The importance of management control systems for startup funding – empirical evidence from external financiers

Abstract

Purpose This study aims to examine which categories of management control systems (MCSs) in startups are most important to external financiers. Furthermore, this paper investigates how equity and debt financiers differ in their perceptions of MCS categories and examines the relevance of MCSs for their investment decisions. Design/methodology/approach This study collects data through a cross-sectional survey sent to equity and debt financiers actively investing in startups. The results are based on survey responses from 73 financiers. Findings The results show that financial MCSs are considered most important, followed by strategic MCSs, while human resources MCSs are perceived as only moderately important. This paper finds significant differences in the perceived importance of MCS categories between equity and debt providers, which can be explained by differing risk profiles and monitoring needs. Although debt financiers consider financial and strategic MCSs to be less important for their portfolios’ startups than equity financiers do, debt financiers perceive MCSs as more important for their initial investment decisions. Originality/value The study sheds new light on the importance of different MCS categories in startups by analyzing external financiers’ perceptions. Overall, the empirical study provides insights that are particularly valuable for startups seeking external financing for company growth.

The relationship between management control systems and innovativeness in start-ups: evidence for product, business model, and ambidextrous innovation

“…Our findings are consistent with the latter suggestion, indicating that increased emphasis on reporting and the monitoring of goal achievement does not support creativity or motivation that influences innovativeness in start-ups. We conclude that diagnostic control systems might be adopted to legitimize the company to external financiers (Schachel et al , 2021) and, at least initially, might act more as a symbol of credibility and good management practices than as a control instance (Davila et al , 2009a) and have less influence on the creativity or motivation of employees. Our results are also consistent with those of Janka and Guenther (2018), who find that younger firms react with loosening controls to higher uncertainty in the innovation process, while more mature firms apply more diagnostic controls under these circumstances.…”

“…Our study makes several contributions to the literature. First, we contribute to a growing body of research on the positive role of MCSs in innovation in general (Barros and Ferreira, 2021; Biswas and Akroyd, 2022; Henri and Wouters, 2020; Müller-Stewens et al , 2020) and in start-ups in particular (Akroyd and Kober, 2020; Becker and Endenich, 2022; Frare et al , 2021; Schachel et al , 2021). Given that many innovations and entrepreneurial projects fail (Åstebro et al , 2014; Davila et al , 2015), practitioners might benefit from guidance on how innovation can be effectively supported via professional management practices such as MCSs.…”

Developing a Model for the Success of Healthcare Start-up Companies in Iran: A Systematic Review and Interviews with Experts

“…Financial management is very important in startups because it includes investment management, financing, working capital, and profit distribution. It helps entrepreneurs understand financial statements, analyze financial data, perform financial planning and management, and enables them to identify and fix problems in the business process and reduce risks (75), (76). In this research, "financial management of the business process" is described by 4 factors, including "investment at the right time" and "analysis of business profit and loss trends".…”

Packages of management control systems, entrepreneurial orientation and performance in Brazilian startups

“…Furthermore, there are many policies that are necessary to support startups, such as the use of managerial and financial information to evaluate companies and distribute funding. There is evidence that external financiers attach considerable importance to startups’ financial MCS elements when deciding whether or not to fund those (Schachel et al , 2021). Thus, information about the combinations of MCS packages that are adopted and lead to startups’ success is relevant for these decision-makers.…”