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Quantifying the Capital Requirements of Start-Ups in Early Growth Phase: Exploratory Evidence from a Seed Capital Fund in Brazil

This article addresses the challenge of quantifying the capital requirements of new entrepreneurial firms in their early fast-growing phase, a topic the authors believe has not yet received much attention in the specialized entrepreneurial finance literature. All too often, entrepreneurs underestimate the capital requirements demanded by their planned growth paths, a practice that has obvious and severe consequences for both their firms’ and their own wellbeing. Unrealistic capital estimates also affect investors in these ventures, as a shortage of capital often causes ventures to fail to attain contractually agreed-upon goals. As a response to these challenges, the authors propose the framework of an empirically based tool to assist both entrepreneurs and investors in their challenging joint task of quantifying the relationship between capital requirements and innovation performance. In building and testing the model, they use data from Brazilian entrepreneurial firms in the portfolio of a Brazilian seed fund between 2008 and 2016.