Predicting startup survival using first years financial statements

Abstract

Numerous papers demonstrate the usefulness of financial ratios in predicting the bankruptcy of companies, but in the case of new companies their usefulness is questionable.Many of the firms that are successful today made few profits when they were first created. On the other hand, both structural inertia from the theory of organizational ecology and the 'survival of the fitter' principle advocate that companies that are healthy in their early years will go ahead in greater proportion than those that start with many difficulties. Our empirical study used financial data from a sample of 6,167 new-born Spanish start-up companies, analysing their evolution up to eight years later. We found healthier financial indicators in the first years of start-up companies that survived eight years than in those that failed, supporting the organizational ecology theory. We found statistically significant differences in profitability, productivity, liquidity, leverage, and size. The models developed showed predictive capacity, but they did not reach that of the bankruptcy models made with mature companies. The analysed period corresponded to a period of economic crisis. The study was repeated with data from another non-crisis period to enhance the validity of the results, and obtained very similar results.

Corporate failure prediction using threshold‐based models

“…The literature indicates that small firms possess their own management style, specific strategic characteristics and access to finance, which are unlike those of medium‐size firms (Ciampi, 2015; El Kalak & Hudson, 2016). As Fuertes‐Callén et al (2020) documented, the structural inertia of companies, which offers greater resistance to face difficulties, has to do with size, age and industry sector. Newly created companies have a higher failure rate than established ones (Cader & Leatherman, 2011); Levinthal (1991) notes that older organizations tend to be organizations that had been, in previous periods, successful and this prior success will buffer them against failure for a certain time.…”

The triple‐edged sword of sensitivity of sales, cash flows, and debt to investments: Venture survival and capital investments

“…Indeed, firms that are classified as higher in cash-flow sensitivity are generally those with the highest growth opportunities and often cash-flow-sensitive investments made by such firms are associated with substantial growth subsequently (Fuertes-Callén et al, 2020;Hovakimian, 2009). Based on this logic, we predict the following:…”

“…The evidence shows that ventures more closely monitoring financial metrics, such as cash flows, have an increased likelihood of repaying creditors and a decreased risk of survival (Musso & Schiavo, 2008;Wise, 2013). Investments that are cash-flow sensitive, most notably capital expenditures (e.g., land and PP&E), can enhance firms' survival rates by affording ventures the capability of expanding production with existing market opportunities (Fuertes-Callén et al, 2020;Hovakimian & Hovakimian, 2009).…”

Feel dragged out: a recovery perspective in the relationship between emotional exhaustion and entrepreneurial exit

“…In the GSOEP survey, the individuals are asked to report their number of years of education completed. Financial stability is the identification of superior firm performance (Fuertes-Callén et al , 2020) therefore important to control for income potentials effect on exit decisions. Income was measured as log of annual net income in euros.…”