One of the most important considerations for starting a small business is the ability to find financing. Founders of small businesses have a variety of sources to choose from, but some sources are better than others. For example, a small business owner can use risky debt or credit cards. These sources drive up the cost of capital, but finding equity during a firm’s first few years can keep costs down and improve the likelihood of succeeding sooner.
Entrepreneurial experience improves the chance of finding equity. Zaleski (2011) found a comparative advantage exists for entrepreneurs with previous experience. This finding is particularly relevant when an entrepreneur changes industries. Potential investors may not see the experience from another industry as causing a barrier. Investors view entrepreneurs with experience as having gained valuable knowledge. Although entrepreneurs frequently fail, entrepreneurs learn from experience.
Experience plays an important role in finding equity financing during a firm’s early years. However, the lower cost of capital from obtaining equity financing can improve a small business’s chance of success. Equity sources view experience as a transferable skill and improves the business founder’s odds of finding financing.
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References
Zaleski, P. A. (2011). Start-ups and external equity: The role of entrepreneurial experience. Business Economics, 46(1), 43-50. doi: http://www.palgrave-journals.com/be/index.html
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