The role of the financial structure, investments, and public guarantees on the survival rates of Italian innovative start-ups.

Innovative start-ups are fundamental players in modern economic systems (Cerved, 2022; Colombo et al., 2013). Their disproportionate contribution to economic growth, innovation, and job creation (Nightingale & Coad, 2014) underlines the need to promote the development and the diffusion of these companies. However, the challenges they must face in the early stage of their life threaten their survival. Most of new companies fail to survive beyond the first five years of operations (Nicolò & Ricca, 2019). Understanding the factors that enhance the survival probability of start-up and identifying effective strategies to reduce high mortality rates is crucial for a sustainable entrepreneurial ecosystem (Furlan & Grandinetti, 2012). There are several causes that can lead a company to bankruptcy or default. In particular, the economic and financial profiles of business management can contribute to the development of formal models for identifying the causes of bankruptcy (Del Pozzo, 2012). This study, currently a “work-in-progress”, contributes to the literature on default risk in start-ups by examining the impact of financial structure and public guarantee funds on the survival rates of Italian innovative start-ups in the cohort of new companies born in 2017. Despite the significance of funding models in start-ups and their relationship with default risk, this topic has been neglected in the literature (Mann & Sanyal, 2010). Using a sample of 869 innovative start-ups established in Italy in 2017 and followed up in the next five years (up to 2021), this study aims to investigate the relationship between survival risk and financing models, focusing on the contribution of institutional investors such as venture capitalist (VC) and the use of internal (equity) and external (banking debts) sources of financing. Furthermore, this study also aims to investigate the role of public guarantees for access to bank credit introduced in Italy with Law no. 662/1996 on the survival rates of innovative start-ups to examine how public guarantees influence access to debt capital and financial risk management in start-ups. Adopting a formal conception of insolvency, as conceptualized by Wilcox (1976), we hypothesize that the risk of bankruptcy is closely linked to the negative income and cash flow dynamics that deplete the liquidity generated from capital injections or to sustained losses that shareholders are no longer able to bear (Merton, 1974). In such a context, we hypothesize that start-up with a greater propensity for growth and innovation, particularly VC-backed start-ups, are more likely to experience a higher risk of default compared to those that rely on equity-based or bank financing models. Therefore, this study aims to answer the following research questions: RQ1: What is the most critical year in the life cycle of innovative start-ups? RQ2: Does the financial structure matter for the survival rates of innovative start-ups? RQ3: What is the impact of investments and operating profitability on the survival rates of innovative start-ups? RQ4: Do public guarantees for access to credit mitigate the high mortality rates of innovative start-ups? Definitively, the purpose of this study is to verify whether this type of company embodies the characteristics of high-growth start-ups, both in terms of failure probability and the significance of the financial structure, propensity for investment despite negative cash flows, and the role that public guarantees can play in these aspects.