Role of Institutions in Startup Financing: An Institutional Theory Approach

Abstract

It has been established by many researchers that entrepreneurs do not create opportunities in isolation; rather, every activity related to the entrepreneurial process is affected by an interconnected network of economic and cultural forces. Hence, the entrepreneurial activity of reaching out to potential sources of external financing is also affected by an interconnected network of various forces. These forces include different actors such as the entrepreneurs, investors as well as the institutions. To understand this interconnected network of forces affecting the startup financing, it is critical to understand this phenomenon from the viewpoint of people who experience it first-hand i.e. entrepreneurs/founders of startups. Hence, this study utilized the institutional theory’s framework to understand different forces/actors/institutions in startup’s surroundings that affect the process of startup financing. A total of 20 semi structured in-depth interviews were conducted from startup founders in Peshawar region, which were analysed using a series of steps suggested by Creswell (2009) and Miles and Huberman (1994). In accordance with the institutional theory presented by Scott (2014), all the institutional forces identified by startups’ founders were categorized into three categories i.e. institutional forces, normative forces, and cultural-cognitive forces. All the institutions under these three categories either create opportunities or challenges for the startups in accessing the external sources of financing. The startups can utilize this research to understand the kind of institutions operating in their surroundings and their potential effect on the financing process to avoid any obstacles or inconveniences while seeking external financing.