Financial signaling by innovative nascent ventures: The relevance of patents and prototypes

Abstract

External finance is a central issue for innovative nascent ventures. In this study, we argue that innovative nascent ventures may use patents to signal appropriability and prototypes to signal feasibility to potential investors. Using new data on 906 nascent ventures, we find that nascent ventures with patents or patent applications as well as prototyped innovations are more likely to obtain equity finance. However, nascent ventures that can solely signal appropriability by patenting are not more likely to obtain equity finance. This result may indicate that venture capitalists and business angels assign higher value to the appropriability signal when coupled with feasibility and vice versa.