Venture Capital Policy Research Articles

Up and to the Right: The Development, Diffusion, and Impact of the Casey Life Cycle Model on Venture Capital Policy and Practice

Up and to the Right: The Development, Diffusion, and Impact of the Casey Life Cycle Model on Venture Capital Policy and Practice

Venture capital and high-tech start-ups in Europe: a systematic review of the empirical evidence

ABSTRACT Empirical literature on venture capital (VC) and VC-related policies posit that VC can play a major role in helping high-tech start-ups grow and innovate. Motivated by the VC policies recently adopted in Europe and by the heterogeneity of the VC effects across countries and regions, we assess this hypothesis in Europe. Using systematic literature review methods, we summarize the results of 34 firm-level studies published between 2000 and 2023 that estimate value-added effects of VC on funded firms in 17 European countries. The results show a clear preponderance of positive effects on firm expansion and investment. The evidence on the effects on innovation and productivity is more limited and mixed. Regarding the channels of these effects, there is considerable evidence that VC reduces credit constraints of funded firms and limited, but supportive, evidence that VC reduces other barriers to growth. The type of VC emerges as a key moderating factor. Private, independent VC tends to have the largest effects. Government VC tends to have lower, but positive, effects and it often complements private VC. Based on the results of the review and on the current landscape of VC in Europe, we provide recommendations for policy and future research.

Emerging trends in government venture capital policies in smaller peripheral economies: Lessons from Finland, New Zealand, and Estonia

AbstractEmerging trends from the developing venture capital industries of three smaller peripheral economies (Finland, New Zealand, and Estonia), demonstrate that government policy can overcome scale and distance barriers to assist in establishing venture capital to support innovative potential high growth ventures. Eight common policy themes for successful venture capital development are: new venture stimulation; dedicated finance policy institutions; stable, internationally harmonized tax and regulations; business angel development; inward investment; international venture capital fund development; smooth pipeline of investment; effective investment exit market. Venture capital policy development themes are interconnected, requiring a holistic ecosystem approach. A blueprint for successful small peripheral economy venture capital development requires an initial phase of new venture demand stimulation and ensuing simultaneity of policies to engineer venture capital development.

Japanese government venture capital: what should we know?

PurposeThe purpose of this paper is to discuss the implication of Japanese government venture capital (VC) policies for future research and to provide basis for policymakers and practitioners.Design/methodology/approachThis is an academic literature review of available peer-reviewed publications on government VC policies. This paper discusses and analyses the current state and issues of the Japanese government VC policies regarding three research questions: What do Japanese government VCs do? Do they contribute to their portfolios? and Do they contribute to the development of VC market?FindingsThere are mainly two findings in this paper: It is effective to establish a complementary relationship with private VCs for Japanese government VCs to contribute to their portfolios; Japanese government should simultaneously continue to make and review policies for the VC market, the stock market, the entrepreneur sector and the environment surrounding them by its strategic long-term commitment to contribute to the development of VC market and new technology-based firms in Japan.Originality/valueAs there are only a few studies on recently strengthened Japanese government VC policies, this paper provides an in-depth discussion on these Japanese VC policies, which can be used for future research and as a valuable resource for policymakers and practitioners.

Venture capital in Europe: social capital, formal institutions and mediation effects

Venture capital (VC) as an industry has existed for more than 50 years, yet it has only moderately developed beyond the USA despite numerous trials of governments to foster it. Vast research endeavors have been carried out to understand the antecedents, barriers, and facilitators of the industry. However, the focus has been rather limited and accounted almost exclusively for formal features of institutional environments, leaving the informal dimensions unexplored. This paper tries to close that gap. Based on longitudinal country-level data on 18 European countries, we first explore if the “usual suspects,” mostly embodied in reformable formal institutions, do play a role in the European context. We also investigate if informal institutions, and in particular social capital, may exert a prominent effect. In this respect, we found that the impact of social capital on VC activity is indeed indirect, through determining those structural formal institutions which in turn significantly affect VC activity. These findings contribute to the literature on VC and inform European policy makers on the most promising channels for creating a prosperous institutional environment for the financing of innovative start-ups.

Evolutionary Venture Capital Policies: Insights from a Product Life Cycle Analysis of Israells Venture Capital Industry

The significance of VC as a component of the ‘Silicon Valley’ model of high tech has led many countries during the 80s and 90s to implement government policies aimed at stimulating this activity. This paper suggests that a major factor in the failure of many of these policies to create an early phase, high tech SU(Start Up) oriented VC industry was the simplistic attitude of policy makers who viewed VC as a ‘pool of capital’. The alternative ‘VC as an industry’ view adopted in this paper explicitely considers issues of VC organization, capabilities, strategy and institutions. An analysis of their impact on VC policy requires considering the context & timing of policy implementation; and the links between VC and VC policies on the one hand and high tech and high tech cluster policies on the other.The new approach focuses on the process of creation of the new industry (“VC Emergence”) and on targeted VC emergence policies which are significantly more complex than the VC-directed policies suggested in the literature. Moreover success necessitates adoption of a systems/evolutionary perspective to Innovation & Technology Policies in general and to VC-directed policies in particular. The successful emergence of a VC industry in Israel during the 90s was not a ‘pure’ market-led process, rather it was triggered by a targeted VC directed policy/program (Yozma), implemented during 1993-98. The incentives structure & timing of this program as well as other elements in its design stimulated entry both of high quality domestic managers/ entrepreneurs (many of them with prior high tech experience) and of reputable, capable and networked investors from abroad. Both groups provided significant added value to the emerging VC industry and hi-tech cluster. Moreover by successfully dealing with the ‘system failures’ associated with achieving critical mass, collective learning, and other processes associated with the emergence or transformation of high tech clusters — Yozma (the Israeli VC targeted policy program) facilitated an extremely rapid and efficient process of VC emergence based on co-evolutionary and other cumulative processes It also assured a pattern of investment which followed a strict definition of VC (dominance of early stage investments in pure high tech SU). Based on the Israeli case and on information on the U.S’s experience, the paper presents an Industry Life Cycle (ILC) model of VC industry evolution. The model contains five distinctive phases with VC emergence being preceded by two phases (background conditions & a pre-emergence) and being followed by the remaining two (crisis & restructuring; and consolidation). Our analysis suggests that a successful process of VC emergence does not by itself assure industry sustainability. Additional restructuring & reconfiguration processes would be required, frequently in response to a post emergence crisis caused by late emergence overshooting.Despite the enhanced complexity of VC policy, the experience from Yozma suggests that Targeted VC (directed) policies are possible and could be successful; and that their likelihood of success depends on a successful policy-high tech co-evolutionary process which in Israel started two decades before implementation. It also suggests that VC emergence policies in certain countries could contribute to high tech industry and to the emergence of new high tech clusters.

Evolutionary Innovation and High Tech Policy: What Can We Learn from Israel's Targeting of Venture Capital?

The paper analyzes Israel’s Innovation and High Tech Policy from a Systems-Evolutionary (S/E) and Life Cycle Perspectives with a focusing on the targeting of the Venture Capital Industry during the 1990s. Other related research strongly suggested that the emergence of Venture Capital (VC) during that decade was a central vector in the re-configuration of Israel’s high tech industry into a Silicon Valley, start up intensive, model of high tech. The paper undertakes a qualitative assessment of the central VC-directed program-Yozma; and compares it both with a prior failed program (Inbal) and with VC policies of other countries. It concludes that in all likelihood, Government intervention was justified and its impact was high. Absence of a clear policy evaluation methodology in the literarure that follows S/E principles implies that the main thrust of the analysis lies in the framing of policies rather than in undertaking a quantitative analysis of economic impact. Israel’s success in its Venture Capital policies (with Venture Capital defined ‘strictly’ in the sense of early phase equity-based finance and support of high tech start ups) contrasts with the seemingly weak impact of policies adopted by other countries, including OECD countries. Moreoever, and in contrast to much of the relevant literature, it also raises the possibility that targeting high tech clusters is possible provided adequate background and, even more important, adequate pre-emergence conditions have been fulfilled. In Israel those conditions

Venture capital and investor readiness in a post-crisis and state-rescaling context: Revisiting the North East of England

This paper supplies a historical and geographically rooted account of how three separate but ongoing processes (state-rescaling, recessionary conditions and SME business support reforms) were perceived to be intersecting and manifesting themselves at the juncture of venture capital and investment readiness provision in the North East of England primarily from the perspective of local fund managers in December 2012. The paper demonstrates how these myriad processes played out in both predictable and unusual ways in a region often constructed as lagging and not known for its buoyant levels of venture capital activity. In particular, the paper provides empirical insights into the uncertainties created by the Coalition government during the transition from Regional Development Agencies to Local Enterprise Partnerships while also going beyond investor narratives to highlight how the empirical findings connect to broader debates in local and regional development. Here the way in which venture capital policy speaks to the Coalition aspirations of rebalancing the economy, decentralisation and localism in both complementary and contradictory ways are emphasised. As is how the North East (but also other Northern regions) is embedded in multi-scalar relationships by virtue of its connections to EU funding streams, and in particular equity funding through the JEREMIE programme, thus raising interesting questions about the future direction of UK venture capital policy.

Diffusion and adaptation: why even the Silicon Valley model is adapted as it diffuses to East Asia

Diffusion scholarship expects little adaptation of core elements of policy models. However, the empirical reality is different; diffusion of even highly regarded models, such as the Silicon Valley venture capital (VC) policy model, results in marked adaptation. This article demonstrates why the Silicon Valley VC model is necessarily adapted differently by policy-makers in the geographically, ethnically and economically proximate states of Hong Kong, Taiwan and Singapore. More specifically, these policy-makers' interventionist orientations, private sector financing preferences and international versus domestic firm promotion biases drive contextually rational – and unique – adaptations of the Silicon Valley VC policy model.

Building a Venture Capital Market in Vietnam: Diffusion of a Neoliberal Market Strategy to a Socialist State

Vietnam’s venture capital (VC) industry took shape in the late 1990s during a period of exceptional economic growth in the country and the development of its high-technology sector. High growth rates and technological advances have typically coincided with both strong VC market activity and state support of equity financing. This, however, has not been the case in Vietnam. In this article a policy diffusion framework is used to investigate the international and domestic origins of Vietnam’s nascent VC policies, and how they became part of the agenda of the Communist Party of Vietnam (CPV) as credit-based, rather than equity-based, solutions. The article argues that Vietnam’s heterodox approach to VC policy results from both external forces from donors and from domestic factors. In particular, Vietnamese policymakers have a preference for credit-based SME financing solutions and Vietnam’s official development assistance providers diffuse expertise on loans, not equity investments, to the Socialist Republic. The only donors recommending VC and equity-based financing in Vietnam have gone “around the state” rather than through it by working directly with the private sector. As a result, Vietnam’s SME financing initiatives have significantly diverged from international VC policy patterns.

Сравнительный Анализ Венчурного Инвестирования В Российской Федерации И В Зарубежных Странах (The Analysis of Venture Investment in Russia and Abroad)

In article the author covers venture capital investment practice abroad where government is involved and plays an important role. The mechanism of venture capital policy making and the question of venture development in Russia are discovered. Today Russian economy is based on raw materials production and intermediation. This fact shatters the national force of a country, which is a wealth of science.

Innovation and Venture Capital Policy in Brazil and South Africa

This paper examines what constrains and what augments innovation in emerging markets, with a focus on the role of venture capital. It analyses what policy options are open to the government to facilitate innovation. To do this it looks at two country case studies: Brazil and South Africa.

New Technology-Based Firms and Venture Capital Policy in Nigeria

The development of high growth New Technology-Based Firms (NTBFs) in Silicon Valley, Israel, Bangalore and UK is attributed to Venture Capital. Evidence of Nigeria focused or based Venture Capital investment in new technology based firms (NTBFs) is surveyed. This study attempted defining what NTBFs is with Nigeria in context; utilizing established classification such as OECD in assessing the kinds of technology-based firms (TBFs) around. Despite the importance of NTBFs, government incentives and VC investments to grow them have been minimal in Nigeria. Using open (unstructured) questions interviews of members of the Venture Capital Association of Nigeria (VCAN) and some executives in technology-based firms, their assessment of the Nigerian business environment shows a need for policy changes to encourage an upsurge of VC investment in NTBFs. This paper relied on secondary source material.JEL Codes: G24, G28, O38, O16, O43, O55

Building an Innovation Economy: Public Policy Lessons from Israel

This paper provides a comprehensive analysis of those factors that were most important in the emergence of Israel’s innovation economy from 1990-2000. It contains a thorough survey of the leading academic ideas regarding preconditions for innovation (generally) and the preconditions for Israeli innovation over a 30 year period (specifically), including: public R&D grants, human capital acquisition, intellectual property rights, financial reforms, venture capital policy and cultural factors. In addition, this paper lends fresh empirical support to the notion that R&D grants and venture capital policies played an important role in Israel’s narrative, and distinguishes those factors which can be emulated by other governments and organizations (ie. deliberate policy-making or responses to market indicators) from those which resulted from historical chance (ie. luck). Finally, this paper draws from Israel’s experience to spell out some key public policy lessons and limitations of innovation policy.

Risk Value of Emerging Technology Products and Their Diffusion through Use of a CASWN-CE and Real Options Approach

ABSTRACT The rapid development of emerging technology products (ETPs) in China's market makes it important to evaluate and forecast ETPs diffusion. Due to the high uncertainty of ETP marketing and inadequate marketing data of China ETPs markets, the traditional forecasting methods cannot be applied to effectively measure it. We use cellular automata embedded small world network (CASWN) and cross-entropy (CE) divergence to measure the differences of the ETP adopters’ spatial distribution. The empirical analysis indicates the success probabilities of ETPs can be predicted effectively though CASWN and CE divergence, which can make a precise judgment for the market prospect of an ETP in the shortest time after an ETP launch. Based on this, we can calculate the expected cash flow accurately and the option value of an ETP project for sound decision-making. In the meantime, the CE threshold value of success of ETPs in China market is obtained only by the spatial data of early-stage after an ETP launch, not rely on time series data. So a new tool is provided for the prediction and venture capital policy of an ETP launch in this article.

Towards a systemic and evolutionary framework for venture capital policy

When compared to the U.S. and Israel, the weak venture capital (VC) markets and VC policy in Europe up to the early 2000s stimulated two alternative streams of research. A majority view, which we term traditional, focuses on the role of VC in overcoming market failure in the financing of innovative ventures. The policy recommendations emerging from this view involve a mix of monetary incentives and institutional changes that can be applied irrespective of the local context. The second is an evolutionary perspective on VC and VC policy. This is based on a dynamic analysis of the co-evolution between VC and high-tech entrepreneurship, as well as an adaptive view of policy and policymaking (Metcalfe, Econ J 104(425):931–944, 1994). In this setting, policy-makers have to overcome not only market failure but also dynamic system failure associated with the linked emergence of entrepreneurial high-tech clusters. Overcoming traditional market failure becomes a necessary but not sufficient pre-emergence condition for the eventual attainment of the latter policy objectives. This paper surveys the post-2000 literature on VC and VC policy and criticizes some of its assumptions and results. Moreover, it examines the Israeli and UK/Scotland innovation policy frameworks from an historical perspective, which allows us to highlight differences in approaches and impacts. The upshot is that the success of VC policies depends on a number of factors, including the phase of emergence of a VC market and high-tech cluster and the specific country/region institutional setting.

Evolutionary interpretation of venture capital policy in Israel, Germany, UK and Scotland

Summary and critique Most of the post-2000 research on VC policy implic-itly assumes that a central problem in creating a VC market is overcoming pre-existing market failure in the finance and support of start-ups. It is generally agreed that ex ante capital provisions (fund-of-funds), financial incentives (capital gains tax reduc-tion and guarantees) and institutional changes can push the system closer to VC market equilibrium. These sets of measures seem generally applicable, regardless of the structure and culture of the econ-omy or its institutions. Moreover, any type of econ-omic system, irrespective of its industrial or institutional configuration and stage of development, is expected to react positively to the setting up of new forms of intermediation and the removal of bar-riers to entrepreneurship. Another weakness of some of the traditional approaches is absence of an ex-plicit analysis of entrepreneurial cluster emergence. Empirical cases In this section, we consider four examples of inter-twined VC and innovation policies that deviated from what we term the ‘traditional’ approach. In all cases, the policy process and its outcomes have been shaped by a series of pre-conditions that can be investigated using the dynamic concepts of ‘emer-gence’ and ‘pre-emergence’ (Abernathy and Utter-back, 1978; Avnimelech and Teubal, 2006).

The patterns of venture capital investment in the UK bio-healthcare sector: the role of proximity, cumulative learning and specialisation

This paper focuses on the patterns of venture capital (VC) investment in dedicated biotech firms (DBFs) in the therapeutic and diagnostic sectors (bio-healthcare). We use a database of 655 UK bio-healthcare deals to map the geographical flows of VC investment and measure the co-location of investors and DBFs. Then, using 20 face-to-face interviews with venture capitalists (VCs) and DBF firms in Cambridge and Scotland, we study the strategic motives underlying the co-location of investors and investee companies and reflect on the catalytic role VCs play in context of the Scottish and Cambridge bio-clusters. From the viewpoint of VC-related policies, we find that our study is more in line with arguments stressing the attractive power of ‘investor-ready’ opportunities (Mason and Harrison 2003) than supply-side approaches that take for granted VC presence at the core of high-tech clusters. In line with Avnimelech, Rosiello, and Teubal (2008), we propose that VC policy should be consistent with the wider strategic objectives of innovation and technology policy.

The Public Sector's Role in the Promotion of Venture Capital Markets

Over the last decades, governments around the world have increasingly dedicated public financing to the promotion of self-sustainable venture capital markets. In most industrialised nations, the state plays some role in the development of the venture capital industry - particularly the high-tech, early stage sector - and tries stimulating, supporting and influencing this market either directly or indirectly, usually by providing a range of incentives. This paper gives an overview over the growing number of research publications on the public sector's role in the promotion of venture capital markets. Typically these analyses are country-specific and tend to fall short on principles. As policy makers have been using several alternative mechanisms within different and highly idiosyncratic national institutional environments, and the interventions took place at very specific time periods, this paper proposes a general framework for publicly supported venture capital programs. Depending on whether support is targeting developing or existing venture capital markets, a stage wise approach starting with the preparation of a private equity industry, moving on to creating and stabilizing venture capital markets and finally using these markets to achieve policy objectives is proposed. At an advanced stage of the venture capital market's development policy makers are faced with two fundamental issues: when operating under the same conditions as private sector investors the government can only pursue policy objectives as long as other limited partners accept them. A major component of the government's value added, particularly during market downturns, is the signalling and certification inherent in its commitment to a venture capital fund. For private sector limited partners, however, only the public investor's financial track record is of relevance, and to create this track record, the government's approach has to closely comply with the private sector modus operandi. Consequently, with increasing maturity and growing investment return potential of the venture capital market government budgets need to be complemented with and finally replaced by funding from private sector investors.

Review Essay: Regional Venture Capital Policy: UK and Germany Compared1

The government has become an important ‘player’ in the provision of early-stage, venture capital finance to nascent and growing businesses. Public funds have been invested by government agencies both directly to client firms and indirectly via investment in the funds of existing venture capital organisations. With the demise of technology stocks post 2000, governments have felt the need to become more involved in the provision of early-stage finance as private investors have increasingly withdrawn from equity markets that have produced unattractive longer-term returns to technology investments. Europe is in the forefront of designing programmes by which the state may intervene to address allegedly supply-side failures in the market for risk capital. Martin et al. (2003) analyse the regional Venture Capital policies of the UK and Germany reviewing the interactions between central governments and regional authorities. They conclude that there are significant regional venture capital gaps in both countries particularly at the earliest stages of investment. In this review, the major findings of their scientific study, key policy implications and future research implications are discussed.