Starting up and Growing New Businesses
Edited by Bart Clarysse, Juan Roure and Tom Schamp
Chapter 7: What Factors Determine the Use of Venture Capital? Evidence from the Irish Software Sector
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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