Abstract
Abstract Innovative firms with good ideas may still struggle to fine-tune them to the stage where they can attract outside funding. We conduct a five-country randomized experiment that tests the impact of an investment readiness program. Firms then pitched their ideas to independent judges. The program resulted in a 0.3 standard deviation increase in the investment readiness score. Two years later, the average impacts on firm investment outcomes are positive but small in magnitude and not statistically significant. Larger and statistically significant impacts on receiving outside funding occur for smaller firms and for firms with lower likelihoods of otherwise being funded.
Highlights
Innovative start-ups and SMEs in developing and transition countries often have good ideas, but may not have these ideas fine-tuned to the stage where they can attract outside funding
Both groups of firms competed in a pitch event, where they were scored by independent judges on their investment readiness, with the top 50 firms going onto a finals stage where they pitched to investors
We find that firms that went through the investment readiness program receive an average of 0.3 standard deviations higher investment readiness scores at this event, and are more likely to get selected to proceed to pitch in front of investors
Summary
Innovative start-ups and SMEs in developing and transition countries often have good ideas, but may not have these ideas fine-tuned to the stage where they can attract outside funding. A sample of 346 innovative SMEs were randomly divided into two groups: a treatment group that received a high-cost and intensive program that involved help developing their financial plans, product pitch, market strategy, and willingness to take equity financing, along with master classes, mentoring, and other assistance; and a control group which received access to an inexpensive online-only basic investment readiness course After this program, both groups of firms competed in a pitch event, where they were scored by independent judges (blinded to treatment status) on their investment readiness, with the top 50 firms going onto a finals stage where they pitched to investors. While much policy attention around the world has been given to efforts to expand the supply of equity finance for innovative start-ups and SMEs (through seed and venture capital co-investment funds and other activities to attract capital), the effectiveness of these programs can be hampered by a lack of readiness of these firms to receive equity investment. Mason and Kwok (2010) highlight three main aspects of this lack of readiness: first, many entrepreneurs are believed to be equity-averse, unwilling to surrender any ownership stake in or even partial control of their firms; second, many businesses that seek external finance are not considered “investible” by external investors due to deficiencies in their team structure, marketing strategy, financial accounts, intellectual property protection, and other business areas; thirdly, even if entrepreneurs are willing to consider equity and have investible projects, presentational failings mean that many firms are unable to pitch their ideas successfully to investors
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