Entrepreneurial Business and Society
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Entrepreneurial Business and Society

Frontiers in European Entrepreneurship Research

Edited by Friederike Welter, Robert Blackburn, Elisabet Ljunggren and Bjørn Willy Åmo

Entrepreneurial Business and Society summarizes contemporary research in the field of entrepreneurship and small business and explores the interplay between the entrepreneur, the entrepreneurial firm and society.
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Chapter 5: The effectiveness of public venture capital in supporting the investments of European young high-tech companies

Fabio Bertoni, Annalisa Croce and Massimiliano Guerini


The creation of an active venture capital (VC) market is a long-standing issue on the agenda of European policymakers (Da Rin et al. 2006). The attempt to improve the framework conditions for the spontaneous growth of VC has been a significant, albeit unsystematic, policy effort (Bertoni and Croce 2011; Mason 2009). Often policymakers have accompanied this long-term endeavor with a direct intervention in capital markets: the creation of public VC (PVC) funds. The investment process of PVC funds is normally set to resemble that of independent VC (IVC) investors: PVC selects companies based on their business plan, invests in their equity (or in equity-like securities), may impose covenants and agree with other shareholders on a state-contingent allocation of cash flow and control rights, and eventually aims at exiting the investment. However the typical PVC funds invest public money, are controlled by a public agency and normally pursue political goals (e.g. job creation and local development) alongside financial ones. This engenders significant differences between PVC and IVC in terms, for instance, of their skills, investment horizon and compensation structure (Brander et al. 2010). This suggests that we should not take for granted that IVC and PVC have a similar impact on their portfolio companies. It is then natural to wonder about the extent to which PVC is as effective as IVC in relaxing the financial constraints of their portfolio companies. This is what we aim to assess in this chapter. Our results may be summarized as follows. Firstly, we confirm that, on average, young high-tech companies in Europe are significantly financially constrained.

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