Initial Human and Financial Capital as Predictors of New Venture Performance

Arnold C. Cooper · F. Javier Gimeno-Gascon · Carolyn Y. Woo

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Entrepreneurship Studies and Influences Firm Innovation and Growth Private Equity and Venture Capital

Abstract

Investigates the probability of new firm success or failure based on factors that can be observed at the time of initial startup. Four categories of human and financial capital were considered: (1) general human capital--which may reflect the extent to which the entrepreneur has had the opportunity to develop relevant skills and contacts--including the entrepreneur's race, gender, education; (2) management know-how--which reflects management skills and knowledge--including the entrepreneur's own skills or skills available through advisors or partners; (3) industry-specific know-how--which reflects specific experience in other businesses; and (4) financial capital--which can create a buffer against random shocks and allow the pursuit of more capital-intensive strategies. Data were gathered from 1,053 responses from questionnaires sent to owners of firms established within the previous 1 1/2 years. The firms, from a variety of industry sectors and geographical regions in the United States, were tracked over a three-year period, during the years 1985 to 1987. Findings show that measures of general human capital impacted both firm survival and growth. One exception to this was gender--female-owned enterprises were less likely to grow, but just as likely to survive. Amount of initial capital was also shown to influence both survival and growth. However, management know-how, number of partners, and having parents who had owned a business had a more limited impact. Significant effects were not found for management level, prior employment in non-profit organizations, not having been in the labor force, and the use of professional advisors. It should be possible to predict the future success or failure of new ventures using the four categories of human and financial capital utilized in this study (after dropping the insignificant components of personal characteristics). These measures are readily identifiable at startup, and in some cases potential problems can be identified and remedied. (SFL)

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