Where Does the Money Come From? The Financing of Small Entrepreneurial Enterprises

Using data from the Wisconsin Entrepreneurial Climate Study, we study the sources of firms’ finance during the very early stages of their lives. Our focus is the evolution of the mix of financial capital from “insiders” and “outsiders” as firms age. We find that at the beginning of firms’ life cycles, the proportion of funds from internal sources increases with age, while the proportion from banks, venture capitalists, and private investors declines. There is also evidence that these patterns eventually reverse themselves, with the proportion of insider finance ultimately declining and the proportion of outsider finance increasing with age. We argue that these findings are consistent with elements of both reputation-based and monopoly-lender theories of firm finance