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What Determines a Startup's Chance of Financing?

Heard the phrase "location, location, location"?

WCU economist Matt Saboe has found that location is just as important to entrepreneurs looking for financing as it is to homeowners choosing a home. And even if the startup doesn't have a bricks-and-mortar presence, the likelihood of that new business finding financing depends on where they locate. Saboe's latest research links location and financing to a startup’s success.

Saboe has completed several studies on new firm emergence, financing and survival by examining data collected on approximately 300 U.S. metropolitan statistical areas (MSAs) from rural areas in Texas to New York City. The Kauffman Firm Survey (KFS) tracked 4,928 businesses that were founded in 2004 and followed them over their first eight years of operation.

Saboe explains that his research "accounts for heterogeneity in financing methods and repeated transactions; explores how local industry conditions affect new firm financing; and considers how the determinants of financing differ for high-tech and low-tech firms."

In various regions there are distinct entrepreneurial ecosystems including Silicon Valley's high-tech hub; North Carolina's Research Triangle region; and the Philadelphia/New Jersey concentration of pharmaceutical companies. All the business services required by a startup in any of those industries, from employees to mentors to financing, can also be found in that region. And each region develops an entrepreneurial culture that supports and encourages more startups.

"Once you identify the key industries, you can also identify who the banks are financing," Saboe confirms. He says it's not just the concentration of businesses in one industry in a particular region (like Silicon Valley) that may spell the success of a new startup, it's the heterogeneous mix of financing options: business loans, angel investors, venture capital, etc. New firms that locate near successful similar startups are more likely to be funded in the same ways as their predecessors.

"While the chance of equity financing is greater in regions with an entrepreneurial culture and small supplier network, the probability of debt financing is greater in regions with concentrated clusters and lower university research expenditures" he notes. "Interestingly, these effects are mirrored for low-tech startups, while high-tech startups are only affected by the industry's wage and region's specialization."

Saboe also used KFS data to study how local industrial conditions affected high-tech and manufacturing startups to gauge the probability of shutdowns and "positive exits" such as mergers and acquisitions.

"The city doesn't determine a startup's failure," he found. "Hard data prove that the characteristics of the individual and the firm determine whether or not it succeeds."

Matt Saboe studies the relationships among urban, industrial organization and innovation economics. He joined West Chester’s faculty in 2013.