Entrepreneurship policy and the financing of young innovative companies: Evidence from the Italian Startup Act

Abstract

While there is a general consensus that young innovative companies (YICs) need special attention by public policy which should aim at alleviating the financial constraints these firms commonly suffer, much less agreement has been reached on the most effective policy instruments reputed to accomplish the task. In this respect, if the scientific debate has very much revolved around the dilemma about the crowding-in or crowding-out effect of public R&D subsidies to firms, there is a dearth of scientific studies which analyse the effectiveness and potential interrelations of different policy instruments which at the same time and in the same institutional context are offered to YICs. By taking advantage of the Italian Startup Act issued in 2012, we analyse, for the first time, the possible existence of interrelationships between firm access to a Government-guaranteed (GG) bank loan program and fiscal incentives for venture capital (VC) equity investments. Results suggest two important facts. First, the two mechanisms appear to be functional to different typologies of YICs. Second, VC investments significantly reduce the probability to access GG bank loans. Overall, our analysis highlights a sort of "institutional division of labour" between the two measures and depicts what we label as a Task segmentation effect.

The evaluation of the Italian “Start-up Act”

“…The provision of debt guarantees should therefore be closely monitored and evaluated, not only because it employs a substantial amount of public capital, but also in order to avoid the risk that easier access to credit, relative to equity, might induce high potential start-ups to opt for a slower growth path, based on debt financing rather than on equity injections. This concern is consistent with the analysis of Giraudo, Giudici, and Grilli (2016), who find some preliminary evidence that once start-ups receive a guaranteed bank loan, they become less likely to attract VC funding.…”

“…Grilli, Mrkajic, and Giraudo (2017) compare the socio-demographic characteristics of the founders before and after the implementation of the policy, respectively, to find that the policy incentivised younger individuals with a stronger professional background to start their business. Giraudo, Giudici, and Grilli (2016) analyse the sources of financing of the innovative start-ups registered in the policy, with a particular focus on the differences between equity-backed and debt-backed companies; Finaldi Russo, Magri, and Rampazzi (2016) compares innovative start-ups in the policy with a suitable counterfactual, to find that firms enrolled in the policy and operating in the service sector raise more external funding and invest more. Similarly, this evaluation mentions only tangentially the "sister" policy on innovative SMEs, which, despite presenting many similarities with the policy under scrutiny, has been introduced more recently and targets older firms, and it is beyond the scope of this report.…”

Are Italian Start-Ups ‘Born Sustainable’? A Systems Approach to Sustainability Challenges

“…Drawing on young people presence in start-ups' boards, the achieved results are not in line with literature as well as with policymakers intentions and actions. Thus, even though an Italian law (the 'Italian Startup Act', nationally known as 'Decreto Crescita 2.0') defined start-ups as young, small firms with a strong commitment to research and innovation, currently they still lack of a significant presence of young people in their board (Antonietti and Gambarotto, 2018;Giraudo et al, 2019).…”

Key Criteria and Competences Defining the Sustainability of Start-Up Teams and Projects in the Incubation and Acceleration Phase

“…As research indicates, start-up entrepreneurs tend to have innovative ideas but they often lack a clear strategy as to what product or service they will provide, and/or what they will capitalize on [18]. In most cases, they lack the necessary funds to pay for legal services or to correctly evaluate market conditions [19]. As a result, this very often leads to stagnation of the business.…”