On the role of entrepreneurial experience for start-up financing

Non-technical summary Founders often have big problems with firm financing issues. Financing problems may arise for many reasons. Information asymmetry and uncertainty are important, but so are such things as ignorance. Experienced entrepreneurs should have more knowledge about financing issues and should be more likely to know who to turn to for help and advice. Thus, they have advantages over novice entrepreneurs when it comes to financing, which should be reflected in differences regarding financing issues. Additionally, the analysis accounts for the kind of experience the entrepreneurs have. It is important whether entrepreneurs have previously been successful or failed, because business failure may trigger other effects than success. The analysis is based on data from the KfW Start-up Monitor. The KfW Start-up Monitor is a representative annual survey of the German population over 14 years of age. The relevant survey was conducted from August to November 2003, collecting information on 40,155 individuals. 1,125 individuals answered in the affirmative when asked if they had become self-employed during the last twelve months, regardless of whether it be on a regular or " sideline " basis. The analysis compares novice and experienced entrepreneurs, where entrepreneurial experience means that they are either portfolio entrepreneurs, i.e. still participating in their previous firm, or are restarters, i.e. they abandoned a previous business. With regard to the extent of the demand for financing, there is only an indication of reduced demand in the case of restarters venturing after a business failure, i.e. bankruptcy. However, experience has some effect on the probability of utilizing different financing sources and the relative extent to which each is used. Portfolio-entrepreneurs are more likely to use means from family and friends and do so for a greater share of their financing needs, too. Moreover, they use their own funds as often as other entrepreneurs, but these make up a smaller share of the total amount financed. Restarters who sold or transferred a previous business are more likely to use bank loans and they also use them for a higher share of their total financing needs. Restarters who closed/liquidated a previous business utilize means from family and friends more often than others, yet they do not differ in the share used. Restarters with failure experience do not differ in their utilization of financing sources, either in terms of probability or extent. Nevertheless, they are more likely to be faced with financing difficulties. This …