Handbook of Research on Venture Capital: Volume 2

Handbook of Research on Venture Capital: Volume 2

A Globalizing Industry

Handbooks in Venture Capital series

Edited by Hans Landström and Colin Mason

This Handbook charts the development of venture capital research in light of the global financial crisis, starting with an analysis of the current venture capital market and the changing nature of the business angel market. Looking at governance structures; the performance of venture capitalists in terms of investments, economic impact and human capital; geographical organization of business angels and venture capital global ‘hotspots’; this book also analyses the current state of venture capital research and offers a roadmap for the future.

Chapter 6: The economic impact of venture capital

Annaleena Parhankangas

Subjects: business and management, entrepreneurship, economics and finance, corporate governance, economics of innovation, financial economics and regulation, innovation and technology, economics of innovation


A widely held consensus exists among business leaders, policymakers and economists that a vibrant venture capital market is the cornerstone of America’s leadership in the commercialization of technological innovation (European Commission, 1994; 1995; Global Insight/NVCA, 2004; NVCA, 2011). This belief is reinforced by the fact that many of today’s most iconic and successful American companies received venture capital at early stages of their lives. These firms include Amazon, Apple, Cisco, eBay, Genentech, Intel, Microsoft and Netscape (Gompers and Lerner, 2001; IHS Global Impact, 2009). The success of the American venture capital industry led many governments to look for ways to nurture a national venture capital industry (Sallard, 1998). It is somewhat more recently that attention has shifted to business angels as a panacea for economic sluggishness and high unemployment (see for instance Mason, 2009a). This optimism over the economic benefits induced by venture capital investments and business angel investments is also shared by the majority of entrepreneurship scholars. It is noteworthy that pioneers in venture capital research have already emphasized the crucial role of venture capitalists in promoting innovation and growth in early-stage companies (Bygrave and Timmons, 1986; Gorman and Sahlman, 1989). More recently, a wealth of ad hoc and more scholarly evidence has emerged to suggest that firms grow faster and overcome the problem of underinvestment in innovative activities if they are backed by venture capitalists (Ueda and Hirukawa, 2003; EVCA, 2002; BVCA, 2008; IVCA, 2005; SAVCA, 2009). In a similar vein, in one of the first studies on informal venture capital markets in the United States, Wetzel (1983) suggests that business angels are the most likely source of funding for small, growth-oriented technology-based firms. This overtly positive view on the economic impact of equity financing has not gone without criticism. There are some scholars suggesting that venture capitalist investments are few in number and benefit only a handful of companies, regions and industries (Aldrich, 2008) and thus have hardly earned their reputation for being a recipe for sustainable and inclusive economic growth and wealth creation. In a similar vein, some voices of concern have been raised to warn us that unsophisticated business angels may do more harm than good in their portfolio companies (Freear et al., 1994).

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