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Financial Signaling by Innovative Nascent Entrepreneurs

In: Money and Ideas

Author

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  • Prashanth Mahagaonkar

    (Max Planck Institute of Economics)

Abstract

INNOVATIVE NEW VENTURES fail if they cannot attract resources needed to commercialize new ideas and inventions. Obtaining external resources is a central issue for nascent entrepreneurs – people who are in the process of starting new ventures. They rarely have sufficient internal resources to finance their startup activities. One important problem is of information asymmetries between nascent entrepreneurs and external financiers. Although the US venture capital industry has grown dramatically in the past 30 years, information asymmetries may still inhibit the commercialization of innovative ideas. In fact, as Hsu (2004, p.1805) puts it, “particularly for entrepreneurs without an established reputation, convincing external resource providers such as venture capitalists (VCs) to provide financial capital may be challenging.” Information asymmetries are likely to be a severe problem, especially for innovative new ventures in the earliest stage of the startup process. Innovative nascent entrepreneurs developing their business concepts and operating businesses that do not yet generate revenues tend to possess assets that are knowledge-based and intangible. Consequently, the quality and value of the new venture cannot be directly observed.

Suggested Citation

  • Prashanth Mahagaonkar, 2010. "Financial Signaling by Innovative Nascent Entrepreneurs," International Studies in Entrepreneurship, in: Money and Ideas, chapter 0, pages 13-36, Springer.
    • Handle: RePEc:spr:inschp:978-1-4419-1228-2_2
    DOI: 10.1007/978-1-4419-1228-2_2
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