Research on External Financing Strategies Based on Technological Capability of Entrepreneurial Firms

We analyze how entrepreneurial firms match product innovation mode with optimal financing under the different states of technological ability and bootstraps by applying principal-agent theory. According to some assumptions that bank finance takes the form of debt whereas venture capital finance resembles private equity, a basic incentive model with two state and sub-state variables is established. The analysis shows that entrepreneur prefers to radical innovation on the circumstance of high technological ability while entrepreneur would prefer to carry out incremental innovation with medium technological capability. The optimal financing is up to cash flow distribution of product innovation pattern and firm's bootstraps. Venture capital finance is optimal only when cash flow distribution is highly risky and positively skewed .Or vice versa, bank finance is optimistic.