Entrepreneurship and the Financial Community
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Entrepreneurship and the Financial Community

Starting up and Growing New Businesses

Edited by Bart Clarysse, Juan Roure and Tom Schamp

This highly accessible book brings together the insights of leading academics and researchers to promote a better understanding of the role of private equity providers in the development of growth-oriented start-ups and the management of growth processes.
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Chapter 7: What Factors Determine the Use of Venture Capital? Evidence from the Irish Software Sector

Teresa Hogan and Elaine Hutson


Teresa Hogan and Elaine Hutson 1. INTRODUCTION New technology-based firms (NTBFs) are major conduits for translating scientific knowledge into commercial products and processes, and play a vital role in the development and diffusion of innovation. (NTBFs are defined as independent ventures less than 25 years old that supply a product or service based on the exploitation of an invention or technological innovation.) In order for such firms to thrive, it is critical that they receive appropriate finance at start-up, through to commercialization and growth. Academics and practitioners agree that venture capital is the most appropriate source of finance for NTBFs. NTBFs tend to satisfy the requirements of classic venture capital, which is a medium-term source of funding used to finance investment activities such as research and development, targeted at new or young firms with the potential to grow and expand. Software NTBFs fit the profile of preferred venture capitalist investments in that they have significant potential for rapid value creation, being in new, expanding markets, with products that are protectable by patent and copyright, and with founders who are generally keen to see their businesses grow. In this chapter, we report the findings of a novel research programme into the venture capital financing of high-technology small businesses in Ireland. Based on a survey of 110 privately held indigenous software companies, of which 54 are venture capital backed and 56 are not, we investigate what factors affect the use of venture capital in NTBFs. Four...

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