Abstract
Many innovative start-ups and SMEs have good ideas, but do not have these ideas fine-tuned to the stage where they can attract outside funding. Investment readiness programs attempt to help firms to become ready to attract and accept outside equity funding through a combination of training, mentoring, master classes, and networking. We conduct a five-country randomized experiment in the Western Balkans that works with 346 firms and delivers an investment readiness program to half of these firms, with the control group receiving an inexpensive online program instead. A pitch event was then held for these firms to pitch their ideas to independent judges. The investment readiness program resulted in a 0.3 standard deviation increase in the investment readiness score, with this increase occurring throughout the distribution. Two follow-up surveys show that these judges' scores predict investment readiness and investment outcomes over the subsequent two years. Treated firms attain significantly more media attention, and are 5 percentage points (p.p.) more likely to have made a deal with an outside investor, although this increase is not statistically significant (95 confidence interval of -4.7 p.p., +14.7p.p.).
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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