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

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.

► We examine the relationship between innovation and external financing of nascent ventures. ► Patents may signal the ability to appropriate the returns of innovation projects, while prototypes signal their feasibility. ► We use a new and unique database of over 800 nascent ventures in the U.S.A. ► Our results suggest that nascent ventures sending both signals are more likely to obtain equity finance. ► Innovative nascent ventures that solely signal appropriability are not more likely to obtain equity finance.