Undercapitalization in early-stage ventures is one of the most challenging obstacles to success facing entrepreneurial startups (Holtz-Eakin, Joulfaian, & Rosen, 1994). Limited research has probed this area and it is often atheoretical with key concepts not rigorously defined (Thornhill & Amit, 2004). In this study we propose a definition of undercapitalization as the failure of young ventures to procure enough capital to fund the organization’s strategic priorities, and theoretically ground the definition by extending recent work on the payments perspective in resource-based theory (e.g., Lippman and Rumelt, 2003). According to this perspective, the relative capitalization of an organization reflects the value of its underlying resources (Lippman & Rumelt, 2003). As such, we suggest that the amount of capital raised by these ventures relative to the intended strategies the firm seeks to implement, reflects the underlying value of the firm’s resource base. Therefore, undercapitalization may be reflective of weaknesses and/or trade-offs in a firm’s core set of resources (e.g., Zingales, 2000).
Townsend, David M. and Busenitz, Lowell W.
"RESOURCE COMPLEMENTARITIES, TRADE-OFFS, AND UNDERCAPITALIZATION IN TECHNOLOGY-BASED VENTURES: AN EMPIRICAL ANALYSIS (SUMMARY),"
Frontiers of Entrepreneurship Research: Vol. 29
, Article 5.
Available at: http://digitalknowledge.babson.edu/fer/vol29/iss1/5