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HOI research | Path dependence in new ventures’ capital structures

The way that new ventures are financed is very important. It has substantial implications for a company’s survival, growth, and performance. For this reason, a lot of research exists that examines what explains startups’ choices of financing sources, typically drawing on rational economic theories such as pecking order or trade off theories.

This study instead investigates less rational motives behind entrepreneurs’ use of funding, by applying thoughts related to something called “path dependence.” This phrase refers to the idea that one’s early choices affect the range of future decisions that one can possibly make. If you choose to go left at a fork in the road, then that choice will impact and limit your future possibilities. The study indicates that the same is true for new companies when it comes to their funding choices.

This research, conducted in cooperation with the House of Innovation, sheds new light on the impact of early financing decisions on new ventures’ future funding. The study analyzed the paths of 1,756 Swedish start-up firms, grouped into categories based on their most common initial external funding source: subsidies, debt, or equity.

The study reveals that financing decisions made in the beginning of a firm’s life do strongly predict the sources of that firm’s future funding. These predictions are subject to rare exceptions when such paths are broken, such as when the company changes its CEO.

The study accomplishes three things.

  • It advances research on determinants of finance in new ventures,
  • It provides a novel extension of the path dependence literature, and
  • It emphasizes the need for more research on financial strategies in new ventures.

Consequently, this study shows that theory of path dependence contributes with a piece of the puzzle to explain how entrepreneurs fund their ventures over time.


Mikael Samuelsson
Graduate school of Business, University of Cape Town

Anna Söderblom
House of Innovation, Stockholm School of Economics

Alexander McKelvie
Department of Entrepreneurship and Emerging Enterprises,Whitman School of Management

House of Innovation Finance Start-up Strategy Economics Article Journal Publication Research