How does Funding from Innovation Norway Impact Start-Ups’ Profitability, and What is the Effect from an Entrepreneurial Perspective?

Abstract

In order to survive the crucial first phase, start-ups rely on different sources of funding. While some start-ups manage with the traditional forms of raising capital such as providing own capital, through family and friends, loan at the bank or by external investors. For a lot of start-ups, this is not sufficient, and additional funding is required. This is where national innovation systems can help alleviate the gap between start-ups and the necessary capital to succeed. Previous studies have produced mixed results, but most agree that innovation subsidies help foster innovation and economic growth. Few studies have been conducted on the Norwegian subsidies program, Innovation Norway (IN) in particular. This thesis set out to understand the impact of funding from IN on a firm-level by answering the following questions: Does funding from Innovation Norway affect the profitability of start-up companies? Does this impact vary across industries and regions and depend on the time of being granted? What is the impact of funding from IN from an entrepreneur’s perspective?

In Part 1 of the thesis, we utilized several regression models where we tested the impact of funding in logarithm on return on assets in year 2. Additionally, we tested for differences between several factors such as industries, regions, and time from when the company was founded to when it was funded. The dataset we used contained companies that were started between 2014 and 2017 and received funding from IN in 2016 or 2017. The dataset also included relevant financial information and information about the funding that was received. In Part 2, we conducted an interview with the CEO of an Agri-Tech start-up to gain valuable insights on the application process and the impact of the funding from an entrepreneurial perspective.

The regression results indicate a small but significant positive effect of funding from IN on startups. Regarding industries and regions, the results are insignificant, indicating no noteworthy differences. Furthermore, we found that start-ups that spent between 8 to 14 months from founded to funded had significantly more negative ROA in year 2. From our results we derive the following recommendations: Applying for funding from IN should be top priority for start-ups unless they are strapped on time and meet the right investor at the right time. Funding from IN can be a certification of their business and reduce the information asymmetry when meeting external investors later on. Lastly, IN should stream-line its application process to not waste the start-ups time