Money and Ideas, Prashanth Mahagaonkar

INNOVATIVE NEW VENTURES fail if they cannot attract resources needed to com-
mercialize new ideas and inventions. Obtaining external resources is a central

issue for nascent entrepreneurs – people who are in the process of starting new

ventures. They rarely have sufficient internal resources to finance their startup ac-
tivities. One important problem is of information asymmetries between nascent

entrepreneurs and external financiers. Although the US venture capital industry has
grown dramatically in the past 30 years, information asymmetries may still inhibit
the commercialization of innovative ideas. In fact, as Hsu (2004, p.1805) puts it,

“particularly for entrepreneurs without an established reputation, convincing exter-
nal resource providers such as venture capitalists (VCs) to provide financial capital

may be challenging.”


The current global financial crisis is difficult for small firms. Small firms face con-
traction of credit from banks, which affects their future investments adversely. On

the equity side, there is a general lack of trust from investors due to increasing un-
certainties every day. Therefore, investment in future projects using either debt or

equity becomes difficult for small businesses in general.
While small firms face these difficulties, the New York Times (Flanigan, 2008)
recently reported that entrepreneurs with innovative ideas and technologies do not
face a funding gap even during the current crisis. There seems to be some hope
among investors on the potential of innovations and the individuals who bring these
to the market. One entrepreneur stated that in this crisis “companies cant raise debt
so there are opportunities for equity investment.” This investment, in his opinion,
will be in areas where new technologies are constantly evolving. In short, the New
York Times calls it the “entrepreneurial edge,” which involves the innovative idea
and the individual.


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