Assessment of Capital Structure of Startup Firms: The Case of Ethiopian Startups

Abstract

Startup firms are part and parcel of the world we live in today. Consequently, the startup space is gaining strong attention and support from policy makers, government bodies, scholars, investors, and financial institutions in the rest of the world, but little is investigated and done in the case of Ethiopia. So long as research is conducted to bridge a gap in scholarship domain, this work aimed at coming up with authentic study of startups in relevance with their sources of finance and capital structure. The research was conducted on 64 Ethiopian startups registered at Yegara.org. The research employed a descriptive research design. And mixed research approach that combined questionnaire and semi-structured interview primary data gathering instruments was used. The study found that startups fundamentally use internal sources of finance of founder/s savings and family and friends’ capital, and show similar finance patterns, regardless of their startup characteristics. It has also been identified that there is a severe lack of startup finance supply in the country and also limited experience of obtaining external finance while there is a strong need for them. When it comes to external finance type preferences, startups showed preference for having equity finance over debt finance. The reasons for preferring equity finance instead of debt were accessibility, non-financial benefits accompanied, and the appropriate investment terms and conditions when compared to debt finance. Moreover, three of the four startup characteristics showed a significant relationship with debt/equity preference. Based on these findings, it is recommended that Ethiopian startups should be provided with external sources of finance tailored to meet their characteristics and conditions, and the government and other key stakeholders shall work jointly to create suitable startup finance scheme and environment.