The recent financial crisis, start‐up financing and survival

• Date: 01 July 2018
• Author: Marc Deloof,Tom Vanacker
• Published date: 01 July 2018
• DOI: http://doi.org/10.1111/jbfa.12319

DOI: 10.1111/jbfa.12319

The recent financial crisis, start-up financing

and survival

Marc Deloof1Tom Vanacker2

1Departmentof Accountancy and Finance,

Universityof Antwerp, Prinsstraat 1,

2000Antwerp, Belgium

2Departmentof Accounting, Corporate

Financeand Taxation, Ghent University,

Sint-Pietersplein7, 9000 Gent, Belgium

Correspondence

TomVanacker,Department of Accounting, Cor-

porateFinance and Taxation,Ghent University,

Sint-Pietersplein7, 9000 Gent, Belgium

Email:tomr.vanacker@ugent.be

Fundinginformation

TheNational Bank of Belgium; The Hercules

Foundation

JELClassification: G01, G21, G32, G33, L26

Abstract

We investigate the effects of the recent financial crisis on start-up

financing and survival using a dataset that covers all Belgian new

business registrations between 2006 and 2009. We find that bank

debt is the single most important source of funding, even for start-

ups founded during the crisis. However, start-ups founded in crisis

years use less bank debt and have a higher likelihoodof bankruptcy,

even after controlling for their creditworthiness. These effects are

stronger for start-ups that are more dependent on bank debt, such

as start-ups founded in bank dependent industries and start-ups

founded by entrepreneurs who are more likely to be financially

constrained.

KEYWORDS

credit availability, entrepreneurial finance, financial crisis, start-up

financing, survival

1INTRODUCTION

The recent financial crisis has increased concerns among entrepreneurial finance scholars and policymakersabout the

financing and survival of start-ups that may be the engines of economic growth. Although scholars have studied the

capital structure of start-ups (e.g., Cassar, 2004; Cole & Sokolyk, 2018; Cosh, Cumming, & Hughes, 2009; Cumming,

2005; Huyghebaert & Van de Gucht, 2007; Robb & Robinson, 2014), to date, we lack a deep understanding of two

definingquestions in entrepreneurial finance,namely: (a) howdoes credit availability at the time of founding determine

how capital is allocated to start-ups, and (b) how does this influence start-up survival?

The impact of credit availability on the financing and survival of start-ups is theoretically ambiguous.1On the one

hand, Stiglitz and Weiss (1981) argue that frictions in capital markets mayprevent start-ups, arguably the most infor-

mationally opaque firms, from accessing formal debt markets.Moreover, debt financing may be inappropriate for start-

ups and increase their probability of bankruptcy (Carpenter& Petersen, 2002; Laitinen, 1992). This literature suggests

that bank debt and hence credit availability plays a negligible role in the financing of start-ups and, if anything, may

increase start-ups’ probability of going bankrupt. On the other hand, Bolton and Freixas(2000) argue that riskier firms,

1Notethat the focus of our paper is on start-ups, not small firms. While most start-ups are small firms, the vast majority of small firms are not start-up s. Thus,

findingsfrom small firms cannot necessarilybe generalized to start-ups or as Chua, Chrisman, Kellermanns, and Wu (2011) indicate: “what works for …small

firmsmay not work for new ventures” (p. 473, emphasis added).

928 c

2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2018;45:928–951.

DELOOF ANDVA NACKER 929

such as start-ups, prefer to use bank loans. Moreover,market imperfections may force efficient start-ups to exit due to

a lack of funds. By securing access to formal debt financing, entrepreneurs may relax financial constraints, which con-

tributes to firm survival ( ˚

Astebro & Bernhardt, 2003). This literature suggests that bank debt and hence credit avail-

ability plays a crucial role in the financing and survival of start-ups.

In this paper,we address at least two hurdles that have prevented scholars from studying the effects of credit avail-

ability at the time of founding for start-up financing and survival. A first hurdle is the scarcity of data on start-ups. In

many countries, start-ups are not required to publicly disclose their financial statements. Data scarcity explains why

relatively few scholars haveinvestigated the financing of start-ups, or have relied on (survey) data of start-ups founded

in one particular year (e.g., Cerqueiro & Penas, 2016; Cole & Sokolyk, 2018; Robb & Robinson, 2014, all rely on start-

ups founded in 2004), or have focused on non-random samples of start-ups applying for financing at one particular

financial institution (e.g., Cressy,1996; Fracassi, Garmaise, Kogan, & Natividad, 2016). We take advantage of the Bel-

gian setting, where all non-financial firms havea legal obligation to annually file their financial statements, to construct

a comprehensivesample of start-ups founded before and during the recent financial crisis. Our data allow us to provide

first-time evidence on the role of credit availability at founding for the financing of start-ups by focusing on start-ups

founded in periods where credit conditions were fundamentally different.

A second hurdle is the endogeneity of financing decisions. While several studies havefocused on bank debt raised,

or the intersection between the demand and supply for bank debt (e.g., Cassar,2004) and its relationship with start-up

bankruptcy (e.g., ˚

Astebro & Bernhardt, 2003; Bates, 1990; Cole & Sokolyk, 2018; Cressy,1996) these studies are often

plagued by endogeneity issues. For example, severalalternative explanations exist for a positive (or negative) corre-

lation between bank debt raised and start-up bankruptcy: (a) bank debt may increase (or decrease) the likelihood of

going bankrupt, (b) self-selection may occur,where only the highest quality start-ups may be the ones that are able to

raisebank debt (or, alternatively,adverse selection may occur, where the highest quality start-ups do not apply for bank

loans), and (c) unobserved factors may influence both access to bank debt and start-up bankruptcy.Scholars require a

quasi-natural experiment,where one can consider an exogenous shift in the availability of bank debt, to provide empir-

ical evidence on how credit market conditions affect start-up financing and survival. The 2008–09 financial crisis pro-

vides us with such a shift in credit market conditions for start-ups. Belgium was rather unique in that the growth in

credit supply during crisis years – while decreasing sharply – did not turn negative for firms in general. However,the

averageamount of credit supplied to start-ups plummeted in 2008, relative to 2007 (National Bank of Belgium, 2009)

and banks relocated credit from high-risk to low-risk firms (De Jonghe, Dewachter,Mulier, Ongena, & Schepens, 2016).

Moreover,interestingly, the financial crisis was not caused by a weakening of business fundamentals in Belgium but by

the subprime mortgage crisis that originated in the US. Still, the crisis eventually weakened business fundamentals in

Belgium, especially in 2009. We investigatethe impact of the crisis on start-up borrowing and survival, and whether its

impact is conditional upon the dependence of start-ups on external finance.

Using a unique dataset covering 14,846 independent, non-financial, Belgian start-ups founded between 2006 and

2009, we start by investigating the financial effects of the crisis on start-ups. Controlling for firm, human capital and

industry characteristics, start-ups founded in crisis years use less bank financing relative to start-ups founded in pre-

crisis years. Consistent with the idea that supply-side forces mattered (e.g., Duchin, Ozbas, & Sensoy,2010), the finan-

cial effects of the crisis are stronger for start-ups with an innate demand for bank debt, i.e., start-ups in bank dependent

industries and start-ups founded by entrepreneurs who are more likelyto be financially constrained. Surprisingly, bank

debt remains the single most important source of funding, even for start-ups founded during the height of the finan-

cial crisis. We then investigate the real effects of the crisis for start-ups. We focus on one specific real effect, namely

firm survival (or its flip-side, bankruptcy), because survival is an important concern for entrepreneurs and investors

in very early stage firms (Damodaran, 2009). We find that the reduction in borrowing by start-ups founded in crisis

years is accompanied by a rise in firm bankruptcies, evenafter controlling for their creditworthiness. Again, consistent

with the idea that supply-side forces mattered, the real effects are stronger for start-ups operating in bank dependent

industries and start-ups founded by entrepreneurs who are more likelyto be financially constrained. We finally discuss

several additional tests and robustness checks related to the financial and real effects of the crisis for start-ups that

broadly confirm our main tests.