Research Summary

Financing New Business Formation

by Paul A. Gompers


New business creation has become a potent force for economicdevelopment in the United States. Prior to 1980, large firms created the majority of new jobs in the American economy. While considerable debate rages over whether small firms are the source of recent job creation, it is clear from the data that new firms are an important source of technology, innovation, and jobs. No one would call Microsoft, Apple, or Genentech small companies, but all of them are very young. From 1972 through 1992, more than 4,513 companies went public by issuing equity in an initial public offering. Most of these firms were less than ten years old. New firms continue to transform the economic landscape, but we know very little about the sources of capital and investment behavior of these firms before they go public.
A goal of the project would be research projects related to optimal sources of financing. Some of the research questions that Professor Gompers is addressing include: How do industry and firm specific characteristics interact to determine the optimal source of capital? How does firm performance affect who gives firms their financing to grow? How do the sources of financing affect the speed at which the firm can grow? Have there been secular changes in the sources of financing over the time period? Does the presence of a professional investor, such as a venture capitalist, improve the pre-public performance of a company (e.g. can it reach a critical size sooner) compared to a firm that has not received venture capital financing.