Journal of Small Business Management 2012 50(1), pp.

6386

The Impact of Human and Social Capital

on Entrepreneurs Knowledge of
Finance Alternatives
jsbm_344 63..86

by Arnout Seghers, Sophie Manigart, and Tom Vanacker

Building upon prior research that demonstrates how the limited knowledge of
finance alternatives of entrepreneurs may cause suboptimal finance decisions, this
paper examines how entrepreneurs human and social capital influence their knowledge of finance alternatives. For this purpose, we use survey data from 103 Belgian
start-ups. Results demonstrate that entrepreneurs with a business education and
entrepreneurs with experience in accountancy or finance have a broader knowledge
of finance alternatives. Having a strong network in the financial community is
further positively associated with the knowledge of finance alternatives. However,
generic human capital, including higher education, industry experience, and management experience, is almost not related with the knowledge of finance alternatives.

Introduction
Finance is one of the necessary
resources required for new ventures to
form and subsequently operate (Ang
1992; Gilbert, McDougall, and Audretsch
2006; Van Auken 2001). Finance decisions are hence key decisions made by
entrepreneurs, which bear significant
implications for the operations, risk of
failure, performance, and future growth
potential of ventures (Cassar 2004; Van
Auken 2001). Traditional finance theory

resorts to the framework of perfect

capital markets (Modigliani and Miller
1958). This framework assumes that
information is free and directly available
to all entrepreneurs, which allows entrepreneurs to make comprehensive finance
decisions with wealth maximization as
their ultimate goal (Brealey and Myers
2000). Moreover, in this perspective, the
supply and demand for finance are in
equilibrium, which implies that all valuecreating projects will find sufficient
finance. Contrary to this image portrayed

Arnout Seghers is Research and Teaching Assistant in the Department of Accounting and
Corporate Finance at Ghent University, Gent, Belgium.
Sophie Manigart is Full Professor at Vlerick Leuven Gent Management School and at Ghent
University, Gent, Belgium.
Tom Vanacker is Assistant Professor at Ghent University, Gent, Belgium.
Address correspondence to: Sophie Manigart, Accounting and Corporate Finance, Ghent
University, Kuiperskaai 55 E, Gent 9000, Belgium. E-mail: Sophie.Manigart@ugent.be.

SEGHERS, MANIGART, AND VANACKER

63

in traditional finance theory, entrepreneurial ventures are often confronted

with finance constraints and are not able
to raise sufficient outside finance necessary to conduct all their value-creating
investment projects (Heshmati 2001;
Himmelberg
and
Petersen
1994;
Hubbard 1998; Ullah and Taylor 2007).
As a result, the growth of entrepreneurial
ventures is often constrained by internal
finance (Carpenter and Petersen 2002;
Heshmati 2001).
Scholars studying finance constraints
within ventures have largely stressed
supply-side arguments, thereby putting
the decision-making process of investors
in the foreground (Mason and Harrison
2002; Wright and Robbie 1998). Within
this perspective, prior research mainly
focused on the role of information asymmetries and transaction costs in explaining why investors may refrain from
investing in value-creating entrepreneurial ventures (Berger and Udell 1998).
Nevertheless, finance decisions may also
be driven by demand-side factors, and
more specifically by the characteristics of
entrepreneurs. Research on demand-side
arguments, which puts the decisionmaking process of entrepreneurs in the
foreground, is more limited but growing
rapidly (Bates 1997; Cassar 2004;
Coleman 2000; Scherr, Sugrue, and Ward
1993; Van Auken 2005). Entrepreneurs
are the driving force of important decisions, and entrepreneurial characteristics
may hence play a key role in explaining
finance decisions (Cassar 2004). For
example, though traditional finance
research assumes that value maximization is the overarching firm objective,
entrepreneurs may want to pursue other
goals (Kotey and Meredith 1997;
LeCornu et al. 1996; Sadler-Smith et al.
2003) that may affect their finance
choices. An important goal for many
entrepreneurs, for instance, is to retain
full control over their ventures, which
might preclude them from raising equity
from new shareholders such as venture

64

capital investors or business angels (Ang

1992; Manigart and Struyf 1997; Norton
1991; Sapienza, Korsgaard, and Forbes
2003). Furthermore, some entrepreneurs
with conservative personal values adopt
reactive strategies emphasizing risk
avoidance (Kotey and Meredith 1997),
and hence such entrepreneurs may
refrain from the use of financial debt.
This paper focuses on another entrepreneurial characteristic that may impact
the finance decisions of entrepreneurs,
namely their knowledge of finance alternatives. Traditional finance theories
assume that all parties have full information, hence that entrepreneurs are fully
aware of the existence of all potential
finance alternatives and their respective
advantages and disadvantages (Brealey
and Myers 2000). However, the assumption that information is free and widely
available may not hold in the context of
new and small ventures (Gibson 1992;
Holmes and Kent 1991; Van Auken
2005). Indeed, entrepreneurs in these
new and small ventures may have
limited access to information and skills
that are necessary to understand the
process of finance acquisition (Gibson
1992; Van Auken 2005). This is empirically supported by Van Auken (2001),
who shows that entrepreneurs generally
have a limited knowledge of finance
alternatives that hamper their ability to
price and negotiate investments. Moreover, learning theory posits that individuals who are not knowledgeable of a
certain topic will not actively search to
expand their knowledge (Cohen and
Levinthal 1990). Though information on
finance alternatives may be abundant for
individuals actively searching for it, an
initial knowledge gap will lead to a
restricted set of finance alternatives considered (Van Auken 2001). Overall, a
good knowledge of finance alternatives
is the basis for making good financial
decisions (Gibson 1992). Hence, even
for entrepreneurs who do not need or
would be unable to raise certain finance

JOURNAL OF SMALL BUSINESS MANAGEMENT

alternatives given the characteristics of

their ventures, it may be important to
be knowledgeable about all finance
alternatives in order to make wellinformed choices. After all, how can
entrepreneurs know that they will be
unable to raise particular finance alternatives when they are not knowledgeable about these alternatives or are
misinformed about the characteristics of
these alternatives?
The goal of this study is to expand this
stream of research by exploring why
some entrepreneurs have a higher
knowledge of finance alternatives compared with others. This is relevant, given
that a limited understanding of finance
alternatives is likely to be an obstacle to
the development of successful capital
acquisition strategies (Gibson 1992; Van
Auken 2001, 2005). In this study, we
focus on the association between entrepreneurs human and social capital and
their knowledge of finance alternatives.
We propose and show that higher levels
of specific human and social capital
that is, more experience in accountancy
or finance, business education, and
knowledgeable networks in the financial
communityare associated with a
broader knowledge of finance alternatives. However, more generic human
capital is almost not related to the knowledge of finance alternatives. This offers
an explanation as to why some entrepreneurs are confronted with a stronger
knowledge gap, potentially leading to
suboptimal finance decisions.
In the following section, the theoretical arguments and hypotheses on the
impact of human and social capital on an
entrepreneurs knowledge of finance
alternatives will be developed. Next, the
empirical strategy used to test the
hypotheses will be explained; the data
and variables employed in this study are
further described. Thereafter, the empirical findings will be presented, followed
by concluding remarks and avenues for
future research.

Theoretical Development
Numerous scholars have highlighted
the importance of taking entrepreneurial
characteristics into account to more fully
understand finance decisions in young
and small ventures (Ang 1991, 1992;
LeCornu et al. 1996; McMahon et al.
1993). We focus on the relation between
entrepreneurs human and social capital
and their knowledge of finance alternatives. This is important as prior research
demonstrates how entrepreneurs knowledge of finance alternatives influences
their finance behavior (Van Auken 2001).
Though traditional finance theories generally assume that decision-makers are
fully aware of all finance alternatives and
their characteristics, entrepreneurship
scholars argue that not all entrepreneurs
have an equally broad understanding of
the finance options that are available,
which leads to a knowledge gap (Gibson
1992; Holmes and Kent 1991; Van Auken
2001). Entrepreneurs often lack detailed
knowledge on finance alternatives,
thereby limiting the set of finance
options that they consider (Van Auken
2001). This limited knowledge of finance
alternatives further hampers entrepreneurs when negotiating and pricing
investments and may result in entrepreneurs being unsuccessful in raising
capital or raising inappropriate levels
and combinations of capital (Van Auken
2001, 2005). We draw upon human and
social capital theory to theorize about the
relationship between entrepreneurs
characteristics and their knowledge of
finance alternatives. The conceptual
framework behind the hypotheses is
summarized in Figure 1.
Prior research demonstrates how an
entrepreneurs human capital and
finance strategies are linked. First,
human capital is positively related with
the wealth of entrepreneurs. Hence,
entrepreneurs with more human capital
can use more of their personal funds
to mitigate their ventures finance

SEGHERS, MANIGART, AND VANACKER

65

Figure 1
Conceptual Framework
HUMAN CAPITAL

Generic human
capital
Specific human
capital

H1

H2

KNOWLEDGE OF
FINANCE
ALTERNATIVES

Van Auken
(2001)

FINANCE
BEHAVIOR

H3
SOCIAL CAPITAL

constraints (Holtz-Eakin, Joulfaian, and

Rosen 1994; Lindh and Ohlsson 1996).
Second, the human capital of entrepreneurs serves as a quality signal to external investors. This is especially valuable
in an environment with high levels of
information asymmetry, as it increases
the probability that investors will provide
financial resources to uncertain entrepreneurial ventures (Hallen 2008). Both
effects explain why ventures established
by entrepreneurs with higher human
capital generally have less binding
capital constraints (Astebro and Bernhardt 2005; Hsu 2007). We argue that the
human capital of entrepreneurs may not
only be associated with their personal
wealth or quality signals but also with
their knowledge of finance alternatives.
Human capital theory states that
entrepreneurs with a greater human
capital stock will outperform their less
endowed counterparts (Becker 1975).
The accumulated knowledge of entrepreneurs is likely to provide them with
superior cognitive abilities that make
them more productive and efficient in a

66

range of start-up activities including financial decision-making (Alsos

and Kolvereid 1998; Van Auken 2005;
Westhead, Ucbasaran, and Wright 2005).
Entrepreneurs with more human capital
are therefore expected to be more
knowledgeable about finance alternatives and as such generate finance
strategies that are more elaborated and
fine-tuned to their business and personal
needs (Van Auken 2005).
Following prior studies, we distinguish between generic and specific
human capital (Becker 1975; Colombo
and Grilli 2005; Dimov and Shepherd
2005; Gimeno et al. 1997). The distinction between generic and specific human
capital is context specific and as such
may differ from prior studies that do not
focus on financial decision-making
(Dimov and Shepherd 2005). In the
current research context, generic human
capital refers to the general knowledge
acquired by entrepreneurs through both
formal education and professional experience, which is broad in application and
not directly related to the acquisition of

JOURNAL OF SMALL BUSINESS MANAGEMENT

financial resources. In our context, specific human capital relates to education

and experience, which is directly applicable to financial decision-making
(Dimov and Shepherd 2005).
We propose that entrepreneurs with
higher levels of generic human capital
will experience a lower knowledge gap
of finance alternatives compared with
their peers with lower levels of generic
human capital. More specifically, we
expect a positive association between the
level of education of entrepreneurs and
their knowledge of finance alternatives.
Higher education contributes to the
ability of entrepreneurs to analyze information, to develop skills to acquire
knowledge independently, and to use
knowledge in order to solve unforeseen
problems (Dochy, Segers, and Sluijsmans
1999). Although higher education is generally broad in its application and may
not directly provide knowledge related
to financial decision-making, the arguments that were just given may explain
why we expect educational attainment to
be positively related with higher knowledge of finance alternatives. This would
provide an additional explanation for the
relation between education and the
amount of finance raised (Robinson and
Sexton 1994).
Next to education, we propose a positive association between entrepreneurial
experience and knowledge of finance
alternatives. There is a considerable
amount of evidence that novice entrepre-

neurs differ from entrepreneurs with

prior founding experience in many
important ways (Westhead and Wright
1998; Wright, Robbie, and Ennew 1997).
Entrepreneurs with higher levels of prior
founding experience and prior work
experience may have learned from their
experience and as such may exhibit more
elaborate strategies for starting new ventures related to business planning,
financing of the venture, and interactions
with external environments among
others (Alsos and Kolvereid 1998; MacMillan 1986). Prior research further indicates how less experienced or novice
entrepreneurs conduct search routines
that are narrower in terms of the amount
of information collected compared with
experienced entrepreneurs that may
draw upon their previous business ownership experience (Westhead, Ucbasaran,
and Wright 2005). This implies that
entrepreneurs with more previous work
and founding experience may search for
more information on finance alternatives
and their characteristics. The expertise
and broader search process, which may
lead to a broader knowledge of finance
alternatives, may explain why experienced entrepreneurs raise start-up
finance more easily and in larger
amounts (Starr and Bygrave 1991).1 This
leads to our first hypothesis:
H1: Entrepreneurs with higher levels of
generic human capital have a greater
knowledge of finance alternatives

The literature on experienced founders segments experienced founders into portfolio

founders, that is, those who start ventures in a parallel fashion, and serial founders who start
ventures sequentially (Alsos and Kolvereid 1998; Westhead, Ucbasaran, and Wright 2005;
Westhead and Wright 1998; Wright, Robbie, and Ennew 1997). Though these authors document
differences between types of experienced founders, following Hsu (2007), we do not focus on
the distinction between both types of entrepreneurs, as we are interested in contrasting
experienced entrepreneurs with novice entrepreneurs. Furthermore, 30 percent of our respondents are experienced entrepreneurs, with the vast majority (90 percent) of them being
portfolio entrepreneurs and only 10 percent of the experienced entrepreneurs being serial
entrepreneurs. The limited number of serial entrepreneurs prevents us further from doing more
refined statistical analyses.

SEGHERS, MANIGART, AND VANACKER

67

than entrepreneurs with lower levels

of generic human capital.
Arguments related to absorptive
capacity indicate that entrepreneurs will
be more likely to learn when they
perform tasks that are more related to
their prior experience and knowledge
base (Cohen and Levinthal 1990). Hence,
the specific human capital of entrepreneurs may turn out to be more valuable
than their generic human capital. Davidsson and Honig (2003), for instance, show
how specific human capital, which is of
immediate relevance to the task at hand,
is positively associated with entrepreneurial discovery and the successful
exploitation of such discoveries. The
same authors also show how the effect of
more generic human capital indicators
was weaker and less consistent.
Entrepreneurs with a business education may not only have developed
general problem-solving skills (Dochy,
Segers, and Sluijsmans 1999) but may
possess more relevant knowledge within
the finance domain compared with entrepreneurs with higher nonbusiness education or compared with entrepreneurs
with less education (Dimov and Shepherd 2005). Even if the knowledge on
finance alternatives acquired during their
business studies might be outdated when
needed, their specific knowledge may
trigger them to actively search for up-todate information and enable them to
more easily acquire other finance-related
knowledge (Cohen and Levinthal 1990).
The knowledge of finance alternatives
may also benefit from specific experience accumulated by entrepreneurs in
the accountancy or finance domain. It is
expected that individuals, who possess
more finance-related experience, will be
more aware about the value that different types of finance providers may bring
to their ventures (Dimov and Shepherd
2005). Direct experience with capital
acquisition is expected to further provide
entrepreneurs with deeper knowledge of

68

multiple finance alternatives and their

characteristics (Van Auken 2005). This
leads to our second hypothesis:
H2: Entrepreneurs with higher levels of
specific human capital have a greater
knowledge of finance alternatives
than entrepreneurs with lower levels
of specific human capital.
The above hypotheses are nontrivial,
however. When entrepreneurs accumulate experience in only one particular
area, this may increase the risk of entering competency traps (Levinthal and
March 1993). More experienced entrepreneurs may, for instance, become
increasingly trapped in current modes of
thought, thereby not recognizing that
situations have changed and that these
changing
situations
require
new
approaches (Shepherd, Zacharakis, and
Baron 2003; Starr and Bygrave 1991).
Moreover, transferring routines from
prior experiences to new ones may be
similar to transferring old lessons to new
environments where they do not fit
(Haleblian and Finkelstein 1999). As
such, experienced entrepreneurs may fail
to develop a more elaborate knowledge
of a broad range of finance alternatives.
Next to human capital, entrepreneurs
can also learn about finance alternatives
through their social capital (Hsu 2007).
The central proposition in social capital
theory refers to the ability of actors to
extract benefits, for example, information, from their social structures, networks, and memberships (Granovetter
1985; Lin, Ensel, and Vaughn 1981). A
high level of social capital of the entrepreneur in the form of relationships
between individuals is useful in obtaining information that would otherwise be
unavailable or costly to locate (Granovetter 1985). Relationships with relevant
individuals and organizations provide an
advantage to entrepreneurs through
access to private information (Podolny
1994). We claim that knowledgeable

JOURNAL OF SMALL BUSINESS MANAGEMENT

relationships in the financial community,

established before start-up, may also
reduce information problems experienced by entrepreneurs, as they enable
information transfer to entrepreneurs
about potential finance alternatives and
investor characteristics (Van Auken
2005). For example, entrepreneurs that
have relationships with bankers are able
to discuss their specific financial needs
with them (Ang 1992; Wright, Robbie,
and Ennew 1997), allowing entrepreneurs to gain a deeper understanding of
finance alternatives. Relationships hence
reduce information asymmetries on the
demand side of the market (Behr and
Gttler 2007). This leads to our final
hypothesis:
H3: Entrepreneurs with more ties in the
financial community have a greater
knowledge of finance alternatives
than entrepreneurs with fewer ties in
the financial community.

Research Method
Data Collection Strategy
A random sample of 450 Flemish ventures founded between April 2008 and
September 2008 were selected from the
records of business incorporation as provided by the Flemish government.2 Given
the homogeneous sample frame, nonmeasured variance in terms of geographical location and venture age is
reduced. Moreover, survivorship and recollection biases are limited by sampling
ventures close to the period of formation
(Cassar 2004).
Between mid-November 2008 and
mid-January 2009, all ventures were telephoned in order to identify whether or
not they fulfilled the conditions of our
research. Following Chandler and Hanks
(1998), we exclude 118 subsidiaries or
companies that merely changed their
legal form from further study, as the
2

focus of this research is on real start-ups.

Furthermore, 44 start-ups indicated they
were not interested in participating to
our research. This resulted in a sample of
288 independent start-ups, which were
mailed a questionnaire. Several possibilities to complete and return the questionnaire were offered, including e-mail, fax,
post, and web survey. A total of 125
questionnaires were returned after telephone recalls (response rate of 43
percent). Comparing characteristics of
early and late respondents, including
management experience, experience in
the same industry and level of education,
with MannWhitney tests, showed no
significant differences between the two
groups. This indicates that the sample is
unlikely to suffer from a nonresponse
bias. The majority of respondents (84
percent) completed the questionnaire
using the web survey. Since some questionnaires were incomplete, the number
of responses used throughout this study
further decreases to 103. Some basic
characteristics of our sample firms are
summarized in Table 1.
Almost all ventures (100 out of 103)
are independent companies set up under
the initiative of the founding entrepreneur. Three ventures are spin-outs of a
corporate company. Almost one-third of
all ventures are active in professional,
scientific, and technical activities (32.0
percent) and another third in the wholesale and retail trade industry (31.1
percent). Other important industries are
hotels and restaurants (8.7 percent), construction (7.8 percent), and information
and communication companies (7.8
percent). Almost half of the ventures
(44.7 percent) were founded with less
than 20,000 start-up capital, whereas 11
percent of the ventures were founded
with more than 250,000 start-up capital.
This shows that the initial size of the
ventures in the sample varies widely.

Flanders is a region in Belgium.

SEGHERS, MANIGART, AND VANACKER

69

Table 1
Characteristics of Sample Firms (n = 103)
Characteristic
Origin of the company
Independent company
Corporate spin out
Industry
Professional, scientific, and technical activities
Wholesale and retail trade
Hotels and restaurants
Construction
Information and communication
Other
Amount of start-up capital
Less than 20,000
20,00050,000
50,001100,000
100,001250,000
Greater than 250,000

The questionnaire was developed

based on previous research (Van Auken
2001) and pretested through personal
interviews with entrepreneurs. These
pretests allowed us to optimize the questionnaire by including finance alternatives specific to the Flemish research
setting and to make the questionnaire
comprehensible for entrepreneurs. The
questionnaire was organized in three
main sections. The first section collected
information about the venture, including
the amount of start-up finance raised and
the industry in which the venture operates. The second section asked respondents to what degree they are familiar
with various finance alternatives. The
final section of the questionnaire asked
details on entrepreneurs education,
prior experiences, and ties with finance
experts.

Variables
Dependent Variables. A list of finance
alternatives was composed based on the

70

Frequency

Percent

100
3

97.1
2.9

33
32
9
8
8
13

32.0
31.1
8.7
7.8
7.8
12.6

46
21
13
12
11

44.7
20.4
12.6
11.6
10.7

finance sources listed by Van Auken

(2001) and government programs aimed
at start-ups specific for the Flemish
region. The knowledge of the respondent with respect to the different finance
alternatives was measured on a sevenpoint Likert scale ranging from
-3 = unaware of the existence of a particular finance alternative to 3 = very
extensive knowledge, with 0 indicating
average knowledge. Hence, negative
values on the scale represent belowaverage knowledge, and positive values
represent above-average knowledge of
finance alternatives. The disadvantage of
self-reported data is that entrepreneurs
could be influenced by their perceptions
of what seems to be a desirable response
rather than indicating their actual knowledge of finance alternatives. Nevertheless, if this would be the case, we would
expect the average entrepreneur to indicate that he or she is more knowledgeable than average. This was not the case.
On the contrary, as described further,

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many entrepreneurs even indicated that

they are unaware of the existence of
particular finance alternatives. To further
motivate our respondents to give accurate data, we also promised strict
confidentiality.
Consistent with prior studies in entrepreneurial finance (Carter and Van
Auken 2005; Winborg and Landstrm
2001), we conducted an exploratory
factor analysis to identify groups of
finance alternatives. Factor analysis is a
data reduction technique that reduces a
list of measures to their essence, that is,
a smaller set of factors that capture patterns in the data (Hair et al. 1998). This
has two major advantages. First, factor
analysis enabled us to identify groups of
finance alternatives that are highly
related to each other. This allows us to
draw conclusions that are more generalizable. Second, if we would study the
knowledge of entrepreneurs on each
individual finance alternative, we would
have to test specific models for each of
the 14 finance alternatives studied.
Testing a large number of models on
related dependent variables increases the
probability of finding significant relationships that are merely due to chance.3
Table 2 presents the results of the
factor analysis. The KaiserMeyerOlkin
measure is 0.868 and Bartletts test is
0.000, implying that a factor analysis is
meaningful (Hair et al. 1998). Only
factors with an eigenvalue larger than 1
are included in further analyses. This
procedure yields three factors, capturing
69 percent of the total variance after
varimax rotation. The factors are broadly
consistent with those identified by Van

Auken (2001). Factor one captures the

knowledge of five traditional and commonly used finance alternatives: loans,
credit lines, trade credit, leasing, and
friends and family financing (Cronbachs
alpha = 0.875). Factor two (advanced
finance alternatives for the start-up
phase) captures the knowledge of four
specific finance alternatives targeted
toward
start-ups
(Cronbachs
alpha = 0.742). Besides Business Angels
financing, three specific government
measures (IWT-subsidy, Vinnof, and
ARKimedes) are included. Factor three
captures the knowledge of five advanced
finance alternatives targeted toward
growth-oriented ventures: public and
private equity, bonds, factoring, and
venture
capital
(Cronbachs
alpha = 0.887). Given the high Cronbachs alpha reliability coefficients of the
three factors, these factors are used as
variables in the multivariate analyses.
The variables were calculated by
summing the values for the items that
compose the respective factors and
dividing it by the number of items.
The knowledge of finance alternatives
is limited to very limited: the three aggregated variables, as well as many of the
individual finance alternatives, have
negative mean values. Unsurprisingly,
the best known finance methods are
common finance alternatives (-0.10).
Within the group of common finance
alternatives, some finance options even
have a positive average knowledge
including bank loans (0.14) and leasing
(0.11). The knowledge of advanced
finance alternatives for the start-up phase
(-2.41) and growth phase (-1.31) is

We thank one of our reviewers for pointing out that the use of factor analysis may also have
limitations. For instance, we lose more fine-grained information on the individual finance
alternatives. In order to test for the robustness of our findings, we also ran regressions using
each individual finance alternative as a dependent variable. These additional regressions largely
confirm the main conclusions drawn from using the broader groups of finance alternatives as
identified by the factor analysis. These more fine-grained analyses are available from the
authors upon request.

SEGHERS, MANIGART, AND VANACKER

71

Table 2
Descriptive Statistics and Rotated Orthogonal Factor
Analysis for Knowledge of Finance Alternatives (n = 103)
Finance alternatives

Common finance alternatives

Loans
Credit lines
Trade credit
Leasing
Friends and family
financing
Advanced finance alternatives
for the start-up phase
Vinnof
IWT-subsidy
ARKimedes
Business angels
Advanced finance alternatives
for the growth phase
Public stock
Private stock
Bonds
Factoring
Venture capital

Mean

Factor
1

0.89
0.88
0.68
0.72
0.64

0.03
0.11
0.17
0.13
0.10

0.18
0.17
0.43
0.24
0.28

-0.10
0.14
-0.15
-0.37
0.11
-0.39

1.00
1.09
1.33
1.38
1.04
1.26

-2.41

0.83

-2.76
-2.43
-2.59
-1.99
-1.31

0.79
1.23
0.91
1.37
1.13

-0.03
0.12
0.13
0.36

0.82
0.78
0.76
0.58

0.15
-0.01
0.21
0.39

-1.35
-1.05
-0.93
-1.65
-1.68

1.24
1.36
1.21
1.58
1.47

0.22
0.19
0.31
0.46
0.44

0.12
0.10
0.17
0.22
0.44

0.88
0.85
0.68
0.61
0.60

lower. The advanced finance alternatives

for the start-up phase are the least
known by the entrepreneurs. The
average knowledge of finance alternatives like Vinnof and ARKimedes are all
below -2.50, where -3 indicates that
entrepreneurs are unaware of the existence of these finance alternatives.
Independent Variables. Descriptive statistics and correlations between dependent, independent, and control variables
are presented in Table 3. The key independent variables measure the human
and social capital of the founding entrepreneur. Scholars generally distinguish
between specific and generic human
capital on the basis of whether education

72

Standard
Deviation

and experience in a particular domain

provide skills that are directly relevant
for carrying out specific activities
(Becker 1975; Dimov and Shepherd
2005; Gimeno et al. 1997). In this study,
the generic human capital of the founding entrepreneur relates to overall education and practical experience with a
scope of application that is typically
broader and not limited to financial
decision-making,
whereas
specific
human capital relates to education and
experience that is directly relevant for
finance decisions in the entrepreneurial
ventures. Higher education can be considered more general in its contribution
to human capital (Dimov and Shepherd
2005). Higher education in humanities or

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SEGHERS, MANIGART, AND VANACKER

73

Dependent Variables
1 Knowledge of Common Financing
Alternatives
2 Knowledge of Advanced Financing
Alternatives for the Start-Up Phase
3 Knowledge of Advanced Financing
Alternatives for the Growth Phase
Independent Variables
Human Capital
Generic Human Capital
4 Higher Education (Dummy)
5 Number of Years of Work Experience
Gained by Founders in the Same
Industry
6 Number of Years of Work Experience
Gained by Founders in Other Industries
7 Founder with a Prior Management
Position in a Large or Medium Company
(i.e., Number of Employees Greater
Than 100) (Dummy)
8 Founder with a Previous
Self-Employment Experience (Dummy)
9 Founder with Previous Start-Up
Experience (Dummy)

Variables

Experience
Self-Employment
Experience Start-Up

1.00
1.00

0.00
0.00

0.29

0.34

0.20

0.00

1.00

6.19

0.00 20.00

Experience Other
Industry
Management
Experience

0.73
9.07

0.00 1.00
0.00 40.00

1.40 -1.31

-3.00

Growth Advanced

Higher Education
Experience Same
Industry

2.00 -2.41

-3.00

Start-Up Advanced

Mean

2.00 -0.10

Max

-2.80

Min

Common

Abbreviation

0.46

0.48

0.40

6.78

0.45
7.78

1.13

0.83

1.00

Standard
Deviation
2

1.000

0.255

-0.049 0.036 0.062 -0.089

1.000

0.132 0.153 -0.165 0.668 1.000

0.108 0.122 -0.261 1.000

0.322 0.028

0.060 -0.311 1.000

0.042 0.135 0.088 -0.068

0.018 0.100 0.189

0.176 0.004 0.063

0.258 0.190 0.320 1.000

-0.158 0.026 0.034 -0.051

0.676 0.537 1.000

0.400 1.000

1.000

Correlation

Table 3
Descriptive Statistics and Correlations of the Dependent, Independent, and Control
Variables (n = 103)a

74

JOURNAL OF SMALL BUSINESS MANAGEMENT

Abbreviation

Min

2.28
0.47
0.47

0.27
0.30

0.149
0.242

0.086

0.044

0.024

0.126 -0.152

0.003 0.068 0.147 -0.022

0.088 -0.117 -0.160 0.097

0.170

0.132

0.057 0.033 0.162

0.072 -0.044 -0.011

0.036 -0.139 -0.123

0.219 -0.228
0.066 -0.107

Correlation

0.026
0.066

0.043

0.044

0.157
0.066

0.366 -0.001 0.144 0.058 -0.121 -0.078 -0.247 0.106 0.093

-0.111 -0.204 -0.210 -0.108 -0.117 0.114 -0.183 -0.039 -0.015
0.217 0.355 0.272 0.232 0.168 -0.007 0.324 -0.053 -0.211

0.204
0.166

0.190

0.153 -0.013
0.105 0.074

0.149

13.14

0.204

0.474
0.338

0.216

0.248

0.45

0.200
0.188

0.145

0.395
0.327

0.48
4.82

Max Mean Standard

Deviation

Specific Human Capital

10 Business Education (Dummy)
Business Education 0.00 1.00 0.35
11 Number of Years of Work Experience
Experience in
0.00 40.00 1.27
Gained by Founders in the Industry of
Accountancy or
Accountancy or Finance
Finance
Social Capital
12 Relationships in the Financial Community Relationships in
-1.00 1.00 0.34
Financial
Community
Control Variables
13 Targeted Number of Employees after 5
Number of
0.00 90.00 5.16
Years
Employees
14 Financial Planning (Dummy)
Financial Planning
0.00 1.00 0.92
15 Shares 100% Retained by the
External
0.00 1.00 0.90
Entrepreneurial Team (Dummy)
Shareholders
16 Ln (Level of Start-Up Capital)
Start-Up Capital
2.56 15.42 10.14
17 Industry: Wholesale and Retail (Dummy) Industry Sales
0.00 1.00 0.31
18 Industry: Professional, Scientific and
Industry Activities
0.00 1.00 0.32
Technical Activities (Dummy)

Variables

Table 3
Continued

SEGHERS, MANIGART, AND VANACKER

75

Abbreviation

Min

Max

Correlation coefficients significant at p < .05 are shown in bold.

Specific Human Capital

10 Business Education (Dummy)
Business Education 0.00 1.00
11 Number of Years of Work Experience Experience in
0.00 40.00
Gained by Founders in the Industry
Accountancy or
of Accountancy or Finance
Finance
Social Capital
12 Relationships in the Financial
Relationships in
-1.00 1.00
Community
Financial
Community
Control Variables
13 Targeted Number of Employees after Number of
0.00 90.00
5 Years
Employees
14 Financial Planning (Dummy)
Financial Planning
0.00 1.00
15 Shares 100% Retained by the
External
0.00 1.00
Entrepreneurial Team (Dummy)
Shareholders
16 Ln (Level of Start-Up Capital)
Start-up Capital
2.56 15.42
17 Industry: Wholesale and Retail
Industry Sales
0.00 1.00
(Dummy)
18 Industry: Professional, Scientific and
Industry Activities
0.00 1.00
Technical Activities (Dummy)

Variables

0.48
4.82

0.45

13.14
0.27
0.30
2.28
0.47
0.47

0.34

5.16
0.92
0.90
10.14
0.31
0.32

Standard
Deviation

0.35
1.27

Mean

Table 3
Continued

0.151

1.000

12

1.000

13

0.091

15

0.088 0.059
0.195 0.078

1.000
0.150 1.000

14

1.000
0.122

16

1.000

17

18

0.174 -0.058 -0.034 0.014 -0.062 -0.461 1.000

0.065 0.104
0.074 -0.097

0.062 -0.064 0.064

0.032 0.176 -0.212

0.038 -0.064

0.022

1.000

11

0.223 0.231
-0.052 -0.015

0.137
0.034

0.033

0.059

1.000
0.264

10

Correlation

science for instance generally does not

provide skills directly related to financial
decision-making by entrepreneurs. We
include a dummy variable higher education, which is equal to 1 if the entrepreneur has a university-level or equivalent
degree and 0 otherwise. Almost threequarters of the entrepreneurs have a
university-level or equivalent education.
Similarly, prior work experience is
very broad and includes multiple tasks
that may not directly relate to financial
decision-making but may nevertheless
enhance an entrepreneurs information
processing and decision-making skills.
The number of years of work experience by the entrepreneur in the same
industry and the number of years of
work experience in other industries
proxy for entrepreneurs general human
capital. Before starting their venture,
entrepreneurs have on average nine
years of work experience in the same
industry as their start-up venture and
six years in another industry. We
further include management experience,
which is measured by a dummy variable equal to 1 if the entrepreneur previously held a management position in
a company employing more than 100
people and 0 otherwise. About one in
five entrepreneurs have previous management experience. Self-employment
experience is measured by a dummy
variable equal to 1 if the entrepreneur
has prior self-employment experience
and 0 otherwise. One-third of the entrepreneurs have prior self-employment
experience. Finally, start-up experience
is measured by a dummy variable equal
to 1 if the entrepreneur has prior
start-up experience and 0 otherwise.
Although entrepreneurs that have prior
start-up experience may have searched
for finance in the past, prior start-up
experience is much broader in its application during new business formation
(Alsos and Kolvereid 1998). Moreover,
it is not necessarily the case that
entrepreneurs with prior start-up expe-

76

rience have experience directly related

to financial decision-making, since
entrepreneurs may have restricted
themselves to personal sources of
finance in the past (Van Auken and
Neeley 1996) or cofounders may have
focused on the finance aspect in previous businesses due to functional specialization (Maurer and Ebers 2006).
Hence, previous start-up experience is
considered to contribute to an entrepreneurs generic human capital but not to
the specific human capital. Close to 30
percent of the entrepreneurs have
start-up experience, which is in line
with findings from other studies (Birley
and Westhead 1993; Hsu 2007).
Contrary to generic human capital,
which is broad in its application, specific
human capital relates to the entrepreneurs education and experience that is
directly valuable for financial decisionmaking. Business education is likely to
equip entrepreneurs with a toolset for
financial decision-making and hence contributes more to specific human capital as
opposed to general human capital
(Dimov and Shepherd 2005). It is measured by a dummy variable, which equals
1 if the entrepreneur has a degree in
business and 0 otherwise. Approximately
35 percent of all entrepreneurs have a
degree in the field of business. Moreover,
prior experience in accountancy or
finance domains is likely to be particularly relevant for financial decisionmaking. We therefore include the number
of years of work experience in accountancy and/or finance as another measure
of specific human capital. About 16
percent of the entrepreneurs have previous work experience in the field of
accountancy or finance. These entrepreneurs have on average eight years of
experience in the field of accountancy or
finance.
The social capital variable is measured
with a six-item five-point Likert scale
ranging from -2 = strongly disagree to
+2 = strongly agree, about network ties

JOURNAL OF SMALL BUSINESS MANAGEMENT

between the entrepreneur and finance

experts, adapted from the items of Shane
and Cable (2002). A finance expert is
defined as an individual with correct and
reliable information about finance alternatives. The items are: Prior to the companys start-up, I had a professional
relationship with at least one finance
expert; Prior to the companys start-up,
at least one finance expert was someone
with whom I had engaged in informal
social activity (for example, playing
tennis, going to the movies); Prior to the
companys start-up, at least one finance
expert was a personal friend; Someone
whom I trust to discuss important confidential matters knew at least one finance
expert; A third party whose judgment I
trust can bring me in contact with a
finance expert; and Through my
network of contacts, I could obtain information from a finance expert.
An exploratory factor analysis is undertaken in order to identify whether all
items were measuring the same construct.
The KaiserMeyerOlkin measure is
0.819 and Bartletts test is 0.000, implying
that a factor analysis is meaningful (Hair
et al. 1998). Only one factor with an
eigenvalue larger than 1 was extracted. As
a result, the six items that were just given
are measures for the same construct
(Cronbachs alpha = 0.863). The social
capital variable is calculated by taking the
average of the values for the six items.
Entrepreneurs report an average level of
social capital of 0.34.
Control Variables. Entrepreneurs with
growth ambitions may have more thoroughly prepared the start-up of their
venture and hence have acquired a
better knowledge of finance alternatives.

We therefore control for the expected

growth rate, which is measured as the
target number of employees (in full time
equivalents) five years after start-up.
The average employment target equals
approximately five employees with a
maximum of 90 employees.4 In order to
further control for preparation, a
dummy variable measures whether or
not the entrepreneur performed formal
financial planning before start-up.
Almost all entrepreneurs (92 percent)
indicate that they performed formal
financial planning before start-up. We
also distinguish between start-ups with
and without external shareholders, with
a dummy variable equal to 1 if there are
external shareholders and 0 otherwise.
If external shareholders are involved,
the knowledge base is likely to be
broader. Only 10 percent of the startups have external shareholders. In order
to account for the initial size of the
venture, we include the natural logarithm of start-up capital as a control.
Entrepreneurs setting up larger start-ups
may have a higher knowledge of
finance alternatives. Finally, we control
for industry effects. We created two
industry dummy variables, Wholesale
and retail and Professional, scientific
and technical activities. More than 60
percent of the start-ups are active in
these two industries.
Correlations across explanatory variables are generally low and do not indicate the existence of multicollinearity
problems.

Results
Main Findings
As the dependent variables are censored, the multivariate relationships

We used targeted turnover after five years as an alternative proxy for the expected growth rate.
Unfortunately, only 78 respondents filled in the targeted turnover after five years. The
correlation between the targeted number of employees and the targeted turnover after five
years is 0.348. Using this variable rather than the targeted number of employees leads to
qualitatively similar results.

SEGHERS, MANIGART, AND VANACKER

77

between the dependent variables and

independent variables are analyzed with
Tobit
regressions.
Table 4
panel
Common contains the regression
models with the knowledge of common
finance methods as dependent variable,
panel Start-up Advanced contains the
models with the knowledge of
advanced finance methods for the
start-up phase as dependent variable,
and panel Growth Advanced contains
the models with the knowledge of
advanced finance methods for the
growth phase as dependent variable.
Three models are reported in each
panel. The first model in each panel
only includes the control variables. The
second model includes the human
capital variables next to the control
variables from the first model. The third
model in each panel is the full model,
including control variables, human
capital, and social capital variables. As
the significance and the sign of the
coefficients are broadly consistent in
the three models within each panel, the
discussion of the results will focus on
the full models. Adding human capital
variables significantly improves all
model fits, whereas adding the social
capital variable significantly improves
the models explaining the knowledge
of common finance methods and of
advanced finance methods for the
growth phase.
The coefficients of the control variables show that entrepreneurs with
higher growth aspirations have a significantly higher knowledge of all finance
alternatives. A higher level of start-up
capital is associated with a higher knowledge of common finance techniques
(p < 0.01). Interestingly, entrepreneurs of
companies active in the industry of
Wholesale and retail have a significantly lower knowledge of common
finance methods (p < .05) and advanced
finance methods for the growth phase
(p < .05). Entrepreneurs of companies
active in the industry of Professional,

78

scientific and technical activities have a

significantly higher knowledge of
advanced finance methods for the
start-up phase (p < 0.1).
In order to test the first hypothesis,
we examine the impact of generic
human capital variables on the knowledge of finance alternatives. Neither
higher education nor experience in the
same industry has an impact on the
knowledge of finance alternatives.
Experience in other industries has a
positive impact on the knowledge of
common finance alternatives (p < 0.01)
and advanced finance alternatives for
the growth phase (p < 0.1). Entrepreneurs with previous start-up experience,
however, have a lower knowledge of
common finance alternatives (p < .05).
Experience as a self-employed and
overall management experience have no
impact on an entrepreneurs knowledge
of finance alternatives. Overall, support
for H1 is weak.
The impact of specific human capital
on the knowledge of finance alternatives
is more pronounced. Specific human
capital leads to a significantly higher
knowledge of finance alternatives, especially of common finance alternatives
and of advanced finance alternatives for
the growth phase. More specifically, both
business education and experience in
accountancy or finance lead to significantly higher knowledge of common
finance
alternatives
(p < .05)
and
advanced finance alternatives for the
growth phase (p < 0.01). Overall, these
results strongly support H2.
The social capital of entrepreneurs is
significantly associated with their knowledge of finance alternatives in several
model specifications. Specifically, entrepreneurs who have network ties with
finance experts have a greater knowledge of common finance alternatives
(p < 0.001) and advanced finance alternatives for the growth phase (p < .05).
These findings provide strong support
for H3.

JOURNAL OF SMALL BUSINESS MANAGEMENT

SEGHERS, MANIGART, AND VANACKER

79

0.462*
0.065*

0.480*
0.054*

0.192
0.000
-120.000

0.143
-0.003
0.039**
0.025
0.079
-0.493*

0.159
-0.003
0.032*
-0.057
0.141
-0.444

0.095
0.000
-134.300

0.013*
0.357
0.300
0.129**
-0.436*
0.030

0.013
0.251
0.415
0.128**
-0.273
0.234

0.011
0.441
0.336
0.166***
-0.149
0.499*

0.670***
0.236
0.000
-113.400

-2.608***

-2.480***

-2.657***

Where p < .1; *p < .05; **p < .01; ***p < .001 (conservative two-tailed tests).

Constant
Control Variables
Number of Employees
Financial Planning (Dummy)
External Shareholders (Dummy)
Start-up Capital
Industry Sales (Dummy)
Industry Activities (Dummy)
Independent Variables
Human Capital
Generic Human Capital
Higher Education (dummy)
Experience Same Industry
Experience Other Industry
Management Experience (Dummy)
Experience Self-Employment (Dummy)
Experience Start-Up (Dummy)
Specific Human Capital
Business Education (Dummy)
Experience in Accountancy or Finance
Social Capital
Relationships in Financial Community
McFaddens Pseudo R2
Prob > [chi symbol]2
Log likelihood

Model 3

Model 2

Model 1

Common

0.062
0.012
-123.400

0.020*
-0.002
0.535
-0.007
-0.188
0.868**

-3.556***

Model 1

0.114
0.007
-116.500

0.420
0.040

0.381
-0.007
-0.007
-0.030
0.635
-0.061

0.017
-0.063
0.248
-0.077
-0.129
0.748*

-3.082***

Model 2

0.402
0.040

0.371
-0.006
-0.003
-0.015
0.584
-0.065

0.018
0.010
0.184
-0.074
-0.189
0.665

-3.177***

Model 3

0.299
0.118
0.009
-116.000

Start-Up Advanced

Table 4
Multivariate Tobit Regression Models (n = 103)

0.082
0.000
-148.700

0.022*
0.768
0.719*
0.062
-0.373
0.601*

-3.499***

Model 1

0.177
0.000
-133.200

0.862***
0.051*

0.237
0.015
0.020
0.145
0.117
-0.143

0.019**
0.427
0.663
0.012
-0.390
0.221

-3.315***

Model 2

0.857***
0.051**

0.225
0.016
0.027
0.204
0.061
-0.174

0.019**
0.510
0.573
0.013
-0.515*
0.053

-3.431***

Model 3

0.539*
0.197
0.000
-130.000

Growth Advanced

Robustness Tests
Additional models were tested in
order to provide evidence with respect to
the robustness of our main findings.5
First, many entrepreneurs may not need
the wide range of finance alternatives
included in our study. Hence, one could
argue that the existence of a knowledge
gap is likely to be less problematic for
entrepreneurs who do not require large
amounts of finance. Entrepreneurs with
higher growth aspirations are known to
realize higher growth rates (Wiklund and
Shepherd 2003) and hence are more
likely to need multiple sources of finance
besides owner funds (Vanacker and
Manigart 2010). Nonparametric tests
comparing entrepreneurs with high
versus low growth aspirations (median
split) show no significant differences in
the knowledge of finance alternatives
between these two types of entrepreneurs: the knowledge of finance alternatives of entrepreneurs with high growth
aspirations is equally limited compared
with that of entrepreneurs with limited
growth aspirations. Hence, entrepreneurs who will likely need to raise more
finance from more diverse sources to
fulfill their growth aspirations start with
an equally low knowledge of finance
alternatives. Furthermore, in the subsample of entrepreneurs with high
growth ambitions, specific human capital
in the form of business education and
years of experience in accountancy or
finance is associated with an enhanced
knowledge of common finance alternatives and advanced finance alternatives
for the growth phase. Relationships in
the financial community are also positively associated with the knowledge of
advanced finance alternatives for the
growth phase. This indicates that the
results from a subsample of entrepreneurs with high growth aspirations are

broadly similar to those provided for the

entire sample including all entrepreneurs. Specific human capital and social
capital of entrepreneurs with high
growth aspirations are associated with
higher knowledge of finance alternatives, providing support for H2 and H3.
High growth-oriented entrepreneurs
with high levels of generic human capital
do not necessarily report higher knowledge of finance alternatives, hence providing only weak support for H1.
Second, additional control variables
were added to the regression models,
including the gender of the founding
entrepreneur, number of founders, and
founders age. The main results remain
qualitatively similar when these additional control variables are included, but
this reduces the sample size. Female
entrepreneurs exhibit different finance
behaviors compared with their male
counterparts (Coleman 2000; Greene
et al. 2001; Neeley and Van Auken 2010).
Our findings show that female entrepreneurs are less knowledgeable of
advanced finance alternatives for the
growth phase, potentially partly explaining the difference in finance behavior.
The larger the number of founders, the
greater the tangible and knowledgebased resources they will have available
(Colombo and Grilli 2005). Nevertheless,
the number of founders is negatively
associated with the knowledge of
advanced finance alternatives for the
growth phase. Finally, the age of the
founding entrepreneur is added. Though
the age of the entrepreneur may serve as
a proxy for generic human capital, we
included more detailed measures (including their educational background and
work experiences) in our regressions,
which, when combined, should reflect
the age of entrepreneurs. The age of
the founding entrepreneur is negatively

These additional tests are not reported due to space considerations but available from the
authors upon simple request.

80

JOURNAL OF SMALL BUSINESS MANAGEMENT

associated with the knowledge of

advanced finance alternatives for the
start-up phase.
Finally, we implicitly assumed
throughout this paper that the knowledge of finance alternatives will influence finance behavior. Van Auken (2001)
indeed demonstrates that limited knowledge of finance alternatives hampers the
ability of entrepreneurs to price and
negotiate investments. We study new
ventures, and no data are available yet
on the finance decisions in these ventures after start-up. Nevertheless, nonparametric tests (further supported with
the regressions in Table 4) indicate that
entrepreneurs who raise more start-up
finance have a higher knowledge of
common finance alternatives. This provides at least some explicit evidence that
within our research context the amount
of start-up capital raised is positively
associated with the knowledge of finance
alternatives, which is of significant interest given the evidence on the undercapitalization of many private ventures
(Holtz-Eakin, Joulfaian, and Rosen 1994).

Discussion and
Conclusion
It is widely acknowledged that financial resource acquisition is a key process
in the start-up and growth of new businesses. Traditional finance theories generally emphasize wealth maximization as
an overarching goal, rational behavior of
all actors, and prefect information
(Brealey and Myers 2000). In such a theoretical setting, financial decision-making
is straightforward: all value creating
investment projects will find sufficient
finance, and finance decisions will not
influence firm value (Modigliani and
Miller 1958). In practice, however, the
process of acquiring sufficient and
adequate finance is fraught with difficulties, especially for small and new ventures. Scholars have argued that
information asymmetries between investors and entrepreneurs may constrain the

supply of finance toward young and small

entrepreneurial ventures (Berger and
Udell 1998). Theories building on the
existence of information asymmetries
typically assume that (potential) investors
are informationally constrained, which is
expected to influence their investment
decisions (Wright and Robbie 1998). This
paper highlights a second information
asymmetry problem, namely the fact that
entrepreneurs do not have full information of finance alternatives. This knowledge gap may lead entrepreneurs to select
only these finance alternatives they are
familiar with, potentially leading to suboptimal finance structures (Gibson 1992;
Van Auken 2001, 2005).
The main contribution of this paper
lies in the finding that entrepreneurs with
higher levels of specific human capital
and higher levels of social capital experience lower knowledge gaps. Consistent
with prior research, we find that specific
human capital is more valuable than
generic human capital (Davidsson and
Honig 2003). Specific human capital, that
is, business education and previous experience in accountancy or finance,
increases an entrepreneurs knowledge of
finance alternatives. Generic human
capital in the form of higher education or
general experience has a more modest
and less consistent impact. The social
capital of entrepreneurs at start-up, and
more specifically their ties to finance
experts, is positively associated with their
knowledge of finance alternatives.
Overall, we contribute to a further socializing of the finance acquisition process in
entrepreneurial ventures (Shane and
Cable 2002) by demonstrating the key
role of entrepreneurial characteristics on
entrepreneurs knowledge of finance
alternatives in start-ups. This is critical as
a good knowledge of finance alternatives
is the basis for making good financial
decisions (Gibson 1992).
We have shown that entrepreneurs
knowledge of finance alternatives in
general is rather limited. Even the know-

SEGHERS, MANIGART, AND VANACKER

81

ledge of commonly used finance methods

is limited. More complex finance options,
specifically targeted toward growthoriented ventures, are even less known.
The advanced finance methods targeted
at start-ups is the least known category.
Though the specific human capital and
social capital of entrepreneurs explain
differences in their knowledge of
common finance alternatives and of
advanced finance alternatives for the
growth phase, these entrepreneurial characteristics are not associated with their
knowledge of advanced finance alternatives for the start-up phase. This may be
driven by the fact that there is little variation in the knowledge of the latter, as
witnessed by the low standard deviation
of this variable. Almost all entrepreneurs
reported that they either are unaware of
these finance alternatives, or that their
knowledge thereof is very limited. Hence,
the government programs specifically targeted toward start-ups are badly known
by all entrepreneurs, even those with high
levels of human and social capital.
This finding is broadly consistent with
previous findings of Van Auken (2001)
for U.S. entrepreneurs and Audet,
Berger-Douce, and St-Jean (2007) for
Canadian entrepreneurs. Two potential
explanations have been advanced for
this general lack of knowledge of government programs (Audet, BergerDouce, and St-Jean 2007; Stevenson and
Lundstrm 2002). First, many entrepreneurs do not seem to understand the
utility or relevance of the government
programs. Second, entrepreneurs may
not need or may not be eligible for
several of these government programs.
We demonstrate how some entrepreneurs are simply unaware of the existence of government programs targeted
specifically toward start-ups. When
entrepreneurs are unaware of government programs, they are both unable to
judge their utility and unable to judge
whether or not their ventures are eligible
for such programs.

82

A methodological strength of this

study is that all social and human capital
variables are measured at start-up, hence
eliminating survival and recall biases. It
would be interesting to add a longitudinal dimension to the current research.
This would allow understanding how the
initial knowledge gap influences subsequent finance and growth processes. Is
the knowledge gap of an entrepreneur at
start-up a major hindrance in the development of the start-up, or is the entrepreneur able to overcome this liability
through subsequent learning and experience? Moreover, the importance of a
knowledge gap may be more or less critical depending upon the growth ambitions of entrepreneurs and their
intention to remain independent. For
instance, it might well be that a limited
knowledge of finance alternatives will
constrain high growth-oriented entrepreneurs more than low growth-oriented
entrepreneurs who have a lower need
for resources. These are important
avenues for future research.
The study suggests implications for
policymakers and for entrepreneurs. The
role of business education is highlighted.
Strengthening lifelong education for
entrepreneurs on business in general and
on financial matters in particular is warranted. Furthermore, when new policy
initiatives are developed, frequent and
clear communication with the target
group and their advisors is key. This
study suggests that well-designed initiatives often fail to capture the attention of
their target group.
Entrepreneurs should understand that
finance is a key resource for their business; failure to understand the finance
alternatives and their characteristics may
seriously hamper the development of
their ventures. Most entrepreneurs,
however, have a limited knowledge of
finance options, even if they have a
broad business experience. They may
enhance their understanding of finance
through training. Furthermore, they

JOURNAL OF SMALL BUSINESS MANAGEMENT

should understand that links to financial

experts are valuable in reducing the
knowledge gap. If they do not have ties
with finance experts yet, they should
actively seek to establish them. Moreover, when entrepreneurs already have
links to experts, they should actively tap
their knowledge.

References
Alsos, G. A., and L. Kolvereid (1998).
The Business Gestation Process of
Novice, Serial and Parallel Business
Founders, Entrepreneurship Theory
and Practice 22, 101114.
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