Drivers of external equity funding in small high-tech ventures

Financing is one of the major issues affecting the success and survival of entrepreneurial ventures. Theory suggests that due to information asymmetry between owners and investors or lenders, there is a "pecking order" of financing preferences, whereby retained earnings is preferred to debt, and outside equity is seen as a last resort. In high-tech ventures, however, outside equity financing is more commonly used than debt, but the reasons for this are not yet well-understood. We develop hypotheses to examine this theory-practice gap, which we test using a sample of private high-tech firms of various ages. We find that the greater the owner's perception of information asymmetries in debt markets, the larger the proportion of external equity in the firm's capital structure. As our sample firms age, their use of external equity relative to other sources of finance diminishes. We also find a positive relationship between the use of external equity and the firm's initial investment. Last, we show that the greater the perception amongst founders that obtaining external equity sends a positive signal, the greater its use. We discuss the implications of these findings and offer suggestion for future research and practice.