DP7165 Financial Signalling by Innovative Nascent Entrepreneurs

Author(s): David B Audretsch , Werner Bönte , Prashanth Mahagaonkar

Publication Date: February 2009

Keyword(s): Innovation , Entrepreneurship , Finance , Information Asymmetries

JEL(s): G14 , G24 , G32 , L26 , M13 , O34

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP7165.asp.asp

Innovative new ventures fail if they cannot attract resources needed to commercialise new ideas and inventions. Obtaining external resources is a central issue for nascent entrepreneurs - people who are in the process of starting new ventures. We argue in this paper that, a way to deal with this problem is to signal appropriability and feasibility of innovation to the financiers through patenting and prototyping activities, right in the early stages of the venture. We build a new dataset of over 900 nascent entrepreneurs with information on financing from conventional sources as well as business angels and venture capitalists. Our results suggest that patenting and prototyping increase the likelihood of obtaining external finance, especially equity. However, the most important determinant of debt is house ownership. This indicates that new start-ups need to protect their innovations and at the same time, should also prototype the intended product in order to obtain start-up finance. New ventures should therefore strategically use their innovativeness in order to obtain external finance.