New Technology-Based Firms and Grants: Too Much of a Good Thing?

While they boost the economy and innovation, New Technology-Based Firms (NTBF) frequently experience difficulties to finance themselves. In Europe, policy makers react by providing them with grants. However, three elements cast doubt on these grants. First, it has been argued that most NTBF financing constraints would be due to the immaturity of projects rather than the lack of investors. Second, Pecking Order Theory suggests that grants, being free and non-dilutive, may be solicited without actual financing constraints. Third, the ability of grants to help their beneficiaries pursue commercial and financial development has been questioned. We contribute to these conversations by answering three research questions: (1) Are grants to NTBF answering to supply-sided financing constraints? (2) Why do NTBF apply for grants? (3) Are grants signaling NTBF to investors? We address these questions by studying the financing path of eight grant-supported NTBF during 3 years after incorporation through case studies. Our findings may be grouped around three themes. First, supply-sided financing constraints exist but are rare. Most of the time, firms attracted equity if they wanted to do so. Second, opportunism and the will to limit dilution support the overwhelming majority of grant applications. Third, we do not observe a certification effect from grants to investors. It rather seems that having attracted outside investors or promising first sales play an important role in obtaining or increasing grant support.