Family Wealth and Entrepreneurship
64 Pages Posted: 17 Nov 2016 Last revised: 2 Apr 2017
Date Written: November 13, 2016
This paper provides evidence that family financial resources -- not those of the immediate household, but those of the extended family members and close relatives -- alleviate credit constraints experienced by entrepreneurs, and stimulate entrepreneurial activities. I build a rich and detailed combination of data on a representative sample of the Swedish population, their family members and the enterprises they run, and show that abundant financial resources in the family motivate initiating businesses in industries with high financial costs of entry. This finding is neither driven by inherited or acquired ability from family members, nor by valuable entrepreneurial experience of relatives. Moreover, I find that individuals with wealthier family members initiate larger businesses. The relation between the structure of financial resources in the family -- liquid assets, fixed assets, and income -- and the composition of startup capital -- equity, debt, and loans from credit institutions -- suggests that family contributes to the financing of startups directly by investing cash in firms' equity or indirectly by providing collateral and guarantees for firms' bank loans. In addition, I find that the marginal entrepreneur financed by family wealth enjoys an income gain after transitioning to entrepreneurship.
Keywords: Family Wealth, Entrepreneurship, Informal Financing, Financial Constraints, Startup, Collateral
JEL Classification: D31, L26, M13, O16
Suggested Citation: Suggested Citation