Strategic fit, local financing, and startup growth

Abstract

Prior work suggests that startups in less-financing-rich contexts grow less than others. Does this growth gap narrow or widen if these startups adopt strategic fit and therefore align their strategic choices with each other and their context? While fit can improve these startups' resource allocation, it can also be harder to achieve and constrain their flexibility. To address this theoretical ambiguity, this study interviews 253 software startups from 34 economies and scores the internal and external fit of their market, moat, and organizational choices, developing the first dataset of its kind. The study finds that performance differences between startups headquartered in less- versus more-financing-rich cities attenuate with strategic fit. This finding is driven by fit better predicting performance in less-financing-rich contexts, rather than by variance in the adoption of fit across these contexts. Additional analyses indicate that fit prevents poor organizational and moat investments, which otherwise penalize startups in less-financing-rich contexts but not in others. Together, these results suggest that strategic fit can help compensate for local financing constraints.

Keywords: Entrepreneurial Strategy, Technology Entrepreneurship, Entrepreneurial Scaling, International Entrepreneurship, Strategy

JEL Classification: M13, M16