- As innovation policy targets innovations suffering from underinvestment, we examine the effect of public grants on innovation. While innovation involves a lot of uncertainty, we suggest public grants as the best option bearing no obligations. But not all innovations are alike as they differ by newness level. Hence, we distinguish between ""new-to-world"" explorative and ""new-to-firm"" explotation innovation. Making use of (inter)national knowledge flow, some exploitative innovations are not ""new-to-firm"" but rather ""new-to-region or -country"" leveraging existing knowledge from another region or country. Allocating grants to the most promising startups, we evaluate startups' quality by high-tech industry and ""entrepreneurial orientation"" (EO). Within over 4,000 early-stage German startups, we find that explorative innovations benefit the most from grants, especially high EO startups. Also, grants help low EO firms to become innovative at all and to launch exploitative innovation with (inter)national knowledge flow.