“With a Little Help from My Family: Informal Startup Financing” (paper)

coauthors Brian K. Baik (Harvard Business School) and Johan Karlsen (Norwegian School of Economics)

Discussed by: Tom Meling (OSU)

Abstract

Using a unique dataset that contains financial information of Norwegian startups and their investors, we depict the characteristics of informal financing, which are startup investments made by family of the entrepreneur. Consistent with theoretical predictions, we document that informal investments are associated with lower returns than external investments, and lower startup risk-taking behavior. On the other hand, firms that receive investments from both informal and external investors exhibit stronger forms of risk taking. Our instrumental variables (IV) regressions further support our findings. Reduced risk-taking behavior is mainly driven from wealthy informal investors, which is consistent with the argument that wealthy investors may be more risk averse. Collectively, our findings empirically illuminate an important source of startup financing that affects startup behavior.

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