Impact of Overconfidence Bias on Entrepreneurs Financing Decisions : The Case of Growth-oriented Startups in Sweden and Germany

Abstract: Background: Both Authors have many years of finance background and as well as studying entrepreneurship motivated to tackle the less researched area in entrepreneurship: entrepreneurs’ behavioural impact on their financial decisions. Such decisions in initial stages of startup formation have a critical impact on company’s future development which raises the importance of understanding the behavioural motives of the entrepreneurs. The paper tries to expand the knowledge in the area of behavioural science and entrepreneurship finance by creating research framework based on one of the key cognitive biases: overconfidence as well as external and internal financing environment. Research Problem: The study explores the new perspective at which extent the entrepreneurial cognition biases affect the entrepreneurs, and more precisely: overconfidence bias shapes the growth oriented Startup’s financing decision process.Research Questions: 1) How does overconfidence bias affect the growth-oriented startup’s entrepreneurs judgment on selecting the alternative financial source options? 2) How do Institutional factors also influence the financial decision-making process? Methodology: This thesis is based on exploratory where a qualitative approach has been used in this study. The research is carried out as a case study analysis, by using multiple case studies.  Findings and Conclusions: The study indicates that in both geographical locations observed entrepreneurs have similar cognitive inclinations, including three overconfidence biases: overestimation, overplacement, overprecision. The most common biases among the entrepreneurs were overestimation; planning fallacy and illusion of control biases. The analysis also showed that overplacement and overprecision does not have a substantial impact on the examined entrepreneurs. There are several positive connections between their cognitive biases and financial decisions. In addition, institutional framework and environmental trends shape entrepreneur’s preferences towards external financing as well. Swedish entrepreneurs compare to Germans more actively use subsidy-based support. As Swedish entrepreneurs might as well mix the investment options with equity and credit-capital based funds, the German founders enjoy the privilege of maintaining their own control with the greater range of credit-based capital availability in their environment (bank loan). Implications: As the academic implication, it gives contribution on understanding how overconfidence bias affects startup’s entrepreneurs are when it comes to financial decision- making processes. From the entrepreneur’s perspective it shows the importance to be considerate of their own biases. Understanding their biases would encourage them to process necessary information to be able to reach a more rational decision and approach on choosing financial sources. For investor’s perspectives, this study will give insight to financial investors (ex. banks, VCs) to look at the startup’s entrepreneurs’ expectations towards investors and how risky are biases affecting the decision taken by the entrepreneurs to the firm where they put their investment on. Limitations and Future Research: Deeper examination is needed to analyse the decision- making process of a firm that was co-founded by more than one entrepreneur (ex: the case of Founder F and G). To extensively analyse the research question, both quantitative and qualitative approaches might be needed. The study would gain more inclusive results with representation of all gender groups. In addition, the participants generational differences might have impact on the study results. Expanding the scope of the empirical data is worth to consider as well, point of analysis and profound analysis on overestimation and overplacement are also emphasized.