01 February 2019
Interview: Dr Robyn Klingler-Vidra
What exactly is venture capital? And how might it enable innovation, entrepreneurship and economic growth?
What is venture capital?
Venture capital is early-stage equity finance for high-growth, often high-technology and start-ups. Professional investors manage other people’s money (e.g. pension funds, foundations and endowments) to propel business growth. Venture capital finance has boosted the remarkable trajectories of some of the world’s largest companies, including Apple, Facebook and Google. Early-stage venture capital helps such promising start-ups hire staff, invest in technological advances and product development. Advanced and emerging economies alike find venture capital markets attractive for their ability to support technological capacity and high-quality job creation.
How might venture capital enable innovation, entrepreneurship, and economic growth?
Venture capital has two key features in this regard: it is said to be a high-powered form of ‘patient capital’ as well as a type of ‘smart money’. I explore the extent to which it offers ‘patient capital’ given its time-horizon and value add to companies’ strategy and growth. Venture capital – particularly given at the seed stage of investment – is patient in that it is typically invested for years. Positions are not bought and sold in line with market fluctuations. In addition, venture capital is said to be ‘smart money’ because fund managers bring more than capital: they bring operational expertise and professional networks that are crucial to companies' growth. For instance, some of the best venture capitalists investing in life sciences are themselves medical doctors who have experience working at leading international companies. Because of their expertise, they are able to identify disruptive products and advise on how to scale successful businesses.
How can governments best support entrepreneurial ecosystems?
For venture capital to thrive, there needs to be an entrepreneurial ecosystem that fits with local norms. There is no one recipe or formula to copy, even that of the lauded Silicon Valley. Each country has – and many are working – to design policies that reflect their local context. This is the key insight of my book, The Venture Capital State: policy efforts’ fit with policymakers’ contextual rationality is the key determinant of their performance rather than the extent to which policies mimic that of Silicon Valley.
Which countries excel in promoting venture capital? Why?
Taiwan and Israel provide excellent examples of effective entrepreneurial ecosystems, tailored to local context, supporting venture capital. They both pursued markedly different paths, but both were successful because of their fit with their respective local environments.
For instance, in Taiwan, regulations were adapted so that local investors maintained control from the early 1980s. Tax incentives were designed in a fashion similar to the strategies that had been proven to work in supporting semiconductor activities. As proof of the effectiveness of these policy efforts that empowered local investors, analysts have claimed that Taiwan has the “world’s most successfully engineered venture capital market.”
The Israeli case, on the other hand, exemplifies the success that countries have had in linking their fledgling venture capital market with international investors. Israel’s efforts centred on the then-Chief Scientist designing a fund that created a domestic cohort of venture capitalists who managed money from foreign investors, as well as the government, in the early 1990s. Israel had the most active venture capital market in the world on a per capita basis, and the second largest (behind only the US on absolute terms) by 2000.
Robyn Klingler-Vidra has two forthcoming articles on state promotion of entrepreneurship. The first is entitled “Legitimate Social Purpose and South Korea’s support for entrepreneurial finance since the Asian Financial Crisis”, co-authored with Ramon Pacheco Pardo, in a special section of New Political Economy on the East Asian developmental state and finance. The core argument is that legitimate social purpose has propelled the Post-Asian financial crisis South Korean policy-makers to strive to diversify the sources of economic activity and job creation away from chaebols while simultaneously embedding the chaebol in the growing entrepreneurial ecosystem. The legitimate social purpose of promoting entrepreneurial finance has input legitimacy via fit with employment and diversification aims and output legitimacy gleaned from the perceived positive performance of the entrepreneurial ecosystem.
The second article, “Science and Technology Policies and the Middle Income Trap: Lessons from Vietnam”, co-authored with Robert Wade in the Journal of Development Studies, explains why the Vietnamese Science & Technology policy is promoting a local Silicon Valley rather than Made in China 2025-styled policies.