Chapter 7: Financial Constraints and Access to Finance
7. Financial constraints and access to ﬁnance1 7.1 INTRODUCTION A key constraint for spin-offs is ﬁnding access to ﬁnance. Our survey of TTOs in the UK identiﬁes access to ﬁnance as the major constraint facing university spin-offs (USOs) (Table 7.1). The existence of a ﬁnancing gap for new and small ventures has long been recognized in policy initiatives to help ﬁll that gap both at the European level (European Commission, 2000a) and in individual countries (Bank of England, 2003). The pecking-order hypothesis assumes that internal funding is preferred over external sources and where these are insuﬃcient then debt is preferred over equity (Roberts, 1991; Watson and Wilson, 2002). Debt is preferred over equity in order to avoid ownership dilution. In line with the pecking-order hypothesis, we would expect that university spin-offs, which are innovative start-ups facing severe ﬁnancing constraints (Westhead and Storey, 1997), look for diﬀerent forms of internal ﬁnancing complemented with debt ﬁnancing before they seek venture capital. Alternatively, we would expect that policy-makers ﬁrst make internal and debt ﬁnancing easier to obtain before they introduce mechanisms to encourage venture capital as a way to stimulate spin-offs. Issues surrounding both demand and supply side aspects of the search for ﬁnance for USOs may create market failure problems that could be more signiﬁcant than for other ventures. On the demand side, shortfalls in human capital in terms of the knowledge and understanding required to develop the case for investment in a way that is persuasive and...
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