Understanding the determinants of startup financial and innovative performance outcomes

Startups provide fundamental contributions to a country’s economic growth. To understand the mechanisms leading to these contributions, the literature has devoted considerable attention to startup organization. Some studies have examined the structure of startups’ top management; others have analyzed the value-adding role of investors. A number of studies have investigated the effects of government R&D subsidies, while others have explored the relation between business cycles and startup dynamics. Yet, there are still several important unanswered questions. This research project proposes to advance the literature along three fundamental lines. The first sub-project seeks to investigate the effect of government R&D subsidies on startups’ R&D employment and innovation. The literature has examined the link between government subsidies and innovation finding inconclusive results. The reason is that subsidies are not randomly assigned and, thus, it is very difficult to find an appropriate control group for subsidized startups. Besides this methodological problem, the literature has neglected the R&D-labor market consequences of government interventions. In periods of labor shortages, such as those currently in the US, Switzerland, or Israel, startups have an incentive to increase employee compensation to avoid high turnover rates. Government interventions may exacerbate the compensation escalation with a consequent detrimental effect on innovation, as startups may use R&D subsidies to pay higher compensation to their employees rather than invest in innovation. To perform this analysis, I plan to use a quasi-experimental approach to address the non-random assignment of R&D subsidies. The second sub-project proposes to explore startup migration choices and their performance implications. The literature has mostly examined the organization of US startups. However, there are many dynamic entrepreneurial environments outside the US, such as Israel, Switzerland, and Singapore. While these countries host a large talent pool and are active in supporting entrepreneurial ventures, their markets are small and the supply of investors is limited. As a result, many startups consider migrating to the US at some point in their lifecycle. Which companies migrate? What are the consequences for their performance? These are novel research questions with important implications. The third sub-project seeks to analyze the relationship between founder overconfidence and startup performance. Existing studies have highlighted the fundamental role founders play in designing their startup strategies and leading day-to-day operations. While these studies have considered founder characteristics such as experience and occupational background, none of them have examined the role of overconfidence. Yet, overconfidence has been shown to play an important role in the decisions that CEOs of established companies make. I plan to fill this gap by transposing the concept of overconfidence to the context of startups, building a novel measure of overconfidence that is better suited for the context, and addressing the non-random founder-startup match. The here suggested research project, if funded, has the potential to provide fundamental contributions to the entrepreneurial finance and management literatures as well as to policy makers, entrepreneurs, and investors alike.