The Israel Innovation Authority Research Grant 2022-2024 --- Government Funding for Startup Companies as Market Signal about their Quality

Government support for startups is not only central to the creation and maintenance Israel’s startup industry, but also essential in order to guide and steer that industry in accordance with government policy. However, when a company seeks government funding, it may send a mixed signal to the market. A company applying for and obtaining government funding may be perceived by the market as a company with high growth potential wishing to obtain additional funding, with the fact that it successfully applied for funding reaffirming this belief. Though, an alternative interpretation might be that the company is seeking government funding because it knows it would be unlikely to obtain the required capital through the market. Our main objective is to study these signaling effects as a function of the attributes of the three major players in this economic environment: 1) the company applying for funding 2) the commercial capital market, and 3) the Innovation Authority (i.e., the funding body), in order to understand the circumstances under which it is advisable for a young startup company to pursue government funding. To do this, we will use a combination of empirical and experimental methods. Our empirical analysis will make use of both quantitative data on startups applying for and receiving government funding and surveys of venture capitalists to assess their subjective perception regarding the signal. Our experimental analysis will simulate a signaling game with the startup company being the sender of the signal and the market being the receiver, incorporating a simulated government screening process and measuring its signaling effect. This study will benefit both startups, by providing them with guidance on the desirability of government funding, as well as the Innovation Authority, by assisting it in tailoring its startup selection policy while harnessing the signaling effect to ensure optimal outcomes.


Last Updated Date : 07/12/2022