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Financial Signalling by Innovative Nascent Entrepreneurs

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Author Info
Audretsch, David B
Bönte, Werner
Mahagaonkar, Prashanth

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7165.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7165

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Related research
Keywords: Entrepreneurship; Finance; Information Asymmetries; Innovation;

Other versions of this item:

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
O34 - Economic Development, Technological Change, and Growth - - Technological Change - - - Intellectual Property Rights

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