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The Role of Innovation in Startup Business Financing, Performance, and Survival

The Role of Innovation in Startup Business Financing, Performance, and Survival

Yesubabu Konga (Pondicherry University, India) and Kasilingam Ramaiah (Pondicherry University, India)
Copyright: © 2021 |Pages: 18
DOI: 10.4018/978-1-7998-8327-2.ch020
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Abstract

Startups are the new firms that drive innovation. However, they struggle due to their newness and smallness to finance their innovation, which often tends to fail. In this context, the chapter unfolds the role of innovation in startup firms' financing, performance, and survival. Contrary to conventional investments, innovation projects require heavy funds in R&D activity. The risks in innovation projects combine with the firm's information asymmetries elevate the cost of financing for the innovative startups. Equity investors such as business angels and venture capitalists mainly fund innovative startups. Founder's human capital signals also affect startup financing. Innovation positively impacts startup firm performance. Process and incremental innovations improve startup survival chances, whereas product and radical innovations reduce the same. The authors propose that innovation enhances survival if it increases market power and lessens production costs while hampering longevity if the innovative firm is burdened with the immoderate liabilities of newness and tininess.
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Startup Definition

A Startup is defined as “a new independent business entity with scalable business model working towards developing innovative products or services or processes.” Startup firms are new and independent because these firms are not formed by splitting an already existing business. Simultaneously, they are also known for risk-taking and innovation because they create entirely new or substantially enhanced products or services, or processes over the existing ones. Startups, in many cases, represent a form of innovation. The startup firms’ contribution to innovation activity is significant and even more than the large companies in some industries. At this juncture, as rightly pointed out by Söderblom & Samuelsson (2014) in their report on innovative startups, it is essential to present an important distinction between small firms and young firms. According to them, young firms are most likely to be small firms, but all small firms need not always be young firms. Hence, it is recommended that firm age is primarily considered over the firm size concerning the concept of startups. Moreover, studies on entrepreneurship are covering both small and young firms, and their results should be interpreted accordingly.

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