Working Paper: CEPR ID: DP7165
Authors: David B. Audretsch; Werner Bnte; Prashanth Mahagaonkar
Abstract: 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.
Keywords: entrepreneurship; finance; information asymmetries; innovation
JEL Codes: G14; G24; G32; L26; M13; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| patents (O34) | ability to appropriate returns from innovation (O36) |
| prototypes (Y60) | feasibility of the entrepreneurial project (M13) |
| patents and prototypes (O34) | perceived value of the venture to potential investors (G24) |
| bank financing does not recognize patents and prototypes (G21) | relies on collateral (G33) |
| patents and prototypes (O34) | likelihood of obtaining equity finance (G32) |