The Search for Competent Capital: Financing of High Technology Small Firms in Sweden and USA

Abstract

The pecking order theory states that firms choose financing in the following order: internal finance-debt-equity. However, most of the research has been conducted on larger (publicly-listed) firms. This article presents a unique empirical material on the financing of high technology small firms (HTSFs) in Linköping, Sweden and Santa Clara County, USA. The data reveals how firms are financed and their preferences for different financial sources. Whilst traditional financial theory and pecking order studies assume only three different financial sources (internal financing-debt-equity), this study also considers who the money comes from: venture capitalists, business angels, banks, corporate venture capital, governments, employees or the firms' founders. The paper shows that the pecking order is different for HTSFs than for larger firms. The HTSFs in the study have a preference for equity financing. The paper also shows that there are differences in financing between HTSFs in Linköping and Silicon Valley and that these differences are not explained by differences in pecking order but rather by differences in availability of finance--in other words, the functioning of the financial systems and the competence provided by the various financiers. HTSFs are primarily searching for appropriate financing.