Financing of Technology Startups in Bangalore: An Empirical Study of Requirements, Sources and Performance

Abstract

Tech startups are integral drivers of economic growth in any economy, given their potential role and significance in employment generation, wealth creation, and aggregate output of a nation. However, most startups are financially constrained to acquire the necessary resources to emerge, survive, and grow. The financial constraints for tech startups primarily stem from ‘liability of newness’ and ‘lack of legitimacy’, which lead to significant information asymmetry between startups and financiers. These financial constraints impede the emergence and growth of startups, particularly in emerging economies like India. Therefore, to promote a conducive entrepreneurial ecosystem, facilitating financial support to startups is critical. This necessitates an exhaustive empirical study to understand the startup financing phenomenon. Against this backdrop, the present study examines the key constructs of startup financing phenomenon in the context of the startup capital of India, Bangalore.We explore 1) the various needs of financing for tech startups and their determinants, 2) the financial sources to meet the needs, 3) the total quantum of finance a startup obtains from these sources, and 4) the influence of financing on a tech startup’s financial performance.To study the startup financing phenomenon over a tech startup’s lifecycle, at the outset, we define the distinct lifecycle stages of a tech startup, namely Early stage, Survival stage and Growth stag, based on age and revenue. We ascertain that the three distinct lifecycle stages identified by us is statistically valid. We use secondary data from the MCA (Ministry of Corporate Affairs, the Government of India) and primary data gathered from 93 tech startups in Bangalore to study the startup financing phenomenon. We employ appropriate statistical techniques to analyze the research objectives. We find that the nature and quantum of financial requirements vary with a startup’s lifecycle stage. While the financial requirements to acquire Human Capital (HC) and Social Capital (SC) vary with the lifecycle stages, the financial requirement for Research Capital (RC) is significant across all the three stages. This variation in a startup’s financial requirements further influences its choice to approach a financial source among Business Angel (BA), Venture Capital (VC), Corporate Venture Capital (CVC), Banks, and Private Equity (PE). We find that as the extent of finance required to acquire HC and SC increases for a tech startup, it predominantly approaches VCs. However, the financial requirement for the acquisition of RC is met by multiple financial sources including BA, CVC, and PE. Furthermore, with an increase in the total quantum of financing required, a startup is more likely to switch its focus from BAs to institutional investors with a larger pool of funds, including VCsand PEs. Given a startup’s choice of financial sources, the total amount it obtains also varies. Further, the funds obtained from these sources play a significant role in influencing a startup’s financial performance. However, the sources that infuse finance have differential influences on its financial performance. This means that irrespective of the sources, the quantum of financial infusion is a significant contributor to a startup’s financial performance. Based on the analyses, we derive appropriate managerial and policy implications for startups, financial sources, and policy makers. We recommend strategies to facilitate credit access to tech startups across all the lifecycle stages through government policies.