Knowing when to quit: experience, binding financial constraints, and withdrawal from new venture creation

Abstract

Abstract Why do people quit the startup process before a business is formed? We treat withdrawal from new venture creation as a test of Evans and Jovanovic’s (1989) model of liquidity constraints at the pre-entry margin. In the model, constraints bind when desired capital deployment exceeds what personal finances can support. We test three predictions with Entrepreneurship in the Population (EPOP) Survey data from 2023 to 2025, comparing 3980 responses from continuing nascent entrepreneurs with 6903 responses from people who considered or pursued a business and then stopped. Experienced founders report deploying more than twice the startup capital of novices. The association between pre-existing financial constraints and stopping is stronger for experienced founders. The experience gap in stopping odds is large at one financial constraint, marginal at two, and no longer detectable at three. A further implication, that funding-rationed seekers stop at higher rates, is directionally positive but not robust across years. The results are consistent with liquidity constraints binding at the pre-entry margin and help reconcile weak wealth-entry relationships with evidence that constraints matter.