Larger firms finance innovation in three main ways.
First through internally generated funds which is a funding
source not available to startup firms.
Second, through bank lines.
Large firms are able to provide the collateral or
guarantees to secure a bank finance much more effectively than most start up firms.
There is some debate on the significance on the role of banks
in financing innovation.
Research by William Man, however has found that secured debt is an important source
of financing for innovation.
And patents are an important form of collateral supporting financing with
16% of the aggregate stock of patents at the US Patent and Trademark Office.
Having been pledged this collateral at some point.
Third, as the OSCD documents,
there are a broad range of tax incentives for reasearch and
development, and entrepreneurial activity in most countries.
Startup firms facing much more daunting financing challenge as we just have noted,
internal capital is not available for startups.
This exposes startups to a higher cost of external capital, and
possibly financing constraints.
There is often an information asymmetry between the innovator and the financier,
with the innovator having a better understanding of a new technology's
potential.
Then an external financier who will obviously expect to receive a premium for
investing in a new idea that hasn't been commercially tested before.
Additionally, the uncertainty of disruptive
innovation means that forecasts are incredibly difficult to make.
Sometimes investing in a technology is the best way of determining
potential impact or even the form of the outcome.
So there is a very real evaluative challenge
providing a potential provider of capital.
It may be a cliche, but the first source of capital for an entrepreneur when
an idea is at the early concept stage may well be friends, family, and fools.
Individuals who invest their own money in entrepreneurs and
startups are known as Angel investors.
And often invest small amounts from 10,000 to $100,000 each.
Innovative platform such as Angel list can connect entrepreneur seeking capital
with Angel investors.
And crowd funding platforms are also emerging as fund raising instruments.
Many governments also provide incubators, seed funding, and
loan guarantees to encourage start ups.