Financing constraints are one of the biggest concerns impacting potential entrepreneurs around the world. Given the important role that entrepreneurship is believed to play in the process of economic growth, alleviating financing constraints for would-be entrepreneurs is also an important goal for policymakers worldwide. In this paper HBS professors William R. Kerr and Ramana Nanda review two major streams of research examining the relevance of financing constraints for entrepreneurship. They then introduce a framework that provides a unified perspective on these research streams, thereby highlighting some important areas for future research and policy analysis in entrepreneurial finance.
How do financing constraints on new start-ups affect the initial size of these new firms? Since bank debt comprises the majority of U.S. firm borrowings, new ventures are especially sensitive to local bank conditions due to their limited options for external finance. Liberalization in the banking sector can thus have important effects on entrepreneurship in product markets. As HBS professors William Kerr and Ramana Nanda explain, the 1970s through the mid-1990s was a period of significant liberalization in the ability of banks to establish branches and to expand across state borders, either through new branches or through acquisitions. Using a database of annual employment data for every U.S. establishment from 1976 onward, Kerr and Nanda examine how U.S. branch banking deregulations impacted the entry size of new start-ups in the non-financial sector. This paper is closely related to their prior work examining how the deregulations impacted the rates of startup entry and exit in the non-financial sector.
From Silicon Valley to Herzliya, Israel, venture capital firms are concentrated in very few locations. More than half of the 1,000 venture capital offices listed in Pratt's Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas: San Francisco, Boston, and New York. More than 49 percent of the U.S.-based companies financed by venture capital firms are located in these three cities. This paper examines the location decisions of venture capital firms and the impact that venture capital firm geography has on investments and outcomes. Findings are informative both to researchers in economic geography and to policymakers who seek to attract venture capital.
Entrepreneurs, take heart. True, the global economic malaise removes opportunities and precious resources—but also adds them in new and interesting ways, argues HBS senior lecturer Bhaskar Chakravorti. In this Q&A he identifies reasons for optimism, and shows how entrepreneurs can think differently about bad news.
The researchers begin with a simply stated question: Can a country grow faster by saving more? Long-run growth theories imply that a country can grow faster by investing more in human or physical capital or in R&D, but that a country with access to international capital markets cannot grow faster by saving more. Domestic saving is therefore not considered an important ingredient in the growth process because investment can be financed by foreign saving. From the point of view of standard growth theory, the positive cross-country correlation between saving and growth that many commentators have noted appears puzzling. HBS professor Diego Comin and colleagues develop a theory of local saving and growth in an open economy with domestic and foreign investors.
Published in 2008
Some places, like Silicon Valley, seem almost magically entrepreneurial with a new start-up on every street corner. Other areas, like declining cities of the Rust Belt, appear equally starved of whatever local attributes make entrepreneurship more likely. Many academics, policymakers, and business leaders stress the importance of local conditions for explaining spatial differences in entrepreneurship and economic development. This paper uses data from the U.S. Census Bureau to characterize these entry relationships more precisely within the manufacturing sector.
Harvard Business School professor William A. Sahlman's article on how to write a great business plan is a Harvard Business Review classic, and has just been reissued in book form. We asked Sahlman what he would change if he wrote the article, now a decade old, today.
Thinking about starting your own business? Read our collection of articles on legal issues, managing resources, product development, and keeping owner control.
Published in 2007
Does trust confer competitive advantage in terms of time, money, and productivity? Previous research indicates that it does. This study shifts perspective slightly and asks whether trust can also act as a barrier to entry. In other words, are trusted suppliers protected from competition if buyers are reluctant to try new products and services offered by other suppliers? Oberholzer-Gee and Calanog explored the link between levels of trust and the decision to adopt a new product using a field experiment on the diffusion of an innovative floor drain for the plumbing market.
What effect does an increase in banking competition have on the entry of start-ups? In particular, does an increase in banking competition have a differential effect on the entry of start-ups relative to the opening of new establishments by existing firms? The U.S. branch banking deregulations provide a useful laboratory for studying how banking competition affects small businesses. Prior to 1970, all but twelve states had stringent restrictions on the ability of banks to open new branches or to acquire the branches of other banks within the state; beginning in the 1970s and until 1994, all but two states removed these restrictions. In this research, Kerr and Nanda studied the entry of newly incorporated businesses between 1976 and 1999 using detailed data collected by the U.S. Census Bureau. Their findings matter for understanding how reforms that affect the financing environment may improve the real economy through the reallocation of resources in the non-financial sectors.
Published in 2006
Transforming high-potential ventures into high-performance ventures, says professor Joseph Lassiter, depends on combining what, how, and who you know. From New Business.
Published in 2005
For new ventures a lack of resources makes growth difficult to come by—just ask those nine out of ten fledgling firms that fail. Professor Mukti Khaire says the key may be in acquiring intangible resources such as legitimacy, status, and reputation.
Published in 2004
A mini case study by professor Donald N. Sull and coauthors on how three businesses in developing countries overcome a lack of resources to succeed. From Strategy & Innovation.
Published in 2003
Will expensing stock options harm the competitiveness of start-ups? Not likely, say Zvi Bodie, Robert S. Kaplan, and Robert C. Merton in this Harvard Business Review excerpt.
Clayton M. Christensen, author of The Innovator’s Dilemma, talks about his upcoming follow-on book on creating sustainable new-growth businesses. His conclusions may surprise you.
Managers know they need growth to survive—but innovation isn't easy. In this Harvard Management Update article, HBS professor Clayton Christensen and co-authors detail the six keys to creating new-growth businesses.
The life of a startup can be precarious, a wrong turn disastrous. Harvard Business School professor Constance Bagley discusses the most frequent legal flops made by entrepreneurs, everything from hiring the wrong lawyer to puffing up the business plan.
Published in 2001
Sam Walton’s retailing career began September 1, 1945, in Newport, Arkansas. He paid a princely $25,000 to Butler Brothers to franchise a 5,000-square-foot Ben Franklin’s variety store. In this excerpt from Giants of Enterprise: Seven Business Innovators and the Empires They Built, author and HBS professor Richard S. Tedlow depicts the huge success Walton made of his first store—against all odds. The book is scheduled for publication later this year by HarperBusiness. Excerpted with permission of the author.
People are buzzing about two classes at HBS that showcase the School's new approach to teaching management. Hear from the instructors who lead them and alumni who took the plunge. John S. Rosenberg takes you there in this article from Harvard Magazine. Part two.
Visit two classes that showcase HBS's new approach to teaching management, and hear from alumni who took the plunge. John S. Rosenberg sorts it all out in this article from Harvard Magazine. Part one of a two-part series.
Published in 2000
Can the entrepreneurial spirit that's thrived in the U.S. and flourished amid the bloom of the dot.com economy make it in Europe and, if so, what will it take?
Two CEOs at the forefront of the transformation in the way businesses buy and sell goods—Scott Randall of FairMarket (HBS MBA '87) and Glen Meakem of FreeMarkets (HBS MBA '91—spoke with Professor Bill Sahlman recently about their paths to new business models and what they've learned along the way.
