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Coupling between financing and innovation in a startup:
Embedded in networks with investors and researchers
Daojuan Wang1* and Thomas Schøtt2
1*Corresponding author, International Business Centre, Department of Business and
Management, Aalborg University, Denmark. daw@business.aau.dk
2 Department of Entrepreneurship and Relationship Management, University of Southern
Denmark, Denmark.
Abstract
Innovation may be a basis for starting a business, and financing is typically needed for starting.
Innovation and financing may conceivably be negatively related, or be unrelated, or plausibly
be beneficially related. These possible scenarios frame the questions: What is the coupling
between innovation and financing at inception, and what is the embeddedness of coupling in
networks around the entrepreneur, specifically networks with investors and researchers? These
questions are addressed with a globally representative sample of entrepreneurs interviewed at
inception of their business. Innovation and financing are found to be decoupled, typically; less
frequently to be loosely coupled, and rarely to be tightly coupled. Coupling is promoted by
networking with both investors and researchers, with additive effects and with a synergy effect.
By ascertaining coupling and its embeddedness in networks as a way for building capability in
a startup, the study contributes to empirically supported theorizing about capability building.
Keywords: Startups; coupling; financing; innovation; networks
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1 Introduction
Innovation may be the basis for starting a business. An entrepreneur may innovate something
that is novel to some potential customers, or may use a technique that has not been used earlier,
or may be doing something that only few other businesses are doing. In these ways, innovation
may be a foundation for the startup. Much scholarship studies innovation. A stream of research
focuses on innovation as a basis for starting a business (e.g. Weiblen and Chesbrough, 2015;
Colombelli et al., 2016; Colombelli and Quatraro, 2017).
Financing may be needed for starting. Indeed, typically, a startup requires some financing.
An entrepreneur may need little financing, but occasionally requires much financing. Typically,
an entrepreneur has some funds of their own for investing in the startup. Frequently, an
entrepreneur also requires some funding from other sources, such as family and friends. An
entrepreneur often borrows from a loan organization, and sometimes obtains venture capital. A
stream of research focuses on financing of startups (e.g. Van Osnabrugge and Robinson, 2000;
Hsu, 2004; Mason & Stark, 2004; Croce et al., 2017). Innovation and financing may be
unrelated in a startup. Innovation may be accomplished before starting a business, or may be
completed on a shoestring budget, and in these situations innovation and financing are
unrelated. Furthermore, potential investors may shy away from the riskiness of supporting
innovation and prefer to invest in routine production, and also in this situation there is no
relation between financing and innovation in a startup. In the extreme, if innovation is pursued
without financing, and if a copy-cat startup attracts financing, then innovation and financing
are even negatively related. Conversely, innovation may require financing and the entrepreneur
may obtain it, and an investor may prefer to finance an innovative rather than a routine startup.
In such a situation, innovation and financing will go hand in hand and be coupled beneficially.
These scenarios – a negative coupling between innovation and financing, or no coupling
between them, or a beneficial coupling between them – represent a gap in our understanding of
startups.
This gap frames our first question for research: What is the coupling between innovation
and financing at inception?
A second issue is the sources of their coupling. An entrepreneur has networks that channel,
enable and constrain the endeavor. An entrepreneur may seek financing by networking with
formal and informal investors. An entrepreneur may pursue innovation by networking with
researchers and inventors. And an entrepreneur may couple financing and innovation by
networking with both investors and researchers. Investors and researchers are not substitutable
partners. Rather, investors and researchers provide complementary resources, and there may
even be a synergy between their inputs into a startup. Such embeddedness of coupling is another
gap in our understanding of new ventures.
This gap frames our second question: What is the embeddedness of coupling in the networks
around an entrepreneur, specifically the networks with investors and researchers?
By addressing these two gaps in understanding a startup, this study makes several specific
contributions. First, coupling of innovation and financing at inception is a way of building
capability in the new business, and the study thus contributes to our understanding of capability
building. Second, this study fills a gap by investigating whether and how these two important
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elements – innovation and financing – are channeled, enabled and constrained by different
networks – especially networks with the investors and researchers – around the entrepreneur.
Third, by focusing on the business founding stage, we overcome the methodological problems
caused by hindsight bias, memory decay, and survivorship bias, which pervade retrospective
studies.
The following first reviews the theoretical background as a basis for developing hypotheses,
then describes the research design, reports analyses, and concludes by relating findings to the
literature of entrepreneurship, venture capital and investment.
2 Theoretical Background and Hypotheses
The phenomenon of financing and innovation being interrelated is conceptualized as a coupling.
The concept of coupling is classical in studies of organizations (Weick, 1976; Orton and Weick,
1990). Elements of an organization have a coupling, in that they tend to occur together and to
be connected, intertwined, reciprocal, reinforcing, and mutually sustaining within the
organization. The coupling has strength; it may be loose, in that the elements are rather
independent of one another, or it may be tight, in that the elements are highly interdependent.
Loose coupling is often found in an educational organization, whereas tight coupling is more
frequent in a firm (ibid.).
Here we apply the concept of coupling to the intertwining between two elements of a startup:
financing and innovation. Coupling is tight if the startup is financing and innovating
simultaneously. Coupling is loose if the startup is pursuing one of the two, but hardly the other.
The elements may be termed decoupled if the startup is pursuing one of the two, but not the
other at all. Finally, of course, a startup may be without ambition of any kind; not pursuing any
of the endeavors.
An established business may benefit from self-reinforcing dynamics between innovation
and financing. Accomplished innovation may attract investors, and, reciprocally, financing is a
means for innovation. For a nascent entrepreneur, however, the dynamics between financing
and innovation are quite different. The entrepreneur is in the process of starting. There cannot
yet be any reciprocal interaction between market feedback and the entrepreneur’s learning and
capability development. No market returns from sales can be employed to strengthen innovation
capability. Moreover, the business opportunity pursued by the entrepreneur is still up for
evaluation and modification; the business is still an idea.
Nevertheless, at this formative stage, there are interactions between the entrepreneur and
stakeholders, e.g., potential investors, inventors, and incubators. Through this interaction, the
entrepreneur modifies ideas and visions for the business and anticipates feasibility, outcomes
and attractiveness (Lichtenstein, 2006). In this realm, the entrepreneur shapes strategic
aspirations, and confidence in achieving specific strategic goals.
Ambition for financing and ambition for innovation tend to co-evolve as they build on
similar underlying organizational strengths. Hence, we may reasonably expect that in some
resource environments around the entrepreneur there will be a presence of ambition for
financing and simultaneously also ambition for innovation. Moreover, it is reasonable to
theorize that the more the entrepreneur is exposed to such environments, the more likely the
entrepreneur’s aspirations are to include elements of financing and innovation. This external
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influence on the entrepreneur’s aspiration formation processes is represented by Ansoff (1987)
in his model of paradigmatic complexity of the strategy formation process. At a more general
level, it is also represented in Ajzen’s model of planned behavior, in which stakeholders’
resources, norms and expectations shape the entrepreneur’s intentions, goals and aspirations
(Liñán and Chen, 2009).
A similar prediction can be made from social comparison theory (Boyd and Vozikis, 1994).
Because the entrepreneur’s business is not yet tested in the market, the entrepreneur may rely
on modeling and imitation as a source of self-efficacy. In this process beliefs in own
capabilities, and thereby aspirations, will be assessed by successes and failures of similar others
(Wood and Bandura, 1989). Finally, the entrepreneur’s aspirations may be influenced by
persuasion through encouragement, even in situations where encouragement is given on
unrealistic grounds (ibid.). These mechanisms may work through direct relationships held by
the entrepreneur or indirectly as the entrepreneur observes and interprets stimuli from the wider
environment.
Coupling may be pursued as a strategy. As a strategy it may be partly based on an analysis
of strengths, weaknesses, opportunities and threats, SWOT, as business students learn and
managers and owners apply. An entrepreneur can hardly estimate any of the elements with
reasonable validity and reliability. But the entrepreneur is likely to discuss such matters with
others, listen to them, and take their advice into consideration when pursuing financing and
innovation. Thus the coupling is likely to be influenced by the network around the entrepreneur,
the network of people giving the entrepreneur advice on the new business. As suggested by
literature on entrepreneurial opportunity and alertness, it is a social process to create and grow
a new venture, entailing efforts by entrepreneurs to use their networks to mobilize and deploy
resources to exploit an identified opportunity and achieve the success (Ebbers, 2014; Adomako
et al., 2018). Besides, “an important part of the nascent entrepreneurial process is a continuing
evaluation of the opportunity, resulting in learning and changes in beliefs” (McCann and Vroom,
2015). The pursuit of coupling is thus embedded in the advice network, which channels, enables
and constrains beliefs and strategy, specifically pursuit of coupling of financing and innovation.
The people giving advice to the entrepreneur are often drawn from a wide spectrum, both
from the private sphere of family and friends and from the public sphere comprising the work-
place, the professions, the market and the international environment (Jensen & Schøtt, 2017).
An entrepreneur’s networking in the private sphere and networking in the public sphere differ
in their consequences for the startup. Networking in the public sphere promotes, whereas
networking in the private sphere impedes, such business endeavors as innovation, exporting
and expectations for growth (Schøtt & Sedaghat, 2014; Ashourizadeh & Schøtt, 2015; Schøtt
& Cheraghi, 2015). We here consider how such networking influences coupling of financing
and innovation.
2.1 Private sphere network constraining coupling
An entrepreneur’s networking in the private sphere of family and friends may shape the
coupling between innovation and financing through its influence on ambition of the
entrepreneur. The entrepreneur’s family is often putting its wealth at risk in the startup, and is
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likely to be cautious and to caution the entrepreneur against being overly self-efficacious, overly
optimistic about business opportunities, and overly risk-willing.
Furthermore, due to mutual trust, frequent contacts, intimacy and reciprocal commitments
in such relationships (Granovetter, 1973, 1985; Greve, 1995; Anderson et al., 2005), their
influence tends to be deep and significant.
When private sphere networking constrains the entrepreneurial mindset, the entrepreneur
becomes less ambitious and will pursue less financing or less innovation, and will be especially
reluctant to pursue financing for innovation.
Conversely, an entrepreneur without such a constraining network in the private sphere will
plausibly feel rather free, and will more wishfully think of own capability, of own efficacy, of
opportunities, and of risks, and consequently will be more ambitious and therefore also pursue
both financing and innovation.
Family members and friends tend to move within the same circles with the entrepreneur
(Anderson et al., 2005). They know each other and are likely to have high degree of social,
cultural, educational and professional homophily (Granovetter, 1973, 1985; Greve, 1995). The
members within such network are likely to possess or access much overlapping information
and multiple redundant ties therefore often add little value when an entrepreneur is seeking
novel resources/information and financing.
The consideration concerning the private sphere leads us to hypothesize,
Hypothesis 1: Networking within the private sphere reduces coupling between financing
and innovation.
2.2 Public sphere networking shaping coupling
An entrepreneur’s networking for advice in the public sphere is drawn from the work-place,
professions, market and the international environment. These formal and informal advisors are
mostly business people and business-related people. They are likely to be more self-efficacious,
optimistic about opportunities, and risk-willing, than the entrepreneur’s private sphere network.
They are likely to influence the entrepreneur to be more self-efficacious, optimistic and risk-
willing, and thereby more ambitious and more likely to pursue both financing and innovation.
Apart from such positive mindset influence, a diverse set of persons working in different
public contexts with quite different knowledge bases, experiences, mental patterns, and
associations enable the entrepreneur to access to a broad array of non-redundant novel ideas
and expanded financing opportunities (Hsu, 2005; Burt, 2004; Dyer et al., 2008). Particularly,
some critical contacts in the public sphere, such as venture capitalists, successful entrepreneurs,
and business incubators, not only directly bring the nascent entrepreneur valuable suggestions,
creative ideas, and financial resources simultaneously, but also play the role of business
referrals and endorsements and further broaden the entrepreneur’s opportunities for acquiring
and enhancing innovation and financing capabilities (Van Osnabrugge & Robinson, 2000;
Mason & Stark, 2004; Löfsten & Lindelöf, 2005; Cooper & Park, 2008; Ramos-Rodríguez et
al., 2010; Croce et al., 2017), generating a “snowballing effect”. These arguments thus lead us
to specify,
Hypothesis 2: Networking in the public sphere promotes coupling between financing and
innovation.
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2.3 Networking with potential investors promoting coupling
Investors, especially venture capitalists and angel investors, often appreciate and encourage
innovation with financial support (Kortum & Lerner, 2000; Engel & Keilbach, 2007; Bertoni
et al., 2010). Investors frequently bring the entrepreneurs more than purely financial capital,
such as their technical expertise, market knowledge, customer resources, strategic advices, and
network augmentation (Sapienza & De Clercq, 2000; Mason & Stark, 2004; Brown et al., 2018).
Investors, angel investors and VCs like to syndicate their investments with others, and to share
the investment risk and strengthen evaluating and monitoring capacities (Kaplan & Strömberg,
2004; Wong et al., 2009; Brown et al., 2018), which will expand and strengthen their financial
and innovation support. As observed by Brown et al. (2018), a key feature of the entrepreneurs
who use equity crowdfunding is their willingness to innovate and they are very proficient at
combining financial resources from different sources and drawing on the networks to alleviate
and overcome their internal resource constraints. Therefore, networking with these investors is
likely to spur and enable the entrepreneur in risk-taking and innovative behavior.
Meanwhile, being in the investors’ circle, the entrepreneur is easily identified and accessed.
In the networking process, the actors learn more about each other, trust emerges from repeated
interactions, and then stimulates closer interpersonal interaction and mitigates the fear of
opportunistic behaviors caused by information asymmetry (Jensen & Meckling, 1976; De
Bettignies & Brander, 2007). Moreover, the endorsement by reputable investors can send a
favorable signal to the investment market about the entrepreneur and the project, and attract
more investors to join (see ZIP case by Steier & Greenwood, 2000). Especially, as found by
Van Osnabrugge and Robinson (2000), angel investors often have entrepreneurial and business
operation experience, and have empathy for an innovative entrepreneur, and have the passion
to help, and perform less due diligence but invest more by instincts. Altogether, this may
enhance the matching opportunity between innovative ideas and funding needs and investment
desire, leading to a coupling between innovation and financing. Therefore, we hypothesize,
Hypothesis 3: Networking with potential investors promotes coupling between financing
and innovation.
2.4 Networking with researchers and inventors promoting coupling
Timmons and Bygrave (1986, p.170) identified a shared view between founders of innovative
ventures and venture capitalists that “the roots of new technological opportunities depend upon
a continuing flow of knowledge from basic research”. Thus researchers and inventors are
generators and carriers of knowledge, intellectual property, and patents. By networking with
them, the entrepreneur may acquire these innovative resources. Codified and tacit knowledge
is transferred in different ways, notably through education, consulting, and R&D-based project
cooperation, and conversations.
Indeed, the benefits of networking with researchers or inventors is expressed in
arrangements in innovation systems, such as the Triple Helix model (Etzkowitz, 2003); science
parks (Löfsten & Lindelöf, 2005), entrepreneurial universities, incubators, research-based spin-
offs, open innovation (Etzkowitz, 2003; Rothaermel et al., 2007; Enkel et al., 2009), and
industrial Ph.D. projects. These models, polices, organizational formats and education
programs are proposed with the same strategic intention: to provide a nurturing environment,
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and link talent, technology, capital and know-how to spur innovation and commercialization of
technology.
Networking with researchers and inventors not only enables the entrepreneur to tap into a
broader research community, but may also sends a signal to the market about the quality and
veracity of the project and its knowledge foundation, and may reduce the investors’ worries
about their investment (Hsu, 2004; Murray, 2004), especially for an early-stage entrepreneur
without established reputation and performance record, and particularly when the venture is
innovative. Therefore, we propose:
Hypothesis 4
：
Networking with researchers promotes coupling between financing and
innovation.
2.5 Networking with both investors and researchers reinforcing coupling
Networking with both investors and researchers can generate synergy leading to further
coupling of innovation and financing as elaborated in the following.
As argued above, networking with investors and with researchers or inventors separately
can provide the entrepreneur with both financial resources, knowledge and talents for
innovation. When the entrepreneur networks with both investors and researchers, the resources
obtained from the two parties may generate an additional “positive loop effect”, which means
more sophisticated innovation brought by the ties with researchers and inventors attract more
capital, and more capital available for R&D further enhance innovation aspiration, which again
attract more capital and then more R&D investment, and then enhance innovation; in mutual
reinforcement.
Moreover, networking with both an investor and a researcher, implies that when legitimacy
is obtained from one of the two, this sends a signal to the other encouraging the other to bestow
legitimacy on the entrepreneur, which may attract further financing and ideas for innovation.
We may call this a “reinforced signaling effect”. The ties with researchers, investors, and their
network contacts help open up more relations for acquiring additional funds and knowledge
like “reinforced snowball effect”. Timmons and Bygrave (1986) had observed that there were
geographical oases for incubating a bulk of innovative technological ventures, where the
founders, entrepreneurs, technologists, and investors cluster. Using a longitudinal case study,
Calia et al. (2007) illustrate how a technological innovation network (with the involvement of
universities, venture investors, and banks) enables a case company to establish its business and
to survive and grow. These synergies suggest an effect that is over and above the two separate
effects of networking with investors and networking with researchers,
Hypothesis 5: Networking with both investors and researchers further enhances coupling
between financing and innovation.
The hypothesized effects are illustrated in Figure 1.
Figure 1 goes here
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3 Research Design and Data
The world’s entrepreneurs are surveyed by the Global Entrepreneurship Monitor (Bosma, 2013).
In most countries covered in the period 2009 to 2014 the survey included questions about
networking, financing and innovation.
3.1 Sampling
GEM samples adults in two stages. The first stage occurs when a country is included, namely
when a national team is formed and joins GEM to conduct the survey in its country. Hereby 50
countries were covered where the essential questions were asked. These countries are drawn
from a diversity of regions, cultures, economies, and levels of development, and form a sample
of countries which is fairly representative of the countries around the world.
The second stage of sampling is the fairly random sampling of adults within a country, and
then identifying the starting entrepreneurs. Entrepreneurs at inception are identified as those
who are currently trying to start a business, have taken action to start, will own all or part of the
business, and have not yet received, or just begun to receive, some kind of compensation. By
this identification of entrepreneurs, this sample is 10,582 entrepreneurs who reported their
networking, financing, and innovation. Representativeness of sampling enables generalization
to the world’s starting entrepreneurs and their startups.
3.2 Measurements
3.2.1 Financing
Financing of the startup was measured by asking the entrepreneur,
How much money, in total, will be required to start this new business? Please include both
loans and equity/ownership investments.
The amount is recorded in the local currency, an amount from 0 upward. To make this
comparable across countries, the amount is normalized by dividing by the median for the
country’s responding entrepreneurs. Then, to reduce the skew, we take the logarithm (first
adding 1), a measure that runs from 0 for no financing, and then upward. This indicator of
financing enters into the measurement of coupling.
3.2.2 Innovation
Innovativeness in the startup was indicated by asking three questions,
Have the technologies or procedures required for this product or service been available for
less than a year, or between one to five years, or longer than five years?
Will all, some, or none of your potential customers consider this product or service new and
unfamiliar?
Right now, are there many, few, or no other businesses offering the same products or
services to your potential customers?
The answer to each question is here coded 0, 1, 2 for increasing innovativeness. The three
measures are inter-correlated positively. The three measures are averaged as an index of
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innovation, running from 0 to 2. This index of innovation enters into the measurement of
coupling.
3.2.3 Coupling between innovation and financing
Two business practices, here innovation and financing, are coupled in so far as they are pursued
jointly. The coupling between two practices in a business is indicated by their co-occurrence at
inception of the business. Coupling between innovation and financing is high to the extent that
innovation is high and financing is high. Conversely, coupling is low when either of them is
low. When the occurrence of each practice is measured on a scale from 0 upward, the coupling
of the two practices is indicated by the product of the two measures:
Coupling between financing and innovation = Financing * Innovation.
If financing is 0 or if innovation is 0, then coupling is 0. Conversely, if both financing is high
and innovation is high, then coupling is very high. The scale has no intrinsic meaning, so, for
analyses, the measure of coupling is standardized.
Validity can be ascertained. Coupling expectedly correlates positively with expectation for
growth, as an indication of performance at inception. Growth-expectation is indicated as
expected number of persons working for the business when five years old (transformed
logarithmically to reduce skew). The correlation is positive (.26 with p<.0005) confirming
validity of the operationalization of coupling.
3.2.4 Networking
The network around an entrepreneur is indicated by asking the entrepreneur to report on getting
advice,
Various people may give you advice on your new business. Have you received advice from
any of the following? Your spouse or life-companion? Your parents? Other family or
relatives? Friends? Current work colleagues? A current boss? Somebody in another
country? Somebody who has come from abroad? Somebody who is starting a business?
Somebody with much business experience? A researcher or inventor? A possible investor?
A bank? A lawyer? An accountant? A public advising services for business? A firm that
you collaborate with? A firm that you compete with? A supplier? A customer?
Networking in the private sphere is measured as number of advisors among the four: spouse,
parent, other family, and friends, a measure going from 0 to 3. Networking with a researcher or
inventor is measured dichotomously, 1 if advised by a researcher or inventor, and 0 if not.
Networking with a possible investor is measured dichotomously, likewise, 1 if advised by a
possible investor, and 0 if not. The network with others in the public sphere is measured as
number of advisors among the other 14, a measure going from 0 to 14 (Jensen & Schøtt, 2017).
Validity can be assessed. In the theoretical section we argued that private sphere networking
is associated negatively, and public sphere networking is associated positively, with self-
efficacy and opportunity-perception. These correlations all turn out to be positive indicating
validity of the operationalization of networks.
3.2.5 Control variables
The analysis controls for attributes of the entrepreneur and the business. Gender is coded 0 for
males and 1 for females. Age is measured in years. Education is indicated in years of schooling.
Motive for starting the business is either seeing a business opportunity or necessity to make a
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living, coded 1 and 0, respectively. Owners is number of owners, transformed logarithmically
to reduce skew. We also control for macro-level context in two respects, national wealth as GNI
per capita, and the elaboration of the national entrepreneurial eco-system, measured as the mean
of the framework conditions measured by GEM in its National Expert Survey (Bosma, 2013).
3.3 Technique for analysis
The population is the world’s entrepreneurs, where a respondent is surveyed in a country. The
data are thus hierarchical with two levels, individuals nested within countries. The country
should be taken into account, both because level of activity, e.g. networking and innovation,
differs among countries, and because behavior is similar within each country. These
circumstances of country are taken into account in hierarchical linear modeling (Snijders and
Bosker, 2012). Hierarchical linear modeling is otherwise very similar to linear regression.
Notably, the effect of a condition is tested and estimated by a coefficient. Hierarchical linear
modeling is used in Table 3.
4 Results
4.1 Descriptive statistics
The sample of 10,582 starting entrepreneurs is described by correlations, Table 1. Furthermore,
among the entrepreneurs, 9% were networking with a researcher or inventor, and 13% were
networking with a potential investor. Although these two kinds of networking are not common,
they are not rare. These two kinds of networking tend to go hand in hand, unsurprisingly, and
are also correlated with networking with others in the public sphere and networking in the
private sphere, but none of these correlations are high.
Table 1 goes here
The correlations among variables of interest and between variables of interest and control
variables are mostly weak, indicating that there is no problem of multi-collinearity in the
analysis.
4.2 Coupling between financing and innovation
Coupling of innovation and financing is high to the extent that innovation is high and financing
is high. Conversely, coupling is low when either of them is low. To see whether coupling is
typical, we cross-tabulate the startups according to their innovation and their financing, Table
2.
Table 2 goes here
Coupling is high in the startups where both innovation and financing is high, the bold-faced
15 percent in Table 2. Conversely, coupling is low in the startups where either innovation or
financing is low, the italicized 10+12+9+8+8 percent. In between, coupling is medium where
one is medium and the other is medium or high, the 12+14+15 percent in Table 2.
The table does not clearly display a tendency for innovation and financing to go hand in
hand. Indeed, the correlation between financing and innovation is .06 (p < .0005). Thus there is
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a weak tendency for innovation and financing to co-occur, a coupling that is loose rather than
tight.
4.3 Networks affecting coupling
Coupling is affected by the various kinds of networks around the entrepreneur, we
hypothesized. Effects on coupling are estimated in the hierarchical linear model, Table 3.
Hypothesis 1 is that coupling is affected negatively by networking in the private sphere. The
effect is tested in the first model in Table 3. This effect is negative, thus supporting Hypothesis
1.
Hypothesis 2 is that coupling is affected positively by networking in the public sphere, with
advisors other than investors and researchers. This effect is tested in the first model. The effect
is positive, thus supporting Hypothesis 2.
Hypothesis 3 is that coupling is affected positively by networking with potential investors.
This effect is positive, thus supporting Hypothesis 3.
Hypothesis 4 is that coupling is affected positively by networking with researchers. This
effect is positive, supporting Hypothesis 4. The effects of investors and of researchers are
substantial, and the effect of networking in the public sphere and networking in the private
sphere are of notable magnitude.
Table 3 goes here
Hypothesis 5 is that coupling is affected positively by networking with investors together with
researchers, as a synergy effect that is in addition to the separate effect of investors and the
separate effect of researchers. This is tested by expanding the model by including the interaction
term, the product of the dichotomy for networking with investors and the dichotomy of
networking with researchers. The effect of the interaction is estimated in the second model in
Table 3. The interaction effect is positive, thus supporting Hypothesis 5. The effect is actually
of a magnitude that is quite substantial. In short, the five hypotheses are all supported.
5 Discussion and Conclusions
The analyses have addressed the two research questions. What is the coupling between
innovation and financing at inception? What is the embeddedness of coupling in the networks
around the entrepreneur, specifically the networks with investors and researchers?
The questions have been addressed by a survey of a globally representative sample of
entrepreneurs at inception of their startup. The representativeness of sampling implies that
findings can be generalized to the world’s starting entrepreneurs.
The next sections discuss our findings concerning, first, coupling as a phenomenon, and,
second, embeddedness of coupling in networks.
5.1 Coupling
Coupling as a phenomenon was found to be infrequent, in that a typical startup does not pursue
both financing and innovation. Often, a startup is either innovative or well financed. Rather few
startups are both highly innovative and well financed. Across startups, innovativeness and
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financing are positively correlated, but only weakly, indicating that innovation and financing
have a coupling that is loose rather than tight (section 4.2).
Coupling between innovation and financing is a capability. Pursuing such coupling in a
startup is building an organizational capability. Coupling goes beyond the capability to innovate
and goes beyond the capability to finance starting.
Coupling is a competitive advantage in the competition among startups, a competition to
enter the market, survive, expand and grow. Coupling in a startup correlates positively with
expectation to grow (section 3.2.3), indicating the benefit to be expected from coupling, and
thus indicating that coupling is a competitive advantage.
It is theoretically surprising to find that coupling is so loose, when coupling is a competitive
advantage. But empirically it is less surprising, when we bear in mind that, typically at inception,
financing is not invested in innovation, but is invested in production. A loose coupling could
also be caused by information asymmetry, where the entrepreneurs who have creative idea and
innovation capability cannot be identified by the investors. Such interpretation can find some
evidence in the study by Shu et al. (2018).
Alternatively, it could also be the entrepreneurs who have financing capability or financial
resources lack the incentives, energy or capability to polish their ideas or projects but are eager
to start the new ventures. These could be the so-called necessity-driven or desperate
entrepreneurial activities, which are in contrast to opportunity-driven actions (Mühlböck et al.,
2018; Fernández-Serrano et al., 2018). The study by Mühlböck et al. (2018), using the data
from the Global Entrepreneurship Monitor (GEM), has provided some evidence. They observed
that many entrepreneurs sprung up during the outbreak of the economic crisis, but these
businesses were started even without (or with a negative) perception of business opportunities
and entrepreneurial skills. The authors term this phenomenon as “nons-entrepreneurship”
driven by necessity, meaning there are no other options for a job but only to start their own
businesses. Usually in such cases, the institutional environment is favorable. Besides, according
to their findings, there is a considerable share of such individuals among early stage
entrepreneurs.
Additionally, we suspect that the coupling is very loose at the inception, because the
competitive advantage of coupling has not yet taken effect at inception. The coupling will have
an effect only later, we expect, namely as the startup competes in the market, for survival,
expansion and growth. Therefore, coupling is appropriately considered strategic building of
capabilities. Future research may advance our knowledge regarding such loose coupling.
From these findings, we may learn at least two practical lessons. First, financing and
innovation do not go hand in hand at the inception, although this is actually important for a new
venture to succeed. The failure rate of entrepreneurial firms is high mainly due to the resource
scarcity and financial constrains (Colombo et al., 2014). Such loose coupling, as discussed
above, could be caused by low participation willingness of the capital owners or a lack of
effective channels for two sides to identify/know each other. Policymakers may give special
attention to these, and design some mechanisms, set up the rules, or provide the supports to
attract or guide the capital into the inception phase and reduce the potential problem of
asymmetry information between two sides. Besides, with aforementioned potential reason of
the presence of necessity-driven entrepreneurs that causes the loose coupling, both
policymakers and investors are suggested to distinguish between the necessity- (especially
13
desperate) and opportunity-based entrepreneurs and take actions. As considered by Mühlböck
et al. (2018) and confirmed by Fernández-Serrano et al., (2018), those desperate or necessity-
driven entrepreneurs with a lesser feasibility and skills may be less successful and thus less
beneficial for the economy than opportunity-driven entrepreneurs.
Second, entrepreneurs, and especially nascent entrepreneurs, should pay attention to create
such coupling, and networking can be an efficient way as will be discussed below. A recent
study by Rezaei Zadeh et al. (2017) found interpersonal skills for networking is one of the top
competences that the entrepreneurs should possess, and they suggest such competence
development be included in university education. Meanwhile, they suggest that continuous
training programs with a network of proactive peers, engaged academics, and a wider business
community will help sustain and develop entrepreneurial intentions and behaviors, as well as
expand the entrepreneurs’ networks. Below, we discuss the network influence in more detail.
5.2 Coupling embedded in networks
Coupling is channeled, enabled and constrained by networks around the entrepreneur. On a
broader level, we may say networking capability is one of the important organizational
capabilities, especially in the increasingly knowledge-intensive and turbulent economic
environment, since different networks represent different conduits of information and resources
that the organization can constantly access. Thereby, the organization can become more flexible
and adaptive. As also advocated by Windsperger et al. (2018, p.671), entrepreneurial networks
should be used by the firms “to complement their resources and capabilities in order to realize
static and dynamic efficiency advantages”.
Networking is typically thought of as inherently beneficial – the more, the merrier – but
some networking may be a waste of time and energy, and some networking may even be
detrimental, so networking has its “dark side” (Klyver et al., 2011).
Networking in the private sphere was here found to be detrimental for coupling, as
hypothesized. This finding is consistent with earlier studies, showing negative effects of
networking in the private sphere upon outputs such as innovation, exporting, and expectation
for growth of the business (Schøtt & Sedaghat, 2014; Ashourizadeh & Schøtt, 2015; Cheraghi
et al. 2014). More generally, whereas networking in the private sphere is beneficial for
legitimacy and emotional support (Liu et al., 2019), networking in the private sphere seems
detrimental for outputs. Network research should not presume that a network is homogenous
(as presumed in the most common measure of an actor’s social capital as number of contacts),
but should distinguish between the dark side and the bright side of a network (Klyver et al.,
2011).
On the bright side, we found that an entrepreneur’s networking in the public sphere – i.e. in
the workplace, professions, market, and international environment – is beneficial for coupling
between innovation and financing. Drawing advices from a wide spectrum in the public sphere,
a wide spectrum of knowledgeable specialists (also apart from researchers and investors),
enables the entrepreneur to combine various kinds of knowledge, information, and resources,
which is beneficial for the simultaneous pursuits of innovation and financing.
An entrepreneur’s networking with a potential investor was also found to benefit the
coupling between financing and innovation in the startup, as expected. As also expected,
networking with a researcher benefits the coupling.
14
Over and above these two additive effects, coupling was found to be further enhanced by
simultaneously networking with an investor and with a researcher, discerned as an interaction
effect in a multivariate model. Networking with an investor and networking with a researcher
are not substitutable for one another, and their effects do not simply add up. Rather, there is a
synergy effect, a further enhancing effect over and above the two separate effects of networking
with an investor and networking with a researcher.
The theory of competitive advantage through structural holes in the network around an actor
can help us understanding the synergy benefit (Burt, 1992a, b). A focal actor has a structural
hole in the network of contacts, when two contacts are not interrelated. The hole between the
two implies that they cannot combine something from one with another thing from the other.
The focal actor, however, can acquire something from one and another thing from the other,
and can thereby combine the two things and, following Schumpeterian thinking, the
combination constitutes a competitive advantage in the competition among actors for new
things. The literal meaning of ‘entrepreneur’ is going in between and taking a benefit, and in
our study the entrepreneur is going between an investor and a researcher, and combining advice
or investment from the former with advice or new idea from the latter, and thereby promotes a
coupling of financing and innovation, a synergy that builds a capability and a competitive
advantage.
From the resource-based view (Barney, 1991; Grant, 1991) and the dynamic capabilities
perspective (Teece et al., 1997), a firm’s resources and capabilities will determine its
competitive advantage and value creation, and a firm needs to constantly adapt, renew,
reconfigure and re-create its resources and capabilities to the volatile and competitive
environment, so that a competitive advantage can be developed and maintained. However, the
entrepreneurial firms, especially those at formation stage run by nascent entrepreneurs, usually
lack the strategic resources and capabilities at the beginning, e.g., financial resources and
financing capabilities, innovation resources and capabilities, business management skills, and
have lesser competitive disadvantages. Furthermore, the emergence and development of a new
venture is a dynamic process with many uncertainties, requiring different resources,
information, and knowledge at different time points (Hayter, 2016; Steier & Greenwood, 2000).
Different relationship networks, especially the professional ones discussed in this study, can
provide new ventures with opportunities for continually accessing needed resources, forming a
basis that enables coupling of financing and innovation, synergy creation from integrating
various resources, develop and sustain the new venture’s competitive advantages, and gain
profit (see also Davidsson and Honig, 2003; Batjargal and Liu, 2004). Along the same lines,
holding a relational governance view of competitive advantage, Dyer and Singh (1998) argue
for the critical resources that enable the firm’s competitive advantage to extend beyond firm
boundaries and are embedded in inter-firm resources and routines, including such components
as relation-specific assets, knowledge-sharing routines and complementary
resources/capabilities. In summary, we may say networking and coupling capabilities are two
crucial capabilities for the nascent entrepreneurs, on top of the others, for identifying, pursuing
and creating market opportunities, and for attaining and sustaining the new ventures’
competitive advantages.
Joining the discussion of the influence of strong vs. weak ties (or private vs. public networks)
on the entrepreneurs, results of this study, falling in line with some of the research (Granovetter,
15
1973; Davidsson & Honig, 2003; Afandi et al., 2017), further remind the entrepreneurs to be
aware of potential detrimental effect of being over-embedded in the private sphere network that
is bringing information and resource redundancy and social obligation. Rather, they are well
advised to actively and judiciously pursue, develop, and maintain public sphere networking,
especially the professional networks with the investors and researchers/inventors, which enable
and promote the coupling between innovation and financing, and capability development in
these regards.
The entrepreneur network capability framework developed by Shu et al. (2018) can be a
good reference, four dimensions comprising network orientation, network building, network
maintenance, and network coordination. Network orientation should be in the first place, which
means a person should be willing to develop and depend on social networks in own daily
socialization, believe, pay special attention to and act on the norms of dependence, cooperation,
and reciprocation. In terms of the orientation, as discussed, this study suggests the importance
and benefits of widening and diversifying the entrepreneurs’ social relations, especially being
in and crossing different professional communities. However, most of the entrepreneurs may
be not aware of this. For instance, a study of university spin-off by Hayter (2016) found that
early-stage academic entrepreneurs have their contacts mainly within academic communities
that are typically located in their home institutions, and such homophilous ties would further
constrain the entrepreneurial development.
With clear orientation, the entrepreneur shall monitor surroundings and make effective
investment to establish and expand the networks. However, as reminded by Semrau and Werner
(2012), it is not a good idea to extend the network size without boundaries because there is an
opportunity cost of time and the cost can surpass the benefits that the networks can bring. Our
study further suggests that it is worthwhile to invest in developing the contacts at least in two
communities, i.e., with capital holders and knowledgeable and new ideas generators, due to the
unique and mutual-reinforced synergistic contributions to founding the new venture, as
discussed earlier. It can happen that the nascent entrepreneurs have sufficient personal or family
wealth to self-finance the start-up process, however, the entrepreneurs ought to remember that
sometimes it is not the “capital” itself that makes the success of a new venture, but the capital-
associated resources that help, i.e., from the sources providing capital. The entrepreneurs ought
to think about the other benefits that the investors could bring, such as commercialization
competences, business management skills, reputation, more diverse network access, synergistic
effect, as shown in several studies (Van Osnabrugge & Robinson, 2000; Hsu, 2004; Mason &
Stark, 2004; Croce et al., 2017). Further, while network maintenance is to ensure stable and
long-term exchange relationships with them, network cooperation is to manage multiple and
dynamic relationships, and to mobilize and integrate resources.
Moreover, these results may also be relevant for well-established organizations that seek to
enhance their innovation and financing capabilities and gain a competitive advantage,
suggesting that strategically developing, managing and utilizing the bridging social ties may be
an efficient way. At the individual level, this may encompass designing an incentive scheme
and training program to improve the employees’ entrepreneurial spirit, networking awareness
and capability. At the organizational level, the firms should strategically manage inter-
organizational relationships, both formal and informal, and build systems that can monitor the
surroundings, and thereby identify and evaluate new business opportunities outside the
16
organizational boundaries. Relevant concepts, models and strategies can be, e.g., cooperative
entrepreneurship (Rezazadeh & Nobari, 2018) and open innovation (Enkel et al., 2009). As
concluded by Rezazadeh and Nobari (2018), cooperative entrepreneurship is likely to lead to
improvement of firms’ agility, customer relationship management, learning, innovation, and
sensing capabilities.
From a public policy perspective, the above results have important policy implications,
stemming essentially from the contribution to innovation coming from networking with
researchers, inventors and investors. If innovation and entrepreneurial businesses are important
for economic development and for people’s life, the study clearly suggests that public policy
should be designed to encourage, facilitate and support business networking activities,
researcher-business collaboration, and investor-entrepreneur connections. Besides, university
education should be another focus by the policy-makers, since it can be an efficient way or a
starting point to foster people’s entrepreneurial spirits, develop the students’ entrepreneurial
competences, especially their networking and relationship management capabilities, and even
provide some opportunities for them to develop their networks which may enable them to be
an entrepreneur in the future. Some strategies and models can be, as documented, the university-
based incubation programs, entrepreneurship education programs, research-based spin-off, and
building entrepreneurial universities (Clarysse & Moray, 2004; Rothaermel et al., 2007;
Budyldina, 2018).
5.3 Limitations
Our research design was to investigate coupling at inception of the startup. This design has the
advantages of avoiding attrition when startups are abandoned and avoiding retrospection if
interviews were to be conducted later. But the cross-sectional focus on inception implies that
the fate of a startup and its coupling are unknown. Coupling is presumably yielding a
competitive advantage, but at inception this is not enacted. Another limitation is that the data
are from around 2014, so we have observed the same constraints confronted by other scholars
of entrepreneur and entrepreneurship (e.g., Mühlböck et al., 2018; Fernández-Serrano et al.,
2018). Entrepreneurial behavior has changed since networking was surveyed by GEM, and
organizing is changing even more with the COVID-19 pandemic.
5.4 Further research
The limitations suggest further research on coupling. Coupling appears important as a strategy
for building capability and competitive advantage. Therefore, an important research question
is, what is the effect of coupling in a startup upon its ability to compete, survive, expand and
grow? An indication of the effect of coupling upon growth was seen in the substantial
correlation between coupling and expectation for growth of the business (section 3.2.3). But,
of course, effects of coupling are far better ascertained through longitudinal research.
The current COVID-19 pandemic is an eco-systemic intervention that is changing
competition and organizational behavior. Based on our findings, we hypothesize current exits
to be especially prevalent among entrepreneurs without coupling of financing and innovation,
and we hypothesize that success is especially likely for entrepreneurs with a tight coupling
17
between innovation and financing. Such hypotheses may well be tested with some of the
surveys that are underway in the wake of the pandemic.
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21
Appendix
Figure 1. Hypothesized effects on coupling
Table 1. Correlations of variables of interest. (N= 10,582).
Coupling
Network
with
investor
Network
with
researcher
Network
in public
sphere
Network
in private
sphere
Coupling
Network with investor
.14
Network with researcher
.12
.31
Network in public sphere
.13
.43
.34
Network in private sphere
.002
.13
.10
.33
Gender: male
.12
.07
.06
.09
-.03
Age
.02
-.03
-.02
-.03
-.04
Education
.15
.07
.06
.11
.02
Motive: opportunity
.10
.08
.05
.10
.02
Owners
.12
.09
.08
.13
.02
Gross National Income per capita
.07
.19
.06
0
0
Entrep. framework conditions
.09
.04
.01
0
0
Numerical independent variables are standardized, then centered within country.
Table 2. Startups, by innovation and financing. (N= 10,582).
Financing
Low
Medium
High
Total
Innovation
High
10%
12%
12%
34%
Medium
12%
14%
15%
41%
Low
9%
8%
8%
25%
Total
31%
34%
35%
100%
H3
+
H4
+
H5
+
H2
+
H1
–
Networking in private sphere
Networking with investors
Networking in public sphere
Coupling
between
innovation
and
financing
Networking with researchers
22
Table 3. Coupling affected by networks.
Main effects
Interaction effect
Networking with investors
.170 ***
.125 ***
Networking with researchers
.172 ***
.144 ***
Networking with both investors and researchers
.119 *
Public sphere networking
.074 ***
.074 ***
Private sphere networking
-.040 ***
-.039 ***
Gender: male
.175 ***
.175 ***
Age
.047 ***
.047 ***
Education
.131 ***
.131 ***
Motive: opportunity
.143 ***
.143 ***
Owners
.086 ***
.087 ***
Gross National Income per capita
.004
.004
Entrepreneurial framework conditions
.067 *
.067 *
Intercept
-.217 ***
-.215 ***
Country
Yes
Yes
N countries
50
50
N startups
10,582
10,582
Hierarchical linear modeling with random effects of country.
Dependent variable is standardized.
Independent numerical variables are standardized, then centered within country.
Independent dichotomous variables are 0-1 dummies.
* p < .05 ** p < .01 *** p < .001
