Financing Technology Based Small Firms in New Zealand Master Thesis by Mark van Dijken

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Financing Technology Based Small Firms

in New Zealand

Master Thesis

by

Mark van Dijken

University of Groningen

Faculty of Economics and Business

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Financing Technology Based Small Firms

in New Zealand

Master thesis

MSc BA specialization Small Business & Entrepreneurship

University of Groningen

Faculty of Economics and Business

Mark van Dijken

Studentnumber 1606220

Oosterweg 110

9724CM Groningen (The Netherlands)

Phone: +31 (0)6-46102213

m.van.dijken@student.rug.nl

vandijkenmark@gmail.com

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Foreword

This document represents the final part of my study as a student at the University in Groningen. It must be said that sometimes it has been incredibly hard to find the right direction and way of doing research on an academic level, however at the same time this project has been the most useful, intense and valuable experience during my life and study career.

This master thesis is both written in New Zealand and the Netherlands. The experience of doing research and an internship in another country (New Zealand) has been unforgettable and fantastic. Therefore, I would like to thank Massey University and in particular the NZ Centre for SME Research for giving me the opportunity to do research within their organisation. I would like to thank all the employees of the School of Management and especially Allison and Martina for helping me feel very welcome.

A special thank you goes to Professor David Deakins. As David gave me the opportunity to work on the project of technology based small firms in New Zealand, a new experience was born. During my three month stay at the centre I learned so much in the field of small business. Working together with a person who is into the field for more than 25 years has been extremely valuable and special.

Furthermore, I would also like to thank my supervisor Rene van der Eijk for his critical and useful feedback. The essential feedback forwarded me into the correct direction and helped me finishing this thesis.

Last but not least I would like to thank my family for giving me the opportunity to study at the university and their continuous support while writing my master thesis.

Mark van Dijken,

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Executive Summary

This exploratory study examines the role of finance in the development of technology based small firms in New Zealand. In theory, finance plays an important role that can influence the outcome of running and developing a technology-based business successful or not.

Therefore, this thesis tried to find an answer on the main question: How the process of obtaining finance affect the development of technology does based small firms in New Zealand? The open conducted interviews with technology-based entrepreneurs and experts led to the indicative results in this thesis that show that the process obtaining finance is difficult, tough and influencing the development of technology based small firms in New Zealand. The analysis of findings revealed that the majority of owner managers of TBSFs do rely on internal funds in order to finance their business processes and needs. Besides using internal funds, bootstrapping methods were frequently used. In addition, these methods are inherently linked to a generally reluctant attitude towards the process of obtaining external financial capital such as, bank finance, business angels and venture capitalist funding. Moreover, the qualitative findings in this thesis show that the averse attitude towards external finance is strengthened by a lack of technological focused and experienced investors in the New Zealand capital markets. The results revealed that the number and visibility of wealthy investors throughout the country were perceived to be very low.

Also, this thesis revealed that a particular form of finance, government subsidies, is founded to have a positive influence on the development of TBSFs. Match funds and technology grants provided by the New Zealand government led to situations where growth potential had be realized much faster. These findings suggest that, by having more financial liquidity flexibility TBSFs were able to develop and produce products which would otherwise not be exploited.

Other qualitative results revealed that TBSFs which searched for external finance were confronted with an early stage finance gap. The finance gap arises between the informal and formal equity market, in between relatively small and large sums of money obtainable capital is lacking. These findings, suggest that the existing gap constrains some TBSFs in their development within the financial climate of New Zealand

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1. Introduction

For several decades now there is a debate going on among academics and policymakers concerning the contribution to economic growth through the use and developing of

technologies by firms. For one of the largest economies in the world (US), technological innovation has been a very important contributor to the growth in employment and incomes (Mowery and Rosenberg, 1989). New and small firms are more able to make this

technological change and employment growth happen than larger firms through their experimentation and innovation (Acs, 1999). Rather more specifically, but in line with the prior argument Audretsch (1995) considers technology-based small firms as the highly important source of new technologies and employment growth. These technological based small firms play particularly an important role in the early stages of development of new technologies and sectors and an important ongoing role in niche markets (OECD, 2007). This study looks at technology based small firms in New Zealand and the challenges they and their entrepreneurial founders face. The presence of technology based firm in New Zealand seems to be highly important. Recently, an annual published list in New Zealand consisting of the top 100 New Zealand technology companies showed that these businesses contribute to a significant part of the economy, with generating sales revenue of NZ$4.7 billion in 2005 (TIN 100 report, 2006). High tech manufacturing currently dominates the New Zealand technology landscape accounting for more than 70% of these revenues. As the global economic downturn, started in 2007, has had a major impact on numerous of businesses all over the world (OECD, 2009) and since New Zealand has a predominantly number of small businesses (97,2% of all enterprises in New Zealand employ 19 or fewer people and dominate in most industries1) the impact on its economy is significant.

According to the Ministry of Research, Science and Technology (2007), New Zealand could increase its economic prosperity by letting grow the high tech sector. This potential increase in economic prosperity can be essential and contribute to the economic recovery of New Zealand. Enabling a greater number of small high-technology companies to grow quickly and reach a larger size within New Zealand will increase the rate of productivity growth.

Experience of clusters shows that an increasing mass of small rapidly growing, high-technology companies stimulates the growth and development of specialized business services to meet their needs (OECD, 2007).

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7 However, since technology based small firms are associated with informational opacity, assets are mostly intangible and acute information asymmetries will arise for technology based small firms compared to non technological SMEs (Cressy, 2003; Berger & Udell, 1998). Likewise, factors that hinder technology-based firms in obtaining capital may result in for example cash flow problems that limit businesses to pursue market opportunities and their growth potential (van Auken, 2004). Moreover, at the same time there is also a conception that small firms face financial constraints (Acs and Audretsch, 1990).

Predominantly technology based small firms will face additional financing issues in being (perceived) more risky since they are known to have even higher default rates than conventional small firms (Westhead and Storey, 1997; Carpenter and Petersen, 2002). In addition, financing problems originate for example from a lack of tangible assets or merely relying on scientific and knowledge based products or services without track record in

markets at an early stage of the business (Stiglitz and Weiss, 1981; Berger and Udell, 1998). Numerous of studies have shed light on this topic focusing on countries such as the UK and US, however there has yet to arise a research study that examines specifically the role of finance in the development of technology-based small firms in New Zealand.

1.1. Aims and research question

It could be argued that technology based small firms play a major role in the New Zealand economy. Despite the known importance of TBSFs for the New Zealand economy, up to now little interest in this field has been shown by academic literature. There has yet to arise a research study that examines specifically the funding situation of technology-based small firms in New Zealand. This study attempts to contribute to the existing literature by exploring New Zealand’s technology based small firms and the problems they are dealing with. This thesis specially aims to examine the key issues of finance that plays a role in the

development of technology-based small firms in New Zealand. Consequently, the main question for this research is as follows:

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8 In order to discuss the proposed research question in the introduction, a number of sub questions have been formed for this thesis including:

Sub research question 1

What is the pattern of finance currently used in NZ by TBSFs?

Is the current pattern of financing appropriate for NZ TSBFs to achieve their potential?

Are there any differences between early stage and established TBSFs in their financing patterns?

It should be noted that these research questions are not exclusive and the research may reveal additional issues that will be pursued if raised by respondents. For example, it may become important to find out if there were recently any growth constraints for TBSFs, due to problems in obtaining external finance

1.2. Structure and scope of thesis

By conducting this research the author intends to present an insightful picture in order to obtain a better understanding of the technology-based small firms in New Zealand. The research could be relevant and useful for policymakers as the study seeks to shed some light on the issues and challenges faced by TBSFs in the New Zealand economy.

This thesis follows several logical steps to build up a clear structure in order to conduct the research in a consistent way. In the meantime the aims and scope are clarified, this thesis will continue by presenting the relevant literature. The literature chapter sets the stage for the thesis presenting three key theories that need to be considered for acquiring an

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1.3. Theoretical boundaries and context

Before starting to describe the relevant literature in the field of technology based small firms this section presents the boundaries of this research study. To facilitate reading this thesis, some important concepts will be explained and clarified beforehand. This will provide the reader a better understanding of the different concepts and boundaries set up for this research.

Definitions

It is widely know that there is no general universal definition used for SMEs. In Europe micro sized enterprises fit within the boundary of 1 and 9 persons engaged (European

Commission, 2003). Small and Medium sized businesses are described as enterprises ranging between 10 and 249 persons engaged. Whereas the United States International Trade Commission (2010) considers a business with fewer than 500 employees as an SME. New Zealand has no standard definition for SMEs. For this study the following definition is adopted with regard to SMEs (Cameron & Massey, 1999):

Micro-sized firms Fewer than 6 employees

Small-sized firms 6 to fewer than 50 employees

Medium-sized firms 50 to fewer than 100 employees

However, the final focus of this research is not on SMEs in general, but more specifically

focused on technology-based small firms (TBSFs). Throughout this thesisTBSFs are treated

as a subset of SMEs in general. While generally the same issues and conditions apply to TBSFs, they can be seen as a sub-category of SMEs. In accordance to the absence of a general SME definition, a definition for TBSFs is also not present. McNally (1995) defines TBSFs as firms whose activities embrace a significant technology component as a major source of competitive advantage (McNally, 1995). A broader description of TBSFs is given by the Bank of England (2001), they particular consider TBSFs as small firms which are operating in the communications, IT, computing, biotechnology, electronics and medical/life sciences industries.

For this thesis the definition of technology based firms used by Ullah et al (2011) will be slightly adapted. TBSFs in this study are broadly defined as independently owned

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10 and advanced technologies developed by application of scientific and technological

expertise. New Zealand

It is widely known the New Zealand economy is small, open and far from most of the worlds markets. Due to its small market many firms need to export their products in order to grow (MED, 2007). Recent research suggests that a relatively small share of New Zealand’s exports come from high-tech sectors such as ICT and pharmaceuticals (Report of New Zealand Government, 2011, p.19). New Zealand is a small, resource based, commodity-exporting economy distant. It is the combination of absence of a sizeable home market and geographical distance from major markets abroad that impinges on the structure and functioning of the economy (OECD Reviews of innovation policy: New Zealand 2007, p.61). While expanding internationally, and thus jeopardize the potential benefits of local domestic activity, the less likelihood of other firms being attracted to base their key activities in New Zealand (MED, 2007). In addition, experience of clusters abroad shows that an increasing mass of small rapidly growing, high-technology companies stimulates the growth and development of specialized business services to meet their needs (OECD, 2007). A recent study by OECD (2007) indicates that one of the main weaknesses in the New Zealand economy is the lack of investment in business R&D. New Zealand has reported slightly more than 0,50% BERD of their GDP, which is relative low to other OECD countries (figure 1). The relatively small proportion of GDP accounted for by business enterprise R&D reflects in part the country’s industrial structure (OECD Reviews of innovation policy: New Zealand, 2007).

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2. Literature Review

There are a number of relevant theories that need to be considered in order to provide an understanding of the issues in development faced by TBSFs and their entrepreneurial founders. After an extensive literature research the author determined that this thesis will be build on three main theories as they can be seen as most relevant and comprehensive to describe the finance issues of TBSFs. These theories are all concerned with the capital structure theory of firms. The first part of this section will therefore outline the capital structure theory formed by Modigliani and Miller (1958). Subsequently, the pecking order theory of Myers and Maljuf (1984) will clarify the consequences for the capital structure of a firm when entrepreneurs have information that investors do not have. Also, since different sources of finance are important for TBSFs to develop and grow the well-known and

recognized business life cycle theory of Berger and Udell (1998) will be emphasized. These three theories will provide a solid theoretical foundation for the role of finance in the

development of TBSFS.

2.1. Relevant theories

Capital structure theory

In finance the capital structure concerns and refers to the firm’s composition of its liabilities. It is the combination of several financing sources that finances the assets of a firm. The decision in which way to compose the capital structure of a firm is important as it has an effect on the firm’s value. The composition of capital will consist of a combination of equity, debt or other financing sources in order to finance the long term assets of a business. Predominantly the capital structure is a mix of debt and equity finance. Debt can be seen as provided capital that has to be repaid in a certain time period, whereas equity is a financial source of an everlasting investment made by the owner or an outside investor.

It was Modigliani and Miller (1958) decades ago being the first ones investigating the cost of capital and as a result forming the basis of the capital structure theory. By conducting a complex static. partial equilibrium analysis they explained how the cost of capital could serve as a source for rational investment decision making. By defining the cost of capital

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12 pay to finance its assets (weighted average costs of capital) at the same time was the

foundation of their pioneering theory.

However, the theory of Modigliani and Miller was not specifically developed for and focused on SMEs, in others words; several assumptions in their study were made that do not hold specifically for smaller (technological based) firms. They assume for example that shares are freely tradable and that firms have access to stock markets. Moreover, in their study they assume that transaction costs do not exist, and that the level of business related information is equally between entrepreneurs or small business owners and investors. However, it is now widely acknowledged that small firms and technology based small firms, face information asymmetries when seeking investors or funders. The problem of information asymmetry (Akerlof, 1977) occurs when there is a mismatch in the supply and demand of information between entrepreneurs or small business owners and potential financial investors. This mismatch or information asymmetry can lead to agency conflicts between those two actors and is likely to be more acute with TBSFs.

For example, if we take a look at debt markets we could say that the issue of information asymmetry occurs in that segment of the market (Stiglitz and Weiss, 1988). Moreover, information asymmetry problems are closely linked to adverse selection and moral hazard problems. The problem of adverse selection arises when an external investor cannot distinguish between good and bad firms. Unknown risks lead to mispriced debt by unaware investors, this mispricing becomes even worse when risks are even larger. Consequently, borrowers will be discouraged by the higher price of debt and suggest banks will decline finance to a larger part of borrowers. In a reaction to this problem a higher rate for (debt) capital will be handled to cover potential losses. In addition to these problems, when the amount of sought external finance is significant relative to the amount of finance present in the business moral hazard issues can arise (Berger and Udell, 1998). In that situation a firm protected from risk act different than it would act if being entirely open and uncovered towards that risk.

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13 without lending support of financial institutions. Various studies have indicated that TBSFs suffer more from asymmetric information than other ‘non technological’ SMEs in raising capital from banks (Stiglitz and Weiss, 1981; Berger and Udell, 1998). Aboody and Lev (2000) for example, focused in their study on a firms’ R&D activities as a source of

information asymmetry. They demonstrated that the ‘insider gains’ are considerably larger for firms involved in R&D than firms that are not. This means that R&D activities concur to an information asymmetry between managers and investors. Since a large number of TBSFs in some way are involved in R&D it can be argued that these specific information asymmetries appear in these firms. At the same time, the authors consider actions to counter these

information asymmetries. By improving disclosure about R&D activities, for example, through the capitalization of development costs from the moment it is proven that a product is

feasible is one of them (Aboody and Lev, 2000).

Subsequent to the assumption that information asymmetries do not a play role, Modigliani and Miller also assume in their study that its relatively easy to enter capital markets and that firms have access to debt and equity. Ang (1991) countered several issues that are

proposed by the capital theory but do not hold for small firms. For example, Ang suggest that small and medium sized firms are not able to raise finance from the public via an efficient market. This means that are likely to rely on for example on their own resources, (private) investors or governmental financial support. Furthermore, the wealth of entrepreneurs or managers of SMEs is mainly available in one single firm (not a wide spread set of personal investments).

Nonetheless, the disparity of assumptions made by Modigliani and Miller suggest that their theory is not adequate enough as a basis for discussing the finance structure of technology based small firms. Therefore, we will turn to an alternative theory the “pecking order”

hypothesis (POH) as it is more relevant and appropriate for discussing the finance issues of small firms.

Pecking order theory

The pecking order theory developed by Myers (1984) and complemented by Myers and Majluf (1984) suggest that businesses have a preference to use internal finance over external finance. This preference arises from the fact that obtaining external financing is costly. The pecking order theory suggests that in regard to the capital structure,

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14 firms will finance their operations and investments internally; these internal sources could be represented by private funds of the owner or retaining earnings of the business. Secondly, debt financing will be approached before turning to the last and least preferable of finance; equity. In case of the necessity of approaching external finance (internal funds are not sufficient) businesses prefer debt to equity because it is seems to be the safest security. Myers (1984) explains this by stating: “the general rule is to issue safe securities before risky ones”. It is the information asymmetry that causes one of the concerns by managers in approaching equity, as investors want a higher compensation for greater risks they are confronted with. Moreover, owners are also reluctant to dilute their control and ownership which is a necessary condition to approach and finally raise equity investors.

The primary preferred sources of capital will come from internal funds. Most new start-ups use informal sources to start financing their business, for instance money from family and friends of the founder (Bruno and Tyebjee, 1985). Berger and Udell (1998) describe this process as: “funds provided by the start-up team, family, and friends prior to and at the time of the firm’s inception”.

According to Myers and Majluf debt financing will be approached after searching for internal funds. Debt finance through bank loans is a possibility, but money will only be made

available by a bank if in their perception the business is able to provide sufficient and satisfactory returns with regard to possible risks. However, banks prefer loans that will be secured by the mortgages on fixed assets, which makes it difficult to obtain bank loans for (technology based) companies with few tangible assets or rather their main asset is intangible and difficult that value.

Once the two earlier described sources of funding are not sufficient or depleted, external equity finance will become an option. Two forms of external equity finance that are most prominent are venture capital and funds provided by business angels.

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15 maybe pledged and the characteristics of the entrepreneur or start-up team (Berger & Udell, 1998).

The second form of external equity finance that could be approached is external finance from business ‘angels’. Business angels are generally seen as providers of informal risk capital in the market. Business angels according to Freear et al (1994) are defined as: ‘high net worth individuals who invest a portion of their assets in high-risk, high-return

entrepreneurial ventures’. Freear et al (1994) investigated, as opposed to the general consensus of characteristics of investors, three groups of high net worth individuals:

experienced BA’s investing in entrepreneurial businesses, potential investors with a desire to enter the investment market but yet without experience, and uninterested potential investors who would not considering to invest. The study showed that interested potential investors in most cases operate in the same way as business angels. Both prefer investing in business that are located relatively close to their homes, and have a preference for investing in a later development stage of a business.

Similar to the findings of Freear et al (1994), Prowse (1998) also highlights the fact that most angels invest near their home, because of their networking contacts in that area. Angels seems to rely on information coming from informal contacts such as friends and other business angels. Nevertheless, the informal capital providers (angels) are very diverse. According to Prowse (1998) this stems from the different backgrounds and motivations of investors. Moreover he stated that there is a difference between so-called ‘active’ and ‘passive’ angels. Active angels are in some way involved in the business they invest, this could through monitoring the business closely or by taken a seat on the board. In contrast, passive angels are those who only provide capital and seldom monitor the business they invested in. It must be said that passive angels rarely act independently; often they are part of an informal network of several angels, a consortium

Wetzel (1983) stated in his study that small technology based-firms that seek financial capital for start-up and growth activities should try to find business angels to support those activities. Frequently business angels are the most likely source of finance for those firms, as they finance perhaps five times as many businesses than public equity markets and venture capitalist together do.

In contrary, Mason (2007) suggests that the significance of the informal venture capital market is overlooked. This has mainly to do with the fact that actions and investments made by angel investors are not documented in an organized way at all. Moreover, it is

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16 as they try to keep out of sight. These factors makes the business angel market invisible and fragmented (Mason, 2007).

As stated by the pecking order theory, the preference of internal financing above external financing has been explained, but has not been analysed from a theoretical angle which says that firms develop over time with corresponding needs. This process is fundamental in the next examined theory of Berger and Udell.

Business Life Cycle theory

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17 Overall, if we take into account all three above discussed theories it can be concluded that finance issues for SMEs, in particularly for technology based small firms is complex but at the same time highly important for their development and growth. This thesis attempts to ascertain if the role of finance is corresponding with the three theories in the development of TBSFs in New Zealand. Next, empirical results and findings of previous work regarding these theories will be discussed.

2.2. Previous studies and empirical evidence

Up till now, there has not been done much research specifically focused on the topic of financing TBSFs. It must be said that much attention is paid to finance in general as a research topic. However, a large number of studies are focused on financing SMEs in general rather than being specifically focused on TBSFs as a subset. Nevertheless some findings of previous work can summarized.

The previous theories regarding the financing structure and strategies of technology based firms have led to several research results. For example, Guidici and Paleari (2000) found evidence that the majority of their researched TBSFs were funded internally and thereby supporting the earlier discussed pecking order theory. By surveying 46 small high-tech firms in Italy their empirical analysis showed that high-tech firms mainly rely on personal finance. Self financing was preferred over debt, and consequently debt was preferred over equity. Equity as a source of finance was the least preferable and could be seen as a last resort. Moreover, Guidici and Paleari highlighted the fact that only finance provided by investors through equity was not sufficient, TBSFs seems to prefer investors that could add value and expertise to a business rather than providing solely capital.

Similarly in the light of internal funding, Ullah, Abbas and Akbar (2009) found in their UK study that TBSFs (software firms) also seem to follow the pecking order hypothesis. The most important source of finance for these firms as an early stage development were the personal savings of owners, venture capital and capital that becomes available through house mortgages.

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18 range of bootstrap methods available to business owners, such as using credit cards,

leasing and delaying of tax payments.

Other studies have found results that are in line with the business life cycle theory of Berger and Udell (1998) which suggest that different funding patterns are present in certain stages of the business life cycle for firms. For example, Freear and Wetzel (1990) concluded in their study that the first and early stages of the researched firms have mainly being funded by individual investors. Their sample showed that the majority of capital provided by individual investors supported the start up of many firms. Nevertheless, the amount of money that had been invested per round through venture capital was much higher. Freear and Wetzel therefore stated that these two forms of capital should be approached as complements rather as being seen as competitors.

Another study that highlighted different funding patterns of firms being early staged or more developed has been conducted by Moore (1994). The conducted research of high

technology based businesses in the UK showed that most firms are financed at the start up or in an early stage by the entrepreneur himself. The majority of businesses were self financed and just seven percent was able to find support for bank finance. Moreover, Moore came to another interesting finding which said that the more firms were developed the less they were constrained financially. Moore stated that bank finance and external equity were more likely sources of funding for development and expansion in later stages of the business cycle.

The study of Boyzaka & De La Potterie (2008) conducted in Belgium also suggest that personal finance is critical in the startup phase of TBSFs. By surveying over hundred Belgium unquoted TBSFs, Boyzaka & De La Potterie concluded that most of the firms had difficulties in obtaining external finance at an early stage. The majority (82%) of cases that have been studied were financed by their founders. Boyzaka & De La Potterie found that financial help from banks and the support by the government were especially important during the early stages of development, whereas business angel and venture capital funding plays a more important role later on.

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19 asymmetries for high-tech firms compared to conventional ventures increases the business risk in this type of investment. According to Sapienza & De Clerq these risks arise for example from longer time horizons and greater technological uncertainty.

In addition, Diamond (1991) reports that monitoring of actions interacts with reputation, which indirectly signals other external financial investors to provide capital. Moreover, in financing high-risk, potentially high-reward projects by purchasing equity while a firm is still being privately held; venture capital organization can be considered as important (Gompers and Lerner, 2001a).

Furthermore, a more recent study from Ullah and Taylor (2007) revealed that almost 80% of their surveyed TBSFs in the UK were financially constrained. These constraints appeared as a result of both supply and demand-side factors. The researched sample showed that the major part of funding difficulties occurred at the start up stage and expansion stage. Ullah concluded that given these difficulties during the early stages, funds were mainly provided by the entrepreneurs themselves. This last finding also gives support to earlier discussed pecking order theory of Myers and Majluf.

However, as being indicated above by the study of Boyzaka & De La Potterie (2008) but not earlier mentioned in this chapter is the role that a government can play in the early stages of the development of TBSFS. Two studies came up with some empirical evidence that

governmental support could be helpful. First, Lerner (1999) showed that awarded firms grew much faster than firms that were not be awarded by a certificate in the high tech sector over ten years. This conclusion was based on a study that examined the government program of the Small Business Innovation Research (SBIR) in the US. The firms that were rewarded through the program had significantly more options to be financially backed by venture capital than firms that had not be rewarded. Secondly, Moore & Garnsey (1992) conducted a similar study in the UK. The study focused on the so called Small Firms Merit Award for Research Technology (SMART) introduced by the government and also had some positive results. The SMART initiative provided grants for small businesses in order to develop technological products and stimulate innovation and thereby counter information

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2.3. Summary

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3. Theoretical Framework

3.1. Propositions

This section presents four propositions in which the role of finance will be connected to development of TBSFs. The designed propositions will be analyzed and tested

simultaneously through the collected data and conducted research. These propositions are assumptions based on the previous highlighted theories and evidence.

Previous work (van Auken & Neeley, 1996; Guidici & Paleari, 2000; Ullah, Abbas & Akbar, 2009 shows that internal funding is an important and preferable way of financing a venture at an early stage. Due to information asymmetries, risks and uncertainties external funding is assumed to be rare. Therefore it could be argued that the pecking order theory holds and thus give rise to the first proposition of this thesis:

Proposition 1:

TBSFs will rely more on internal funding than on external funding in order to develop and maximize growth potential.

While being more specific focused on the business phase and technological stage, different financial sources are preferred at different stages as explained by the theory of Berger and Udell (1998). Being in a certain technological phase will have consequences for certain funding sources and strategies to fund particular operations. Especially the studies of Freear & Wetzel (1990) and Moore (1994) showed that the financial supply side causes a different financing pattern for TBSFs in different phases; therefore proposition 2 will be:

Proposition 2:

Early staged TBSFs will have a different funding pattern than more established TBSFs.

Being more inexperienced, information asymmetries and opaqueness, carrying more risks, having no or a minimal track record it is assumed that early staged firms face more

difficulties in obtaining finance and thus face more challenges in their development

(Sapienza & De Clercq, 2000; Diamond, 1991). In contrast, by having an easier access to finance, more options could be explored and the best funding option can be selected. In particular during the early stages it is assumed that an easy access to finance positively contributes to a better development of TBSFs in general. On the other hand, the more difficult this process will be the more difficult it will be to develop a business.

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Early staged TBSFs will experience more difficulties in accessing external finance and thereby being more constrained than more established TBSFs.

.Unlike the fact that not much empirical work and complementary evidence is present, it is assumed in this thesis that the role of the government positively can contribute to the development of TBSFs. Two earlier mentioned studies (Moore & Garnsey, 1992; Lerner, 1999) showed both a positive influence of government initiatives in regard to small technological focused firms. By certificating and subsidizing particular operations it is assumed that the support by the government helps TBSFs to develop much better and faster. Therefore, finally the last proposition incorporates the role of the New Zealand government support.

Proposition 4

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3.2. Concepts and the conceptual model

In this study several concepts will be tested during the analysis of the acquired data

originating from the interviews. The concepts stem from the theory and are related to the sub research questions and designed propositions in chapter 3. The comments and answers given by the entrepreneurs will be tested by the developed concepts. The interview

questions were build on these proposed concepts and can be analyzed with the answers of the interviewed key informants to validate data. The following concepts have been extracted from theory and created for this study: source of funding, stage of development, availability

of government subsidies and access to finance. These concepts will be described as follow:

1. Source of funding

Funding as a concept should be seen as which source is used and selected by the TBSF in order to develop the business. The concept can be divided into internal and external sources of funding. Internal funding consists of personal saving, funding of family and friends and retained earnings. External funding is covered by venture capital, funding from business angels and bank finance.

2. Stage of development

This concept can be defined by the life cycle staged model of Berger and Udell (1998). The stage of development of a TBSFs can be start up, early stage, developing stage and the mature or established phase. In this thesis an early staged or developing firm is less than five years old, whereas an established firm exists for five or more years.

3. Access to finance

For this concept the level or degree of difficulty experienced by a firm in obtaining a source of capital stays central. It is assumed in this thesis that the easier it is for TBSFs to access finance, the more beneficial it is for the development of these firms.

4. Availability of government subsidies

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24 The concepts explained above result in a visual conceptual model that is showed below.

Conceptual model

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3.3. Summary

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4. Methodology

This chapter works to demonstrate what methodology is used for writing this thesis. Data for this research was gathered from numerous interviews with key informants and owner

managers of technology based small firms across different sectors throughout New Zealand. The thesis builds upon some of the issues that were raised at the Policy Symposium of the NZSME research centre on supporting technology-based small firms in August 2011. For this study a programme of qualitative interviews with founding entrepreneurs where possible was conducted and supplemented by interviews with key informants.

4.1. Research type and design

According to Yin (2003:20) every type of empirical research has an implicit, if not explicit research design. The design can be seen as a logical plan for getting from the initial set of questions to some set of conclusions. Philliber, Schwab & Samsloss (1980) considers a *research design more as a ‘blueprint’. This blueprint is coping with several problems: what questions to study, what data are relevant, what information to collect and how to analyze the results. This exploratory study will provide qualitative data. According to Zikmund (2003:54) exploratory research is conducted to clarify ambiguous problems. Since the importance of TBSFs for the New Zealand economy is known in general, this research is therefore to gain a better understanding of the issues faced by those TBSFs.

An exploratory study provide information to use in analyzing a situation, but uncovering conclusive evidence to determined a particular course of action is not the purpose of this thesis (Zikmund, 2003:55). Consequently, this thesis helps to crystallize the financing issues of TBSFs in New Zealand. Also, as characterized by Zikmund (2003) this research may require subsequent research to provide more conclusive evidence. This research will be a multiple case study research as it the most appropriate type of research in order to answer “how” and “why” questions (Yin, p.7).

4.2. Data collection

The selected qualitative research technique to collect the necessary data within the different case studies is face to face in depth interviews. Yin (2003) states that interviews are

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27 studies. Therefore, this study includes insights originating from 7 key informants; as they do not only provide insights in financing TBSFS, they are also able to provide sources of

corroboratory or contrary evidence (Yin, 2003). All the participants were directly contacted by email. A letter was attached to the original email to provide additional information. The original interview request letter can be found in the appendix of this thesis. The generated data for this study is based on 27 interviews undertaken during August and October 2011. The majority of the interviews lasted approximately one hour, varying from 45 minutes till one and half hour.

Respondent selection

Several of the 20 interviewed respondents were recruited from an existing database of the New Zealand Centre for SME Research. The respondents were all carefully selected and consisted of founders and/or managing directors of technology-based firms. As this study is focused on several challenges that TBSFs face, it was necessary to interview those people who were in charge and being aware of all issues that could play a role. So, a founder or a managing director could give the most appropriate answer to questions which were focused on the challenges in the past as well as the near future. In this research the recruited respondents had to own or manage the business, as they were seen as the only persons who could provide an answer on specific problems and challenges in a larger context (whole business).

The centre is using this database for an annual survey named BusinesSMEasure and has a panel data set of 1500 SMEs. Furthermore, snowballing as a technique was used to gather additional contacts. By using several gatekeepers new contacts with TBSFs were

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28 Furthermore, the interviewed technology based small firms were selected on the basis of several criteria:

- A firm its products and/or services embody innovative and advanced technologies developed by application of scientific and technological expertise

- The firm fits within the definition of SMEs (< 100 employees) - The firm is a registered and based in New Zealand

A systematic overview of all the interviewed participants is shown in table 1 (TBSFs) and 2 (Key Informants) below. Table 1 shows the 20 interviewed TBSFs on different locations in New Zealand, as said before; the majority of firms were represented by their founder. In case founders were not available for an interview, they were replaced by the current managing director. Table 2 shows the second interviewed group; 7 key informants.

Table 1 Technology based small firms

TBSF Location Interviewee details

TBSF # 01 Petone Founder

TBSF # 02 Wellington Founder

TBSF # 03 Palmerston North Founder

TBSF # 09 Palmerston North Founders

TBSF # 10 Wellington Managing director

TBSF # 11 Wellington Managing director

TBSF # 14 Auckland Founder

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29

TBSF # 16 Auckland Managing director

TBSF # 17 Auckland Founders

Table 2 Key informants

Key Informant Place Interviewee details

KI # 1 Palmerston North Development agency KI # 2 Wellington Incubator manager KI # 3 Wellington Development agency

KI # 4 Wellington Funder

KI # 5 Wellington Development agency

KI # 6 Wellington Funder

KI # 7 Auckland Incubator manager

All the key informants are experts in the field of supporting and facilitating businesses. The key informants do represent both government and private institutions.

4.3. Data analysis

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30

Table 3

1. Preparation of raw data files

The interview transcripts were formatted in common format and of each raw data file a copy was made.

2. Close reading of text

The raw data files were read multiple times, which made the author familiar with the text and content by gaining an understanding of the selected “themes”.

3. Creation of themes

The intensive research and reading of all the 27 transcripts identified and defined the themes which are classified into the proposed concepts..

4. Overlapping coding and uncoded text

Text that could not be assigned to any of the themes or concepts was not immediately seen as irrelevant, but would be only used as background information.

5. Continuing revision and refinement of theme system

Appropriate quotes that convey and reinforce the essence of different themes are inserted into the findings section.

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31

4.4. Measurement criteria

As this thesis is characterized as a multiple case study research, it is highly important to set different measurement criteria to ensure the quality of the research. Yin (2003) provides three review mechanisms to ensure this: construct validity, external validity and reliability.

Construct validity

By making use of multiple sources of evidence the validity of a research could be increased (Yin, 2003) For this thesis, triangulation is conducted in order to increase the validity of the research. A variety of sources such as government and agency reports, annual reports and statistical information originating from the OECD is used to validate the statements done by the interviewees. Moreover, seven key informants will be interviewed in order to validate findings of the entrepreneurs.

External validity

Yin (2003) commented that external validity deals with the problem whether a study’s findings are generalizable beyond the immediate case study. The replication logic has been used in study, since the same interview questions have been asked to 20 different

respondents it contributes to the generalization of findings in this study.

Reliability

According to Yin (2003) reliability should be defined as: ‘The objective is to be sure that if a

later investigator followed the same procedures as described by an earlier investigator and conducted by the same case study (..) the later investigator should arrive at the same findings and conclusions’. In this study all the interviews were face to face conversations

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32

4.5. Summary

This chapter provides an adequate description of the chosen research design and data collection method. This exploratory qualitative research study is based on twenty face to face interviews with owner and/or managers of TBSFs with a variety of early/well established firms. The respondents were all carefully selected and consisted of founders and/or

managing directors of technology-based firms. Moreover, these interviews were conducted among a diverse range of TBSFs across different sectors including: creativity, IT and

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33

5. Results

This chapter will describe the outcomes of all 27 interviews conducted for this research. Firstly, the data derived from the interviews with the entrepreneurial founders or manager directors of the different TBSFs will be presented. First, some descriptive characteristics are presented which focus on the size, age and industries of the different TBSFs. In addition to that another table will give some insights how the different TBSFs are funded. These (quantitative) data of the TBSFs helps as a basis for analyzing the acquired data in a qualitative way. Secondly, after the analysis of these themes the findings of the interviewed key informants will be shown.

5.1 Technology based small firms

5.1.1 Business profile information

This section will analyze the data of the 20 interviewed TBSFs. As said before, even though the information gathered during the interviews was qualitative in nature, it is still important to provide some basic descriptive information of the interviewed TBSF. Table 5.1 shows the company profiles of the 20 interviewed TBSFs.

TBSF Size by FTEs Age of firms (in years) Industry sector ANZSIC group - main product or service

TBSF # 01 10 15 Manufacturing Pharmaceutical and medicinal product manufacturing TBSF # 02 5 2 Professional, Scientific and Technical Services Design of customised interactive software

TBSF # 03 42 15 Professional, Scientific and Technical Services Computer system design and related services TBSF # 04 4 3 Professional, Scientific and Technical Services IT consulting service - software development TBSF # 05 4 3 Professional, Scientific and Technical Services IT consulting service - software development TBSF # 06 3 3 Manufacturing Pharmaceutical and medicinal product manufacturing TBSF # 07 12 14 Professional, Scientific and Technical Services Software and hardware system integration

TBSF # 08 8 3 Professional, Scientific and Technical Services IT consulting service - software development TBSF # 09 5 2 Professional, Scientific and Technical Services Design of customised interactive software TBSF # 10 17 24 Information media and Telecommunications Motion picture and video activities TBSF # 11 3 6 Construction Plaster product manufacturing

TBSF # 12 21 11 Professional, Scientific and Technical Services IT consulting service - software development TBSF # 13 19 9 Professional, Scientific and Technical Services IT consulting service - software development TBSF # 14 1 1 Administrative and Support Services Employment Placement and Recruitment Services TBSF # 15 2 5 Manufacturing Photographic, Optical Equipment Manufacturing TBSF # 16 31 12 Professional, Scientific and Technical Services Software simulation and testing service TBSF # 17 2 1 Professional, Scientific and Technical Services Computer hardware networking TBSF # 18 3 3 Professional, Scientific and Technical Services Design of customised interactive software

TBSF # 19 2 1 Professional, Scientific and Technical Services Development and sale of customised computer software TBSF # 20 5 7 Professional, Scientific and Technical Services Design of customised interactive software

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34 or less people, whereas only two firms (10%) employ 25 or more people. Furthermore, among the 20 interviewed TBSFs slightly more than half of the firms can be characterized as early staged, whereas the other half could be seen as more established. Of all firms 55% were established over the last five years, this means from 2006 onwards and seen as early staged. The other 45% were established in or prior to 2006, thus in existence for at least 5 years and thus more established.

Table 4.1 also shows the different TBSFs in several industry sectors. This classification originates from the Australian and New Zealand Standard Industrial Classification (ANZSIC, 2006) and the descriptive information shows that the majority of firms are classified into the Professional, Scientific and Technical Services industries. However, as this classification into industries could be seen as fairly broad, the next column provides therefore more detailed information about the main product or service delivered by all firms. The majority of interviewed firms are involved in products or services that embody advanced or developed technologies in IT or the software industry. Also, a number of firms were involved in the manufacturing sector, focused on biotechnology or photographical equipment

manufacturing.

Before turning to the analysis of the qualitative themes we now have a look at some quantitative information of the funding situation of all the TBSFs. Although the interviewed sample for this study only includes 20 TBSFs it is still worthwhile to have a look on how those businesses were financed during their existence. Therefore table 5.2 provides an insight on how all the interviewed TBSFs were funded; it shows for example that the majority of TBSFs were internally funded (65%). In both cases, early staged and established TBSFs, the majority of them were solely financed internally. For the early staged TBSFs banks loans and venture capital as a source of finance solely were not available or used. Furthermore, the proportion of early stage TBSFs using business angel finance was slightly more than using venture capital. Of all established TBSFs more than half (60%) were financed internally. The other 40% of the firms used a bank loan, business angel finance or a

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35

Table 5.2: Funding of 20 TBSFs

All TBSFs (n=20) Number of TBSFs Percentage (%)

Internally funded 13 65 Externally funded 7 35 Early staged TBSFs (11) Internally 7 64 Externally 4 36 Bank loan 1 9 Venture Capital 0 0 Business Angels 2 18 Combination BA / VC 1 9 Established TBSFs (9) Internally 6 67 Externally 3 33 Bank loan 0 0 Venture Capital 0 0 Business Angels 2 22 Combination BA / VC 1 11

We now turn to the more in depth analysis of the obtained data by taking a look at the overall data matrix. The matrix gives an overall view of answers and quotes given by the

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Table 5.3: Overall data matrix (Green is a positive answer / Red is a negative answer)

TBSF / CONCEPT # 1 # 2 # 3 # 4 # 5 # 6 # 7 # 8 # 9 # 10

Source of funding

Relying on nternal funds

“No debt used, rather retained earnings

which made the management of the

business much easier”

“We are funded internally and not

looking for any external capital”

“Merging with another established company helped raising private

equity”

“Business is internally funded by own savings and government grants, this has been sufficient so

far” “Seed funding was based on market research, an American investor invested $50,000”

“Over the last five years we raised approximately 5$ US

dollar”

“Being self-funded from the start, our start-up

cost were not that high”

“We are trying to bootstrap as long as possible, we might be greedy but want to keep the shares for

ourselves”

“The collateral required was more

than the value of

the loan itself”

x

Stage of Development

Early staged N/A

The first six months has been a learning

experience” N/A N/A “The past 2,5 years can be considered as a pre-launch phase”

“All the fundamentals are in place, however there is still a lot of

risk”

N/A

“We grew too quickly, we had

no experience at all”

Established

“We are at the mature plateau at the

moment”

N/A “

“We have a proven track record pf software innovation, product development

and commercialisation”

“Steep learning curve last three years” N/A N/A “Smallness of the business delivers a good dynamism” N/A

x

Access to finance

Perceived as difficult

x

“We are going to

seek bank funding”

“Contacts were key in raising capital, it just

opened doors”

“Can’t even get a bank overdraft facility”

x

“Money was needed as a proof of concept, it was very difficult to obtain” “The requirements and criteria set

by business angels are really

tight”

“Pool of funding for TBSFs in NZ is

incredibly low”

x

“The NZ market is just too small for

making huge amounts of money” “It is always hard to raise funds and their seems to be no improvement” Government subsidies Perceived as positive “Acceleration or tax breaks would have

helped us”

“We have been involved in three rounds of funding”

“Very appropriate, no strings were attached”

“Absolutely fantastic, helpful support in an early

stage”

“100K has been matched”

“we raised two million through grant funds”. “Being able to access non dilutive capital on reasonably terms that gets the company pick up the technology

makes a huge difference”

“Once a 20K grant was taken”

“Grant for scaling up sales abroad”

“It still costs us money, but it was

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37

TBSF / CONCEPT # 11 # 12 # 13 # 14 #15 # 16 #17 #18 # 19 # 20

Source of funding

Relying on nternal funds

‘Three years of R&D activities have been financed with own

savings’

“Bootstrapped from the start, a few loans were taken

from friends”

“You really got to know what you’re doing with your cashflows, and that’s

challenging”

“Equity finance least preferred way of finance because typically you give more away than you

get back”

“Entrepreneur and brother has set money aside to

build the business”

“Business was funded by a bank loan, as much as money as possible was lended”

x

“First capital raised by family and friends to build the prototype product”

x

“So far the company

has not approached any capital”

Stage of Development

Early staged N/A N/A N/A

“We lack experience at the moment to develop

the business” “The developed and manufactured product was launched and sold direct online” N/A “200K is needed to further develop the prototype” “Incubate in NZ and being stable on the radar”

“You get constraint if you grow (too)

quickly, your growing to a point

where you can’t raise any more money and you end

up losing opportunities

N/A

Established

“Our product has been developed for

six years now”

“Not growth ‘at all costs’, we have grown very fast and need to consolidate”

“We went from a high growth model to a “sustain where we are” at the moment”

N/A N/A

“We don’t need help to run the business, we need help how to grow the business”

N/A N/A N/A

“It was very difficult to be sustainable with 12 employees, so we introduced a strategic refocus” Access to finance Perceived as difficult

x

“NZ is characterized by small volume money, so we’re forced to do more with less”

“How do you meet them?”

“To start a company making a product in NZ is practically

impossible”

x

“It’s hard working to get funding in NZ, there are not many

places to go”

“We got the funding but it was a long, slow

and distracting process” “People (potential investors) seems to be thinking investing is companies rather than in people” “The investor we spoke to, thought that the valuation of the company was too high and therefore did not invest”

“There are not many people to talk to, there is a very small

group of people investing in IT and

software”

“We can’t get the finance to growth and survive naturally

to give long tem reward”

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38 Perceived as positive

“We are being involved in a five stage market development funding program” “Made the development of products possible and easier”

x

“It is a huge help, it could be financed internally but we would not do that because it was

too money intensive”

“Grants have been useful to help and supporting to develop

a strong product foundation”

“First money has to be generated before being able to use such

grants”

“We are looking for getting a grant”

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5.1.2 Source of funding - reliance on internal funding

By asking the entrepreneurial founders how they managed to fund their business from the start or over the last couple of years, the majority of TBSF owners responded by stating that they have relied on internal funding. A substantial number of firms used bootstrapping methods and retained earnings to maintain and develop their businesses. An illustrative comment was made by one of the entrepreneurial owner respondents:

It appears to be that owner managers of most TBSFs rely on internal funding, especially in the early stages of their development. As expected most of the respondents acknowledge and experience these periods as tough and challenging

Interestingly, a major part of the TBSFs who relied on internal funding often have service projects that are executed for revenue purposes only. These projects are set up and do not directly contribute to the desired technological development of the firm or the products they would like to produce. The results suggest that these complementary projects seems to be there for generating and building up internal sources in order to be able to invest in the firms real technology-based project.

This particular TBSF was delivering services to its clients by using open-source software which can not be copyrighted. Nevertheless, by using this open source software the company is able to make profits by offering its developed services. However, being able to build, develop and own a product will the desired outcome, but this will cost far more money and time. This finding is confirmed by another TBSF that is involved in the open-source software industry, TBSF 13 stated:

“We are entirely internally self funded, we have never used any debt rather we lived from retained earnings which made the management of the business much easier” (TBSF 1)

“You really got to know what you are doing with your cash flows, we are bootstrapped from the start and that is challenging and restrictive at the same time” (TBSF 13)

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40 ccccccccccccccccccccccccc cccccccccccccccccccccccccccccccccccccccccccccccccccccc

This suggests that these firms working with open source technology prefer to build up internal sources to fund their operations rather than seeking for external capital to develop and create their own products.

Furthermore, personal savings and capital provided by family and friends were the major sources of finance for TBSFs. These sources of capital were mainly used for starting up the business or to finance the early stages of the firms. The amounts of capital which were frequently reported and thus available for most of the entrepreneurial founder ranged on average between $10.000 and $80.000. Interestingly, one of the biotechnology companies was also entirely internally funded and used a worse case scenario planning strategy.

5.1.3 Source of funding - attitudes to external funding

Many references were made during the interviews in regard to external capital as a source of finance for TBSFs. In particular the majority of TBSFs showed a reluctant attitude towards external funding. The willingness to obtain external capital was low on average for several reasons. For example one of the interviewee’s stated that:

This comment was made by an entrepreneurial founder of an early staged company. As illustrated by this owner manager, more companies shared these same thoughts and attitudes. An explanation of this attitude could possibly be given by another owner manager who stated that:

“We have the idea of using and selling this service company in the future and thereby generating enough resources to be able to develop products”. (TBSF 13)

“There was no traditional business plan composed, we used a worst case scenario as a starting point. Right from the start we were financed internally”. (TBSF 1)

“Our internally funds are sufficient at the moment, if we need any capital in the near future a government grant would be an option” (TBSF 4)

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41 This item of control of ownership was also mentioned by other TBSFs. The results show that several TBSFs are reluctant to external capital as they have to share their business with the outside investor:

Another explanation for the reluctant attitude to external capital might be come from the data that show that some TBSF are not willing to grow and as a result of that act in a reluctant way to external finance. For example, some business owners noted that even when funding would be required for potentially growing their firm, they would not take debt funding. One owner manager of an established TBSF commented:

Debt finance is one source of capital already mentioned, however a number of potential sources of external finance were mentioned frequently during the interviews. These sources could be divided into; debt financing by banks, funding provided by business angels and equity finance raised from venture capitalists.

Firstly, debt financing by banks is founded to be rare for most of the TBSFs. Criteria set by banks are often perceived as too high and conditions for obtaining a bank loan are seen as very tight.

This was a comment made by a TBSF which is well established and had already a proven sales and track record. In this case the bank was cautious with their finance behavior towards this TBSF.

However, it must be said that there were some exemptions of TBSFs who were able or willing to raise funding through banks. One of them was a firm specialized in manufacturing photographic equipment and obtained a bank loan during the early stage of the business. In this case the entrepreneur succeeded in borrowing money, however in order to acquire the bank loan a personal asset (house) of the entrepreneur was put forward as collateral. In a

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42 similar way another early staged firm tried to borrow money from the bank but the terms and conditions were not acceptable due to high collateral requirements:

According to these findings, it appears that most banks are not willing to provide capital to TBSFs and if they do high collateral requirements are imposed.

Following the debt finance by banks, raising external equity from business angels and venture capitalists do show nearly the same pattern. Only two companies were successful in raising venture capital or being involved in a business angel funding round. The majority of comments and views regarding the process of obtaining external equity finance were similar. The general perception on the capital market of New Zealand is that it’s lacking sufficient numbers of investors in technology focused businesses. Apparently, the visibility and

experience of high net worth individuals and VCs in New Zealand is lacking. One respondent illustrates this by saying:

Moreover, following the owners and managers it seems to be that the number of investors and amount of risk capital is limited in the New Zealand market. One of the owners

expressed the view that this limitation is also coming from inexperienced unconfident investors that maintain the investor sentiment:

An issue that is closely related to the previous mentioned comments is the price that has to be paid in order to acquire external equity capital. According to the majority of owners, once potential external capital is founded the collateral requirements by investors frequently make it unattractive to close a deal. The following quotes are representative for this:

“With regard to the bank loan: the collateral required was more than the actual value of the loan itself” (TBSF 9)

“Pool for funding TBSFs in NZ is incredibility low” (TBSF 6)

“We had to go fishing for equity, rather than investors coming to us” (TBSF 3)

“Investors need to see the returns that high growth companies can deliver and therefore gaining confidence in that asset class” (TBSF 6)

Financing Technology Based Small Firms in New Zealand Master Thesis by Mark van Dijken

Financing Technology Based Small Firms

in New Zealand

Master Thesis

by

Mark van Dijken

University of Groningen

Faculty of Economics and Business

Financing Technology Based Small Firms

in New Zealand

Master thesis

MSc BA specialization Small Business & Entrepreneurship

University of Groningen

Faculty of Economics and Business

Mark van Dijken

Studentnumber 1606220

Oosterweg 110

9724CM Groningen (The Netherlands)

Phone: +31 (0)6-46102213

m.van.dijken@student.rug.nl

vandijkenmark@gmail.com

Foreword

Executive Summary

Table of Contents

1. Introduction

1.1. Aims and research question

1.2. Structure and scope of thesis

1.3. Theoretical boundaries and context

2. Literature Review

2.1. Relevant theories

2.2. Previous studies and empirical evidence

2.3. Summary

3. Theoretical Framework

3.1. Propositions

3.2. Concepts and the conceptual model

3.3. Summary

4. Methodology

4.1. Research type and design

4.2. Data collection

4.3. Data analysis

4.4. Measurement criteria

4.5. Summary

5. Results

5.1 Technology based small firms

5.1.1 Business profile information

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

5.1.2 Source of funding - reliance on internal funding

5.1.3 Source of funding - attitudes to external funding