The Handbook of Technology and Innovation Management

15.5. Small Firms, Startup Finance, and Venture Capital

As should be apparent from much of the preceding discussion, any problems associated with financing investments in new technology will be most apparent for new entrants and startup firms. For this reason, many governments already provide some form of assistance for such firms, and in many countries, especially the US, there exists a private sector 'venture capital' industry that is focused on solving the problem of financing innovation for new and young firms. This section reviews what we know about these alternative funding mechanisms, beginning with a brief look at government funding for startups and then discussing the venture capital solution.

15.5.1. Government funding for startup firms

Examples of such programs are the US Small Business Investment Company (SBIC) and Small Business Innovation Research (SBIR) programs. Together, these programs disbursed $2.4 billion in 1995, more than 60% of the amount from venture capital in that year (Lerner, 1998a). In Germany, more than 800 federal and state government financing program have been established for new firms in the recent past (OECD, 1995). In 1980, the Swedish established the first of a series of investment companies (along with instituting a series of measures such as reduced capital gains taxes to encourage private investments in startups), partly based on the US model. By 1987, the Swedish government's share of venture capital funding was 43% (Karaomerliolu and ...