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This paper examines how economic policy uncertainty impacts the likelihood of mergers and acquisitions as an exit route for startups. Our results show that an increase in policy uncertainty reduces the likelihood of mergers and acquisitions in startups. We argue that EPU negatively impacts the likelihood of M&A activity by increasing both the risk premium for the target firms and the cost of developing the absorptive capacity for the acquirer firm. However, startups that can build competitive advantage and can demonstrate innovative capabilities through the presence of intellectual property are more likely to exit via merger and acquisition, even in high policy uncertainty. Our results are robust after controlling for macro-level indicators and other model specifications. The study contributes to the growing literature that examines the impact of policy uncertainty on various aspects related to businesses in general and startups in particular.

We examine the M&A exit behavior of new, young businesses and the way the exit is shaped by their innovative capabilities and their growth in employment. Using a large sample of startups founded in 2004, we find that businesses organized as corporations had very different acquisition outcomes than those organized as sole proprietorships. These different acquisition outcomes could be explained by differences in innovation and growth potential in the startup year as well throughout the business’ lifetime. Our results suggest that higher innovation and employment growth explain the likelihood of M&A exit for new, young corporations but not for sole proprietorships. These results indicate that acquirers value the growth potential signaled by corporations through intellectual property rights and growth in employment and, therefore, businesses with high quality innovations are the most attractive targets for acquisitions. Young corporations with external equity investors are more likely to become M&A targets, as angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the business becomes an acquisition target. Our results also show that young corporations owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer’s perspective, entrepreneurs with startup experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors.

In this article, we examine how startup firms finance their operations over time. We empirically test the financial growth cycle theory developed by Berger and Udell (1998) using the Kauffman Firm Survey data, the largest longitudinal data set comprised of all U.S. startups launched in 2004. Simultaneously, we examine whether the pecking-order and trade-off theories explain the changes in capital structure of startups from inception to the later stages of development. Consistent with the predictions of financial growth cycle theory, at the startup stage, entrepreneurs rely on initial insider capital sources, such as personal savings, financing offered by friends and family, quasi-equity, and personal debt. Over time, as firms become less opaque, the proportion of business debt and trade credit financing in the total capital injection volume increases significantly. Although the proportion of owner’s equity in total capital injections decreases over time, the annual balance of owner’s equity increases, suggesting that owners use retained earnings to increase their ownership stake in the firm.

We analyze a private firm’s likelihood of exiting through a merger or acquisition. To test our hypotheses we use the confidential version of the Kauffman Firm Survey data, the largest longitudinal dataset of newly formed businesses in the United States. Our results show that firms with R&D activity and those characterized by lower information asymmetry are more likely to become M&A targets. We also show that having intellectual property rights such as copyrights, patents and trademarks does not significantly affect the firm’s likelihood to exit through M&A. These results suggest that acquirers value the growth potential signaled through R&D rather than the existing intellectual property and therefore, firms with high quality innovations are the most attractive targets for acquisitions. The hypothesis that venture-backed firms are more likely to become M&A targets finds strong support in our analysis. Angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the firm becomes an acquisition target. Our results also show that firms owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer’s perspective, entrepreneurs with start-up experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors.

We analyze the impact of firm’s asset uniqueness and its growth opportunities on the leasing decisions of U.S. startups. To test our hypotheses, we use a unique dataset provided by the Kauffman Foundation. Our results show that startups in the high-technology sector have a lower propensity to lease whereas startups with high R&D intensity have a higher propensity to lease. In addition, we examine the impact of owners’ characteristics on the decisions to lease and find that female and older entrepreneurs as well as highly educated owners are less likely to lease. Our findings confirm previous studies on leasing decisions that larger and more leveraged businesses have a higher propensity to lease their assets. Consistent with Ang and Peterson (1984) and Bathala and Mukerjee (1995) we report that leasing and debt are complements rather than substitutes to each other.

Small business owners use a variety of bootstrap financing methods to acquire the needed resources necessary to survive and eventually grow their businesses. One such method is to lease equipment and/or machinery. Leasing is a viable alternative to bank financing and for small businesses, leasing is a flexible strategy to preserve cash. In this study, we analyze the impact of asset specificity and growth opportunities on leasing decisions of a large cohort of startup businesses. To test our hypotheses, we use a unique dataset provided by the Kauffman Foundation. 1 Our longitudinal analyses show that startups with unique/specific assets have a lower propensity to lease whereas startups with high growth opportunities are more likely to lease their assets. We also argue that the owners’ demographic and socioeconomic characteristics are likely to impact their individual risk-taking behavior. Thus, factors such as owners’ experience, education, age, gender, and race are likely to impact the decision to lease assets. Our results show that owners’ characteristics do have a significant impact on these decisions. The findings reveal that female and older entrepreneurs as well as highly educated owners are less likely to lease. Our work advances prior research on the determinants of leasing in large, publicly traded firms and provides additional insights on entrepreneurial bootstrapping.