Analysis of the capital structure of startups in light of the tradeoff and pecking order theories

Gabriela de Carvalho Colombo; Matheus da Costa Gomes; João Paulo Augusto Eça; Maurício Ribeiro do  Valle

doi:10.14211/regepe.esbj.e2338

Authors

Gabriela de Carvalho Colombo Universidade de São Paulo (USP), São Paulo, SP, Brazil https://orcid.org/0000-0001-6942-4897
Matheus da Costa Gomes Universidade de São Paulo (USP), São Paulo, SP, Brazil https://orcid.org/0000-0002-4611-6047
João Paulo Augusto Eça Universidade de São Paulo (USP), São Paulo, SP, Brazil https://orcid.org/0000-0003-2313-6368
Maurício Ribeiro do Valle Universidade de São Paulo (USP), São Paulo, SP, Brazil https://orcid.org/0000-0003-2439-3526

DOI:

https://doi.org/10.14211/regepe.esbj.e2338

Keywords:

Startup, Tradeoff, Pecking Order, Fundraising

Abstract

Purpose: Startups have significant differences compared to other companies. They have many intangible assets (e.g., team tenure and experience of founders), are risky, and tend not to generate profits in their initial years (Heirman & Clarysse, 2007; Weber & Zulehner, 2009). Does the startups’ financing choice also differ from that of traditional companies? We analyzed the capital structure of startups in their first years of life based on the classic tradeoff and pecking order theories. Methodology/approach: We collected data on 40 startups in the city of Ribeirão Preto, São Paulo, Brazil, through a questionnaire on the profiles of the founders, company characteristics, bottom-line performance and financing sources. The data collected covered the year of founding and the three subsequent years. Findings: The results indicated that these startups mainly financed themselves through the founders’ capital in all four years covered. Only in the third year did they start using resources generated internally, indicating pecking order adherence. However, the presence of angel investors and government subsidies contrasted with the absence of bank debt. In line with the tradeoff theory, bank debt was not a viable financing option in the early years of these firms since they had low profitability and high risk. Theoretical/methodological contributions: We offer a theoretical contribution by analyzing the adequacy of traditional financial theories in the specific context of startups. Originality: The finance literature about startups is scarce, and few studies have analyzed these companies from the capital structure theoretical perspective. Social contributions / for management: We provide a panorama of the financing of startups to support their financial planning regarding fundraising.

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Author Biographies

Gabriela de Carvalho Colombo, Universidade de São Paulo (USP), São Paulo, SP, Brazil

is a partner and responsible for the accounting sector at Planejare Contabilidade Sociedade Simples. Bachelor of Accounting Sciences from FEA-RP/USP. His areas of interest include Corporate Finance and Technological Entrepreneurship.

Matheus da Costa Gomes, Universidade de São Paulo (USP), São Paulo, SP, Brazil

is a professor of Economics and Accounting at Universidade Paulista UNIP, in Ribeirão Preto/SP. He has a doctorate, master's degree and undergraduate degree from FEA-RP/USP. His areas of interest include Corporate Finance and Financial Accounting.

João Paulo Augusto Eça, Universidade de São Paulo (USP), São Paulo, SP, Brazil

is a professor of Finance and Accounting at Centro Universitário Barão de Mauá. He has a PhD in Controllership and Accounting from FEA/USP, a master's degree in Controllership and Accounting from FEA-RP/USP, a degree in Accounting from the Universidade de Franca and a degree in Administration from the Universidade Estadual de Montes Claros. His areas of interest include Capital Structure, Sources of Financing and Debt Renegotiation. He is a researcher at the Finance and Risk Laboratory at FEA/USP.

Maurício Ribeiro do Valle , Universidade de São Paulo (USP), São Paulo, SP, Brazil

is an associate professor at the Universidade de São Paulo (FEA-RP/USP). He has a doctorate in Controllership and Accounting from the Universidade de São Paulo (FEA/USP), a master's degree in Business Administration (concentration in Finance) from Fundação Getúlio Vargas – SP and a degree in Economic Sciences from Universidade Estadual Paulista Júlio de Mesquita Filho. His areas of interest include structure and cost of capital, sources and forms of financing.

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