New research from Professor David Robinson and the Kauffman Foundation reveals that 75 percent of most firms’ startup capital is made up in equal parts of owner equity and bank loans and/or credit card debt, underscoring the importance of liquid credit markets to the formation and success of new firms.

Other key findings include:

• Outside debt (financing through credit cards, credit lines, bank loans, etc.) was the most important type of financing for new firms, followed closely by owner equity. These two sources accounted for about 75 percent of startup capital.
• Insider debt (from friends, family, and spouses) and outsider equity were much less important sources of startup capital.
• Owner debt and insider equity were the least important sources for startup capital.
• Firms with high credit scores (low risk) started businesses with much higher levels of startup capital than firms with low credit scores. The average amount of startup capital was $136,000 and $50,000 respectively. These compare with about $78,000 for firms overall.
• High-tech firms with high Dun & Bradstreet Credit Scores (low risk) started with nearly $275,000 in financial capital. More than $100,000 of this financing was from outside equity investors such as venture capitalists and other informal investors.
• Outside equity financing was the most important source of startup capital for high-tech firms with high credit scores.

“These findings reveal how important smoothly functioning credit markets are to the success of startups,” said Robinson. “I think many people understand the importance of bank credit for firms that are already up and running—our results show bank credit is critical at the very earliest stages of a firm’s life.”

The full report, “The Capital Structure Decisions of New Firms,” is available here.

I appeared on Business News Network to discuss: the missteps in implementing TARP, who should be bailed out, alternative plans to regenerate credit and the implications for the real economy. View the clip here.

Image courtesy of Wikimedia Commons

Are entrepreneurs more optimistic than the rest of us? What does it take to succeed as an entrepreneur? Professor David Robinson shares insights and details from his research in this video from Duke’s Center for Entrepreneurship and Innovation.

Learn more about Robinson and Duke colleague Manju Puri’s research on optimism and entrepreneurship here.

Here’s a nice summary of new work by Duke PhD alumna Rosie Ferraro, and Fuqua marketing faculty members Jim Bettman and Tanya Chartrand, courtesy of the Journal of Consumer Research:

Products with visible brand names are everywhere; many times we don’t even notice them. But how much do those unnoticed exposures affect brand choices? Quite a bit, according to a new study in the Journal of Consumer Research.

Authors Rosellina Ferraro (University of Maryland), James R. Bettman, and Tanya L. Chartrand (both Duke University) conducted a series of experiments using Dasani water and found that study participants who viewed pictures of ordinary people near bottles of Dasani were more likely to choose that brand over three other brands—even if they were unaware they had seen the logo.

“For example, on any given morning, one might pass several people with Starbucks coffee in hand. Will this repeated exposure affect an observer’s decision to select Starbucks coffee if given a choice among coffee brands? We show that the answer is yes, and that repeated exposure to a brand will lead to an increased likelihood of selecting that brand,” write the authors.

Read the rest of this entry »

It is earnings season and many banks will be reporting their earnings. What are we to make of these earnings? In usual circumstances, it is hard to decode earnings. Today, it is next to impossible.

By the way, why did Goldman Sachs and Morgan Stanley change their status to bank holding companies? One major factor was the flexibility they got to report their earnings.

Read the rest of this entry »

BNET has posted a nice story about Gavan Fitzsimons’ research showing that cause-related marketing can help increase brand sales.

The VIX is hovering around 70%. This is an annualized volatility. Bringing it to a daily level, volatility would be about 4.5%. Hence, the VIX is telling us that market moves of up to +/- 9% should not be unexpected.

Market pundits often refer to market volatility as a measure of fear. Let me offer some ideas as to the drivers of this volatility.   Read the rest of this entry »

The credit crisis is 13-months old. Unfortunately, policy makers have been late to the game. In addition, the game plan has changed so many times that it is not surprising that there is a general lack of confidence that we can fix the problems.

Recent actions (equity injections, purchasing troubled assets) will take a number of months to implement. These actions are too late for the real economy. The damage has been done.

The relevant question is how deep of a recession will we see? Read the rest of this entry »

The government doled out $125b of equity injection to 9 banks yesterday. It is a dramatic change from the original TARP proposal (to pay a premium price for toxic assets). I have advocated for weeks an equity injection (along with other measures).

However, there are serious problems with the government’s implementation. Read the rest of this entry »

Dan Ariely considers economists’ approach to mistakes today on predictablyirrational.com:

I always found the appeal to the market gods a bit odd. Why would the market fix mistakes instead of aggravating them? When the Chicago economists sometimes (reluctantly) admit that people make mistakes, they claim that people make different types of mistakes that will eventually cancel each other out in the market. Behavioral economics argues that, instead, people will often make the same mistake, and the individual mistakes can aggregate in the market. Let’s take the subprime mortgage crisis, which I think is a great example (but a very sad reality) of the market working to make the aggregation of mistakes worse. It is not as if some people made one kind of mistake and others made another kind. It was the fact that so many people made the same mistakes, and the market for these mistakes is what got us to where we are now.