets, the author analyzes cash flows to the VCs, revealing several interesting statistics regarding early- and late-stage investors in small and large acquisitions for each of the four types of convertible preferred stocks. While possible outcomes include failures, acquisitions, or initial public offerings (IPOs), most involve small acquisitions. Importantly, the traditional method for estimating the post-money value is inaccurate because the assumption of using common stock does not capture the significant added value of preferred stock.

Stakeholder engagement strategy of technology firms: A review and applied view of stakeholder theory

This research explores how managers and leaders of the information and communications technology (ICT) firms perceive receptiveness of start-up, growth, or mature developmental stage organizations toward ‘corporate social responsibility’ (CSR), ‘creating shared value’ (CSV), and ‘creating value for all stakeholders’ (VAS) business-stakeholder engagement models. Drawing from the three fundamental tenets of stakeholder theory, defined as ‘jointness of interest’, ‘cooperative strategic posture’ and ‘rejection of a narrowly economic view of the firm’, we found that start-up firms tend to be receptive toward VAS, growth towards CSR, and mature towards CSV business-engagement models. These exploratory findings are important as they suggest that even though a society that seeks to encourage technology companies to broaden their range of stakeholders for innovation, such as their communities or the environment, they might best direct instrumental change toward start-up firms as appreciative of VAS model. We see evidence that these new firms require some time to develop perspectives of ‘jointness of interest’ as they strive to become growth or mature firms.

Small Business Owner Liquid Wealth at Firm Startup and Exit

Small Business Owner Liquid Wealth at Firm Startup and Exit

Initial Funding and Founders’ Human Capital: An Empirical Analysis Using Multiple Surveys for Start-Up Firms

Initial Funding and Founders’ Human Capital: An Empirical Analysis Using Multiple Surveys for Start-Up Firms

Understanding the Budapest Entrepreneurial Ecosystem: Human Capital Flows and Social Capital Ties

Socio-economic transition in the CEE (Central and Eastern Europe) region in recent decades forms the operating context for young entrepreneurial ecosystems. This study has the aim of analysing institutional and cognitive features of CEE ecosystem development by considering Budapest as a prime example of an urban entrepreneurial ecosystem. Alongside the analysis of event registration data, a qualitative research approach is deployed featuring semi-structured interviews with entrepreneurs and other institutional actors attending a networking event in Budapest. The methodological foundation for this approach is adapted from Triple Helix ecosystem theory. A conceptual model is produced from the research process, and ecosystem theory is developed by accounting for dynamic human capital flows and social capital ties do not present in the original Triple Helix theory. Results primarily indicate moderate levels of asset values and that attendance by entrepreneurs is largely motivated by locating start-up funding. Prime outcomes of interviews are a lack of innovation-focused specific human capital and increasingly market-based means of social capital development. Furthermore, the findings presented as propositions assume a partial virtual nature for human capital flows and social capital ties between ecosystem actors. On this basis, the resulting conceptual model accounts for the presence of digitalisation. Thus, ongoing entrepreneurial ecosystem development entails continual institutional adaption to information technology-driven socio-economic conditions. The Budapest ecosystem would, however, need to acquire a stronger virtual aspect in order to realise greater growth potential. Implications for Central European audience: While research on entrepreneurial ecosystems has gained strength, it has barely been applied to the CEE region. This study represents a formative attempt in this regard whereby the resulting conceptual model may be used to empirically evaluate entrepreneurial ecosystems within the region by comparing specific internal and external human and social capital movements. The model primarily implies that digitally derived human and social capital would require deeper integration between start-up firms and institutional actors. Crucially, there is also an implicit need for institutions to develop digitalised infrastructure more intensively in order to nurture innovative start-up activity in the CEE region.

Strengthening business incubation practices among startup firms. Evidence from Ugandan communities

PurposeThe purpose of this paper is to provide the initial evidence on the role of business incubation (BI) in supporting startups and BI practices from developing communities in Uganda.Design/methodology/approachThis study is cross-sectional and a triangulation of quantitative and qualitative data were used. Data were collected by means of a questionnaire and an interview guide from 28 incubators.FindingsResults indicate that business incubators play different roles in communities such as business assistance, networking, provision of necessary infrastructure and provision of an enabling environment. Furthermore, BI practices were identified such as networking, human resource, tenant management and assessment practices.Research limitations/implicationsThis study was cross-sectional and thus monitoring changes in behavior of incubatees overtime was not possible. The study was conducted in Uganda, and it is possible that the results of this study can be generalized to developing communities with environments similar to that of Uganda.Practical implicationsThe results are important for business incubators in improving the sustainability of startups in Uganda. The study will enable business incubators to understand their role and incubator practices in as far as supporting small and medium-sized enterprises is concerned.Originality/valueWhile there have been a number of studies on BI, this study provides an initial empirical evidence on the role of BI and BI practices using evidence from developing communities in Uganda.

The development and disruption of relationships between leaders and organizational members and the importance of trust

Our contribution lies in extending theorizing on relationship quality, by illustrating how the interwoven relationships between a leader and ‘follower’ may support or disrupt relationship development over time. Based on a study of leaders and organizational members in high-tech start-up firms, we provide concurrently a broader, more in-depth understanding, and therefore a more detailed and nuanced view, of how relationship quality develops or is disrupted. In particular, we highlight the importance of trust, exploring the under-researched topic of how differing interpretations of trust by leaders and organizational members can impact leaps of faith, acceptance, short-term or longer-term relationship quality. The findings address critiques of Leader Member Exchange (LMX) theory as the dominant explanatory construct for relationship quality, and highlight the need for longitudinal qualitative studies to explore the meanings both leaders and individual members of their organization give to their relationship over time.