Developing* a* Globalisation* of* Venture* Capital* Thesis:* How* Are* Small,* Peripheral*Economies*Seeking*To*Establish*Sustainable*Venture*Capital*Ecosystems?**CM# Mason,# Professor# of# Entrepreneurship,# Adam# Smith# Business# School,# University# of# Glasgow.#

colin.mason@glasgow.ac.uk##

#

R#Baldock,#Senior#Research#Fellow,#Centre#for#Enterprise#and#Economic#Development,#Middlesex#University#

Business#School.#robbaldock@rHblegal.com##

#

#

Abstract##

The#paper#develops#a#globalisation#of#venture#capital#(VC)#thesis#by#examining#emerging#strategies#by#small#

peripheral#regions#and#nations#to#develop#sustainable#VC#industries.##

#

VC# is# perceived# as# a# key# factor# in# developing# potential# high# growth# firms.#However,# private#VC# funds# and#

investments#are#geographically#concentrated#H#globally#in#just#a#handful#of#countries#and#within#countries’#core#

regions# H#prompting#peripheral#nations#and# regions# to#develop#governmentHsponsored#venture#capital# funds#

(GVCFs).#Various#evaluations# suggest# their# lack#of# success,# due# to# restrictive# investment# focus,# inability# to#

add#value#and#thin#markets#associated#with#weak#peripheral#ecosystems.##

#

Drawing# on# six# case# study# peripheral# regions# and# countries:# North# East# England,# Nova# Scotia# (Canada),#

Ireland,#Estonia,#Finland#and#New#Zealand,#we#examine#how#GVCFs#are#evolving#to#meet#a#common#goal#to#

increase#early#stage#and#growth#finance#for#potential#high#growth#firms.###

# #

We# discuss# eight# factors# contributing# to# improved# GVCFs# and# potential# for# future# sustainable# private# VC#

marketsU# international# investment,#demand#stimulation,#crossHborder#collaboration,# regulatory#harmonisation,#

improved#exit#markets,#smooth#finance#escalator#operation,#angel#market#support,#institutional#oversight.###

#

#

Key#words:#venture#capitalU#peripheral#economiesU#economic#development#policy#

#

#

Acknowledgement*#

The# authors# would# like# to# acknowledge# partial# funding# support# for# this# research# from# the# Department# for#

Enterprise,#Trade#and#Industry#(DETI),#Northern#Ireland#and#to#the#excellent#case#study#materials#provided#by#

SQW#Research#and#led#by#Joe#Duggett.#The#views#expressed#are#entirely#those#of#the#authors.##

#

*

Introduction#*The# paper# develops# a# globalisation# of# venture# capital# (VC)# thesis# by# examining# how# small# economies#

(countries#and#economic#regions)*seek#to#develop#sustainable#private#sectorHled#VC#ecosystems.###

Surprisingly# little# has# been# written# about# the# development# of# VC# from# a# crossHcultural,# smaller# developing#

market#perspective.#Lerner#(2010)#focuses#on#the#cases#of#Israel#and#New#Zealand,#whilst#Cetindamar#(2003)#

reviews#21#mainly#European#countries,#with#a#consideration#for#the#maturity#of#VC#markets#and#a#focus#on#the#

more#mature# VC# systems# in# the# relatively# smaller# European# economies# in# Sweden# and# Denmark# and# the#

more#mature#market#in#Canada.#Cetindamar#(2003,#drawing#on#Karaomerlioglu#and#Jacobsson,#2000)#assess#

VC#market#maturity#in#terms#of#size#(volume#and#numbers#of#VC#investors),#diversity#(VC#investors#operating#

at# different# stages# from# seed# to# buyout)# and# competence# (in# relation# to# VC# investment# experience).# The#

study’s#findings#highlight#the#importance#of#government#institutions#to#provide#a#stabilising#influence#over#the#

long#period#(several#decades)#required#to#establish#a#VC#system#and#to#enact#specific#intervention#measures.#

It#also#recognises#the#importance#of#exit#markets#in#providing#recycling#of#VC#investment#funds#and#that#trade#

sales#to# larger#businesses#are#often#a#compensating#mechanism#for#a# lack#of#effective# local#capital#markets#

enabling#IPOs#(Karaomerlioglu#and#LindholmHDahlstrand,#1999).#####

#

In# this#paper#we#extend# from# this#narrow#vision#of#VC#ecosystem#development# to#consider# the#more#global#

perspective# brought# about# by# a# combination# of# the# improvements# in# communications# technology# and# the#

recognition# that#effective#VC#development# requires#scale#and#crossHborder# connectivity# (Technopolis,#2011U#

Dittmer# et# al.,# 2014).# Whilst# Lerner# (2009,# 2010,# 2011)# was# not# the# first# author# to# postulate# that# the# way#

forward#for#the#development#of#VC#was#through#taking#a#global#perspective,#he#has#provided#a#recent#blueprint#

for# developing# a# more# free# market,# globalised# approach# to# the# development# of# VC.# We# develop# this# by#

incorporating#wider#entrepreneurial# finance#ecosystem#approaches#which# involve#stimulating#and#developing#

the#entrepreneurial#startHup#and#early#stage#business#demandHside# (Hwang#and#Horowitt,#2012U#Mason#and#

Brown,#2013U#Hughes,#2009),# the# increasing# influence#of# improved#global#communications# (via# IT#and#more#

rapid# travel)# impacting# on# startHup# early# stage# business# mobility# and# development# (Deakins# et# al.# 2015U#

Lerner,# 2010)# and# global# supply# of# entrepreneurial# finance# (Hopp,# 2010U# Hopp# and# Rieder,# 2011)# and#

institutional# factors#which#can# impact#on#finance#escalator#supplyHside#development#(Mazzucato#and#Penna,#

2014).#Here#we#examine#how#six#small,#peripheral#national#and#regional#economies#are#attempting#to#develop#

their#VC#ecosystems#and#how#their#experiences#and#lessons#build#on#the#current#knowledge#base#and#support#

our#globalisation#of#VC#thesis.###

#

The#paper#proceeds#by#first#examining#the#rationale#and#role#of#governmentHsponsored#venture#capital#(GVC)#

schemes#in#developing#the#early#stage#entrepreneurial#finance#ecosystem#and#critiques#of#this#role.#We#then#

develop# a# hypothesis# for# the# globalisation# of# VC,# suggesting# that# this# might# offer# a# possible# solution# for#

developing# effective# GVC# schemes# in# smaller# economies,# provided# that# a# broad,# holistic# entrepreneurial#

finance# ecosystem# approach# is# adopted.# A# synthesis# is# then# presented# in# which# the# study# of# six# small#

economies# reveals#eight#key#emerging# themes# for# the#development#of#GVC#and# local#VC#ecosystems.#The#

paper# concludes#with# a#discussion#of# the#emerging# themes#and#development# of# an#entrepreneurial# finance#

ecosystem#model#founded#on#our#globalisation#hypothesis#that#offers#potential#for#sustainable#VC#ecosystems#

in#these#small#economies.#######

#

Venture*Capital*and*Economic*Development:*a*critique*of*Government*Sponsored*Venture*Capital*#

Definition,)role)and)concentration)of)VC)#

Venture#capital#–#which# is#defined#here#as# independently#managed,#dedicated#pools#of#capital# that# focus#on#

equity# and# equityHlinked# investments# in# privately# held,# (potential)# high# growth# companies# (Lerner,# 2009)# –#

plays#a#central#role#in#the#emergence#of#new#industries#by#funding#and#supporting#innovative#companies#which#

come# to# dominate# these# industries# (Gompers# and# Lerner,# 2001,# ch.4).# VC# investment# speeds# the#

development#of#companies,#enabling# them#to# transform# ideas#quickly# into#marketable#products#and#become#

industry# leaders# through# firstHmover#advantages#(Zhang#and#Dodgson,#2007).#VCHbacked#companies#aim#at#

more#radical# innovations,#are#significantly#faster# in#introducing#their#products#to#the#market#and#pursue#more#

aggressive#market#strategies#than#other#startHups#(Hellmann#and#Puri,#2000,#2002).#Peneder#(2010)#finds#that#

VCHbacked# firms# grow# significantly# faster# than# other# firms.# Of# course,# venture# capitalists# (VCs)# highly#

selectively#seek#to# invest# in#businesses#with#potential# to#generate#a# large#return#within#a# fiveH# to#sevenHyear#

time# frame,# typically# exiting# via# IPO# (initial# public# offering)# or# trade# sale# of# their# investee# business# to# a#

corporate#buyer.#VCs# therefore# invest# in#management# teams#with# rapid#enterprise#building#capability#and# in#

businesses# that# have#a#durable# competitive#advantage,#where# rapid#expansion#has# significant# payoffs,# and#

which# operate# in#markets# that# already# have# sizeable# sales# in# conjunction#with# a# large# number# of# potential#

users# who# have# not# yet# become# customers# (Bhidé,# 2007).# Peneder# (2010)# further# demonstrates# that# the#

positive#impact#of#VC#investment#on#growth#remains#after#controlling#for#the#selection#effect.#

#

However,# VC# is# highly# concentrated# geographically,# both# globally# and# within# countries# (Mason,# 2007U#

Avdeitchikova,#2012).#At#the#global#scale#the#US#accounted#for#68%#of#VC#investments#in#2013#with#Europe#

accounting#for#a#further#15%#(Ernst#and#Young,#2014).#Within#Europe,#VC#investment#as#a#proportion#of#GDP#

is#also#concentrated,#with# just# five#countries# (one# fifth)#above# the#European#average:#UK,#France,#Sweden,#

Norway#and#Netherlands,#and#disproportionately#concentrated#in#the#UK.#Within#countries#VC#investments#are#

geographically#clustered,# typically# in# the#most# technologically#advanced# regions# (Florida#and#Kenney,#1988U#

Florida# and#Smith,# 1993U# Zook,# 2002U#Mason,# 1987U#Mason# and#Harrison,# 1991,# 2002U#Martin# et# al.,# 2002U#

2005U#Chen#et#al.,#2010).#Indeed,#there#is#evidence#that#this#geographical#concentration#has#been#increasing#

in#recent#years#(Mason#and#Pierrakis,#2013).##

#

Rationale)for)government)intervention)#

Lerner#(2010)#has#indicated#that#most#of#the#established#VC#markets#across#the#globe#have#been#founded#and#

stimulated#by#government#support.#This#has#been#based#on#the#desire#to#assist#innovative#and#potential#high#

growth#business#development#and#plug#perceived#gaps#in#funding#emanating#from#the#uneven#distribution#of#

private# investment.#Hence,#policyHmakers#around# the#globe# in# regions#and#countries#with#deficiencies# in#VC#

have#introduced#initiatives#intended#to#increase#its#supply.#Such#interventions#are#based#on#two#assumptions.#

The#first#is#that#VC#plays#a#vital#role#in#innovation#policy,#facilitating#the#commercialization#of#the#science#base,#

and#entrepreneurship#policy,#facilitating#the#emergence#of#highHgrowth#businesses.#The#second#is#that#the#lack#

of#VC# is# the#consequence#of#market# failure#and#that#GVCFs#can#effectively# fill# this#gap.#These#assumptions#

are#now#explored.#

#

Critiques)of)GVCFs)#

Recent# studies# have# questioned# the# effectiveness# of# GVCFs.# Nightingale# et# al.# (2009)# examined# six# UK#

government–backed#VC#(GVC)#schemes,#finding#that#their#impact#was#modest#when#compared#to#a#matched#

control#sample.#Munari#and#Toschi#(2015)#also#report#that#UK#GVCFs#have#had#only#a#modest#impact#on#the#

performance#of# their# investee#businesses,#noting#that# those#funds#with#a#regional# focus#were# least#effective,#

not# least# because# of# the# inability# of# the# investee# businesses# to# attract# further# funding# through# syndication.#

Bertoni# et# al.# (2015)# examine# GVC# schemes# across# Europe# looking# at# their# impact# on# invention# and#

innovation.#They#find#Government#backed#companies#do#not#patent#more#than#independent#VC#(IVC)#Hbacked#

firms#or#nonHVC#backed#firms#and#conclude#that#“GVC#is#a#poor#substitute#for#IVC”#(p.933).#Their#only#positive#

finding# was# that# the# combined# effect# of# IVC# in# syndication# with# GVC# was# positive# and# greater# than# their#

individual# effects,# suggesting# that# they# may# play# a# complementary# role.# However,# this# potentially# favours#

regions#which#already#have#an#abundance#of#IVC,#given#the#traditional#concept#of#VCs#investing#close#to#their#

location#(Baldock#and#Mason,#2015).#Another#study#on#the#same#database#by#Grilli#and#Murtinu#(2014)#noted#

that#whereas# IVC#had#a#positive,#statistically#significant# impact#on#sales#growth#of#highHtech#entrepreneurial#

firms#GVC#investment#did#not#have#any#significant#impact.#The#only#situation#in#which#GVC#was#positive#was#

when# they#were#nonHleading#partners# in#a#VC#syndicate.#Brander#et#al.# (2014)# in#a# study#covering#Europe,#

USA,#Canada#and#Asia#also# found# that# firms#with#both#GVC#and# IVC#perform#better#and#are#more# likely# to#

have# successful# exits# than# businesses# that# only# receive# GVC# funding.# This# is# consistent# with# these# firms#

receiving#more#investment.#Overall,#it#would#appear#that#IVC#has#assisted#business#growth,#whilst#the#impacts#

of#GVC#have#been#mixed#and#generally#inconclusive.##

#

This#evidence#can#be#interpreted#in#several#ways.#A#demandHside#perspective#would#argue#that#rather#than#a#

consequence# of# market# failure# where# viable# business# propositions# have# been# unable# to# obtain# sufficient#

funding# it# suggests# that# the# problem# is# one# of# thin# markets.# Such# regions# lack# sufficient# numbers# of# high#

potential# firms#that#are#being#held#back#by#a# lack#of#earlyHstage#VC#H# there#are#simply#too#few#firms#with#the#

capability#of#achieving#the#commercial#success#that#generates#the#exceptionally#high#financial#returns#sought#

by# VC# investors# (Mason# and# Brown,# 2013).# An# alternative,# supplyHside# interpretation# of# the# modest#

performance#of# the# investee#companies# is# that# it# reflects#shortcomings# in# the# investment#decisions#of# some#

funds# or# the# support# they# provide# to# investee# firms.#On# the# first# point,# poor# investment# outcomes# could# be#

attributable,#at# least# in#part,# to#the#poor#design#and#investment#restrictions#imposed#on#the#schemes#by#their#

government.# These# include# the# following:# funds# that# are# too# small# and# hence# unable# to# make# followHon#

investments# (Murray,# 1994U# 1999U# Lerner# 2010)U# # evergreen# funds# that# have# suffered# mission# creep# and#

persisted#in#investing#in#poor#performing#portfolio#businesses#(Murray#et#al.,#2009,#referring#to#Finnish#GVCFs)U#

time# limited# funds#which# have# lacked# the# flexibility# to#maintain# portfolio# businesses# until# optimal# exit# points#

(Lerner’s# 2010# ‘long# game’# investment# requirement)U# investment# restricted# to# specific# regions# (e.g.# UK#

Regional# Venture# Capital# Funds# in# the# 2000s,# NAO,# 2009)U# investing# only# limited# amounts# in# any# given#

business#(e.g.#due#to#European#Commission#state#aid#restrictions,#set#at#£2m#for#initial#investments#in#the#UK,#

enhanced# to# £5m# in# January# 2014)U# and#only# investing# at# the# early# stage#and# investing# in# specific# sectors,#

such# as# ‘technology’# (e.g.#UK#HiTech# funds# in# the# 2000s),# all# of#which#may# compromise# fund# performance#

(Baldock#and#Mason,#2015U#Nightingale,#2009).#A#caveat#here#is#that#many#of#the#poorer#performing#UK#funds#

referred# to,# for# example# in# the#Munari# and#Toschi# (2014)# study,# relate# to#old# style#government# funds#which#

were# subsequently# adjusted# in# favour# of# larger,# less# restricted# private# sectorHled,# private# coHfunding#

approaches,#taking#on#board#Lerner’s#lessons#(Baldock#and#North,#2015).##

#

On# the#second#point,#VC# is#by#definition# ‘smart#money’,#and#expertise#matters#as#well#as#cash.#However,#a#

recent#panHEuropean#survey#demonstrates#that#‘independent’#and#‘government’#funds#make#different#types#of#

value# added# contributionU# ‘independent’# firms# provided# more# support# for# professionalization,# changing# the#

management# team,# exit# orientation,# and# also# made# greater# impact# on# accelerating# growth# and# providing#

credibility# to# other# investors# (Luukkonen# et# al,# 2013).# The# superior# role# of# IVCs# in# enhancing# the#

professionalism# of# their# investee# businesses# also# finds# support# in# other# studies# (e.g.# Maula# et# al.,# 2005U#

Gompers#et#al.,#2006U#Boue,#2007).#In#short,#the#evidence#points#to#the#conclusion#that#public#sector#VC#funds#

may#not#be#as#‘smart’#as#private#sector#VC#in#terms#of#adding#value#as#Shäfer#and#Shilder#(2009)#suggest#is#

the#case#for#Germany,#hence#they#have#less#impact#on#their#portfolio#firms#than#private#investors.#This#may#be#

linked#to#the#challenges#faced#by#public#sector#VC#funds#in#recruiting#experienced#and#committed#investment#

managers#(Hood,#2000).##

#

A#final#explanation#is#that#for#VC#to#be#effective#it#needs#to#operate#as#part#of#an#ecosystem#involving#demandH

side#stimulation#through#an#entrepreneurial#support#system#that#generates#a#strong#deal#flow#of#attractive,#high#

potential#businesses,#typically#with#a#born#global,#wider#international#market#approach,#which#is#a#crucial#factor#

for#new#potential#high#growth#businesses#emanating#from#small#national#markets#(Deakins#et#al.,#2015).#From#

the#supplyHside#there#needs#to#be#informed#institutional#investors#(including#pension#funds,#endowments#etc.)#

willing#to#accept#the#risks#of#earlyHstage#equity#investment#and#invest#in#VC#funds,#large#professional#VC#funds#

of# sufficient# scale# and#managerial# competence# to#make# initial# and# followHon# investments# and#grow#portfolio#

firms# until# attractive# exit# opportunities# are# identifiedU# and# a# supportive# network# of# high# quality# advisors#

(Nightingale#et#al,#2009).#Lerner#(2010)#also#points#to#the#importance#of#financial# intermediaries#in#facilitating#

the#development# of# a# financing#ecosystem.#This# is# similar# to# the# competence#block#model# of#Eliassion#and#

Eliassion#(1996),#defined#as#“the#total# infrastructure#needed#to#create#(innovation),#select#(entrepreneurship),#

recognise# (VC# provision),# diffuse# (spillovers)# and# commercially# exploit# (receiver# competence)# new# ideas# in#

clusters#of# firms”.#This# forms#a#network#of#complementary#competences# that#are# required# for# the#successful#

commercialisation# of# innovation.# High# growth# entrepreneurial# ventures# are# unlikely# to# emerge# where#

competence#blocks#are#incomplete.#

#

However,# it# needs# to# be# acknowledged# that# GVCFs# are# aiming# to# plug# funding# gaps,# which# occur# where#

private#VCs#consider#the#riskHreward#ratio#insufficient#to#enter#the#market,#as#evidenced#by#the#retreat#of#VCs#

to#less#risky#later#stage#investment#post#Dotcom#(Pierrakis,#2010).#Therefore,#in#plugging#this#gap#and#avoiding#

displacing#private#VC,#government’s#focus#is#likely#to#be#on#funding#viable#business#propositions#which#fall#into#

Oakey’s# (2003)# ’probably# fundable’# rather# than# ‘definitely# fundable’# investment# category.# The# upshot# is# that#

government#funded#venture#is#unlikely#to#achieve#private#VC#performance,#but#may#well#result#in#other#forms#of#

positive#externality#gains#to#the#economy,#such#as#through#R&D#spillovers#(Wilson#and#Silva,#2013U#Griliches,#

1992U#Jaffe,#1996).##

#

Learning*from*previous*experience*–*an*emerging*globalisation*hypothesis*#

This#discussion#suggests#that#from#a#policy#perspective,#there#is#the#need#to#balance#economic#development#

requirements# such# as# regional# imbalances# (Mason# and# Pierrakis,# 2013)# and# financing# more# marginal# but#

viable# business# cases# (Oakey,# 2003)# with# the# provision# of# a# private#marketHled# approach# which# optimises#

returns# (Lerner,# 2010).# There# is# also# the# need# to# avoid# programme# duplication# and# private# sector#

displacement#(Leleux#and#Surlemont,#2003)#and#the#attendant#negative#impacts#that#over#supply#can#have#on#

inflated#valuations#and# reduced#quality#of#deals#as# investors#struggle# to# find# justifiable# investments# (Lerner,#

2010U#NAO,#2009).#It#also#acknowledges#that#developing#the#supplyHside#cannot#be#successfully#undertaken#in#

isolation# from#the#wider#equity# finance#ecosystem#(Hwang#and#Horowitt,#2012).#The#development#of#a#more#

efficient#seed#and#early#stage#financing#escalator#or#pipeline#(Mason#and#Pierrakis,#2013U#Mason#and#Brown,#

2013)#requires#a#carefully#integrated#policy#to#develop#the#VC#and#equity#finance#ecosystem#(Hughes,#2009),#

taking# into#account#both# the#supplyHside#mechanism#and#potential#demandHside# failures#such#as# investment#

readiness# (Mason#and#Kwok,#2010)#and# the#crucial# roles#of# the# financial# intermediary#advisory#and#support#

network#(Lerner,#2010).)#)Nevertheless,#the#model#and#approach#of#the#funds#that#are#established#is#crucial#to#their#ultimate#success.#In#

this# respect# Lerner# (2009U# 2010)# and# Kirk# (2011)# argue# for# a# global# perspective,# attracting# in# skilled# and#

experienced#investors#with#the#ability#to#maximise#portfolio#company#performance#and#to#train#local#investors#

and#raise#their#standards#(exemplified#by#the#government#backed#Yozma#funds,#established#in#Israel#in#1993).#

A#similar#approach# to#angel# investing# is#advocated,#particularly#where# there#are#sector#specialisms# that#can#

enable#international#syndication#(Hopp,#2010U#Hopp#and#Rieder,#2011).#Lerner#(2009U#2010)#goes#on#to#argue#

that#the#financing#ecosystem#needs#to#be#an#open#system,#with#effective#knowledge#transfer,#outward#looking#

and# seeking# to# attract# inward# skills# and# investment.#As# such# this# requires# a# policy#mindset# that# is# oriented#

towards#establishing#successful#global#linkages#and#networks.#Specifically,#Lerner#(2010)#advocates#a#global#

perspective# in# establishing# hybrid# programmes,# attracting# foreign# investment# and# VC# skills# which# can# be#

transferred# into# improved# local# VC# spin# out# activities# over# time,# developing# a# lasting# legacy,# as# well# as#

encouraging#portfolio#businesses#to#establish#a#multinational#presence.#The#key#proviso#is#that#investment#into#

businesses#seeks#a#realistic#return#within#the#country#where#the#funds#are#being#established,#creating#a#viable#

VC#market#and#developing#businesses#which#drive#forward#the#national#economy,#with#government#retreating#

and#avoiding#funding#duplication#once#the#private#sector#is#fully#established.##

#

Whilst#Lerner#focuses#on#the#attraction#of# inward#investment#and#skills# in#order#to#establish#and#develop#VC#

markets#in#peripheral#economies,#Hopp#(2010)#introduces#an#important#additional#element#in#the#development#

of# syndication# to# spread# seed# and# early# stage# risk,# generate# greater# funding# streams# and# introduce#

international#connections#and#potential# later#stage#VC#connections#which#can#open#up#global#markets.#This#

model# is# now#enshrined# in# the# London#Tech#City# seed#VCs#which# syndicate#with# business# angels# at# seed#

stages#and#with#other#VCs#in#later#VC#stages#(GLA,#2013U#British#Business#Bank,#2015).#There#is#also#growing#

evidence#that#sector#preferences#are#breaking#down#the#barriers#of#distance,#where#once#VCs#would#not#travel#

more#than#one#hour#to#portfolio# firms#they#are#now#syndicating# internationally#with#key# lead#angels#and#VCs#

located#in#other#countries.#Improved#communications#systems#(such#as#broadband#and#skype)#have#assisted#

in#this#process,#but#there#is#also#evidence#that#physical#connectivity#through#low#cost#direct#city#flight#linkages,#

such#as#London#City# to#Dublin#or#Berlin#have#helped#(British#Business#Bank,#2015).#This#evidence#supports#

both#Lerner’s#and#Hopp’s#globalisation#hypotheses.##

#

A#particularly#pertinent#element#of#Lerner’s# (2010)#globalisation#hypothesis# is# the#need# for#effective#VC#exit#

markets#and#that#for#smaller#economies#which#lack#local#capital#markets#that#can#provide#initial#public#offering#

(IPO)# options,# trade# sales# to# larger# businesses# are# typically# the#most# likely# exit# option# (see# also# Baldock,#

2015

1

),#which#Cetindamar#(2003)#refers#to#as#a#compensatory#mechanism#for#immature#capital#markets.#The#

crucial#points#here#are#that#small#cap#public#feeder#markets#like#the#UK#Alternative#Investment#Market#(AIM),#

or#First#North# in#Sweden#and#Finland#provide#opportunities# for# local#businesses# to#exit#VC#and#remain# local#

(Baldock,# 2015U# Kallas,# 2012U# Black# and#Gilson,# 1998),#whilst# trade# sales# or# public#market# exits#which# are#

overseas# (i.e.# buyouts# from# overseas# companies# or# IPOs# on# established# feeder# markets# such# as# the# US#

NASDAQ)#may#lead#to#fullHscale#company#relocations#to#the#new#investor#home#countries,#or#the#retention#of#

only#a#smallHscale#R&D#base#within#the#original#country#or#region.#Alternatively,#a#lack#of#exit#market#options,#

as# widely# experienced# during# the# GFC,# may# lead# to# under# capitalisation# of# potential# growth# businesses,#

resulting# in# their# sub# optimal# performance# and# even# closure.# Amini# et# al.# (2012)# also# highlight# the#

underrepresentation#of#peripheral# regions# like# the#UK’s#North#East# in# IPOs,#suggesting# that#even# in# the#UK#

where# the# established# AIM# public# feeder# market# exists,# peripheral# regions# can# still# suffer# similar# types# of#

business# and# IP# loss,# undermining# regional# development# progress.# However,# Lerner’s# (2010)# globalisation#

hypothesis#argues#that#an#increasingly#global#entrepreneurial#financial#market#the#important#factor#is#that#exits#

are#facilitated#and#that#funds#are#recycled#back#into#the#home#country,#as#exhibited#by#the#‘Skype#4’#in#Estonia.#

Recent# evidence# from# the# UK# from# Baldock# and# North# (2015),# Baldock# (2014)# and# also# BIS# (2016#

forthcoming),#supports#this#view,#suggesting#that#trade#sales#are#generating#recycled#funds#and#also#IP,#mainly#

in#the#form#of#local#serial#entrepreneurship.##

#

Finally,#a#crucial#dimension#to#the#emerging#globalisation#hypothesis#is#the#institutional#requirements#for#a#key#

oversight#body#which#has#control#or# lobbying#powers# to#develop# the#VC#finance#ecosystem.#Mazzucato#and#

Penna# (2014)# and# Breedon# (2011)# draw# on# the# role# and# experience# of# the# German# Kreditanstalt für Wiederaufbau (KfW: Reconstruction Credit Institute),# notably# in# operating# technology# funds#(Grunderfonds),#as#a#potential#model.#They#argue#that#an#oversight#organisation#can#manage#and#control#the#finance#escalator/pipeline#(Mason#and#Brown,#2013U#North#et#al.,#2013),#effectively#developing#and#monitoring#

interventions#to#ensure#that#there#is#a#smooth#supply#and#operation#of#VC#funds#from#seed#stage#through#to#

later# ‘series#AHB’# funds#and#beyond#to#an#effective#IPO#exit#or# trade#sale#market#(Deakins#and#Freel,#2012).#

Alongside#this#role#to#develop#and#effectively#operationalise#GVCFs#through#private#sectorHled#coHinvestment#

partnerships#(advocated#by#Lerner,#2010#and#Murray,#2007),#these#policy#bodies#can#encourage#crossHborder#

collaborations,#linking#for#example#in#Europe#with#the#European#Investment#Fund#(EIF)

2

#to#ensure#greater#fund#

scale#and#coverage#which#might#be#particularly#effective#for#developing#VC#in#peripheral#countries#and#regions#

1 Baldock (2015) found that trade sales were the most likely form of VC exit for UK and US businesses. 2 See Baldock (2014) for detail of the Notion Enterprise Capital Fund, a UK GVCF which received top up EIF funds and operates across Europe.

(Dittmer#et#al.,#2014U#Mazzucato#and#Penna,#2014).#Furthermore,#these#bodies#can#act#as#affective#lobbyists#

for# government# policy# to# encourage# investor# tax# incentives# and# international# regulatory# harmonisation# to#

encourage# inward# investment# (advocated# by# Lerner,# 2010).# They# can# also# lobby# for# entrepreneurial#

ecosystem#support#and#development,# including# linkages#with#educational# institutions# to#encourage#business#

spinHouts#and#provision#of#investment#readiness#programmes#(IRP),#incubators#and#accelerators

3

#that#prepare#

businesses#for#VC#applications#(Mason#and#Brown,#2013U#Mason#and#Kwok,#2010).############

#

*Emerging*approaches*to*public*sector*VC*in*peripheral*economies:*a*synthesis*#

Methodology*and*Data*#

This#research#sought# to# identify#new#approaches#to#the#development#of#public#sector#VC#in#small#peripheral#

economies.# It# is# based# on# six# case# studies,# comprising# four# countries# H# Estonia,# Republic# of# Ireland,# New#

Zealand# and# Finland# –# and# two# peripheral# regions# H# North# East# England# and#Nova#Scotia# (Canada).# # The#

cases#were#selected#because#they#all#have#similar#contexts#and,#as#a#consequence,#have#similar#challenges.#

First,#they#are#all#small.#Finland,#Republic#of#Ireland#and#New#Zealand#are#the#largest,#with#populations#of#5.4#

million,#4.6m#and#4.5m#respectively.#Nova#Scotia#and#Estonia#are#the#smallest,#with#respective#populations#of#

0.9m#and#1.3m# (Table# 1).#All# of# the# cases# therefore# face# the# challenge#of# being# small# economies#with# low#

volume# investment#opportunities#and# limited# indigenous#sources#of#VC.#Second,#all#are#peripheral,#either# in#

global# or# continental# terms# (Estonia,# Finland# and# Republic# of# Ireland# within# Europe,# New# Zealand,# within#

Australasia)#or#in#terms#of#their#national#economy#(North#East#England,#Nova#Scotia#H#a#Canadian#province#on#

its#Atlantic#periphery).#Finally,# these#markets#are#relatively# immature# in#VC#terms#(Cetindamar,#2003),#being#

mainly#established#within# the# last# two#decades,# including#specific# focus#of#VC#activity#within# the# two#regions#

studied#(NAO,#2009U#Hammond,#2015).#The#longest#established#VC#market#in#this#study#is#in#Finland#where,#

from#the#outset#in#1967,#the#government#was#involved#through#the#creation#of#Sitra#(the#Finnish#National#Fund#

for#R&D)#and# shareholdings# in#Sponsor,# the# country’s# first#VC# company.#However,# it#was#not# until# the# late#

1980s# that# a# private# LP# legal# status#was# adopted,#which# encouraged# the# growth# of# the# private#VC#market#

alongside#public#sector#support# (Luukkonen,#2006).# In# the#Republic#of# Ireland#(Barry#et#al.,#2012)#and#Nova#

Scotia# (Hammond,#2015)#private#VC#only#started# to#appear# in#any#numbers#during# the#early#1990s,# in#both#

cases# on# the# back# of# emerging# ICT# sectors.# In# the#North#East# of# England# (NAO,# 2009)# and#New#Zealand#

(Lerner,# 2010U# Lerner# et# al.,# 2005)# government# backed# VC# programmes# began# to# stimulate# market#

development#during#the#early#to#mid#2000s,#whilst#the#youngest#VC#market# in#this#study#is# in#Estonia,#which#

only#ignited#after#the#Skype#trade#sale#enabled#the#recycling#of#funds#through#the#establishment#of#VC#by#the#

local# ‘Skype# 4’# entrepreneurs,# further# demonstrating# how# the# ICT# sector# has# been# an# important# catalyst# to#

more#recent#VC#activity.############

*Small#peripheral#markets#therefore#present#challenges,#first,#in#view#of#the#geographical#concentration#of#VC#in#

major# technology# clusters# around# the# world.# Second,# the# combination# of# small# size# and# peripherality# has#

meant# that# these# areas# have# been# largely# ignored# by# international# investors.# Third,# all# of# the# case# study#

regions#have#experienced#a#decline# in#VC# investment#at#some#stage#since# the#onset#of# the#global# financial#

crisis.#Figure#1#demonstrates#that#this#decline#was#most#marked#in#Finland,#whilst#the#Republic#of#Ireland#has#

experienced# an# overall# rise# during# this# period,# albeit# with# a# tailHoff# in# 2011H12.# There# has# also# been# some#

overall#increase#in#VC#investment#in#the#smaller#locations#(Estonia#and#North#East),#but#an#important#caveat#is#

that#smaller#regional#locations#are#more#prone#to#spikes#in#investment#which#are#skewed#by#oneHoff#deals,#as#

noted# in# the# annual# BVCA# reports# (see# 2013).# Overall,# the# inconsistent# performance# exhibited# reflects# the#

wider# structural#pressures#on#VC# that#originate# in# the#Dotcom#boom#and#bust# (Pierrakis,#2010)#which#have#

driven#down#returns,#making# it#harder# for# fund#managers# to#raise#new#funds#(notably#reflected# in# the#overall#

decline#of#EuropeanHwide#VC#investment#by#EVCA#members# from#73bn# in#2007#to#38bn# in#2012#and#2013)#

and#the#switch#by#investors#to#later#stage#private#equity#deals#(Wilson#and#Silva,#2013U#Mason#and#Pierrakis,#

2013),#leading#to#some#case#locations#having#low#seed#and#early#stage#proportions#of#VC#investment#(Table#1:#

Estonia#and# for#Canada#and# the#UK#as#a#whole).#Fourth,#VC# in#all# case#study# locations# is#underpinned#by#

governmentHbacked#VC#(underpinning#Lerner’s#2009#and#2010#case# for#government# intervention# to#develop#

the# VC#market).# Finally,# they# all# want# to# increase# their# numbers# of# high# growth# firms,# underpinned# by# the#

Lerner#(2009,#2010)#and#Murray#et#al.,# (2012)#policy#rationale#to#provide#effective#financial#support# to#young#

innovative#businesses#and#grow#economies.#

**(insert*Table*1)**

3 See for example UK Growth Accelerator programme (BIS, 2014) established 2012 to assist potential high growth firms with business coaching and access to finance.

#

The# studies# are# based# on# a# combination# of# desk# research# including# reports# of# organisations,# synthesis# of#

investment# statistics# and# policy# documents# and# 30# inHdepth# telephoneHbased# interviews#with# experts# in# the#

entrepreneurial# ecosystem.# These# experts# included# government# and# oversight# agency# policy# makers# (e.g.#

British#Business#Bank,#European#Investment#Fund)#and#senior#staff#from#delivery#agencies#(e.g.#New#Zealand#

Venture# Investment# Fund# (NZVIF)# and#Finnish# Industry# Investment# Fund),# trade# associations# (e.g.# national#

business# angel# and# VC# associations),# financial# intermediaries# (e.g.# accountants),# trade# press# reporters,#

practitioner#business#support#services#and# leading#academics.#This#was# intended# to#cover# the#nature#of# the#

early#stage#VC#market,#strategic#and#policy#context,#and#interventions#and#initiatives.#The#aim#of#the#analysis#

was# to# identify#and#discuss# themes# that#appeared# in#all#or#most#of# the#case#studies,#providing#guidance# for#

developing#small#economy#VC#markets.#The#emergent#eight#key#themes#are#summarised#in#relation#to#each#

case# study# in# Table# 2.#We# now# discuss# each# theme,# drawing# on# key# case# study# examples# which# provide#

lessons#learned#and#pointers#for#good#practice#in#developing#the#VC#ecosystem.##

#

(Insert*Table*2)*#

Themes*#

Theme*1:*An*international*mindN*and*actionNset*#

The#case#study#regions#are#increasingly#seeking#to#attract#international#investment,#and#expertise.#Generally,#

seed#and#early#stage#capital# investing# is#undertaken#by# investors#with# ‘boots#on# the#ground’#–# locally#based#

investors# are#more# likely# to# identify# investable# deals,# and# such# investments# require# frequent# and# intensive#

interaction#between# investor# and# investee#which# favours#geographical# proximity.#However,# proximity# is# less#

important# in# later# stage#deals.# Indeed,# the#valueHadded# from#nonHlocal# investors#often#derives# from# the# fact#

that#they#are#based#elsewhere#–#typically#Silicon#Valley#H#and#are#able#to#assist#the#company#with#its#market#

expansion.##

#

Case#study#regions#are#therefore#developing#‘pipelines’#to#investors#in#other#regions#and#countries,# involving#

the# development# of# links# between# local# VCs# and# VCs# in# other# locations,# initiatives# to# attract# VCs# to# the#

location# (for# example# the# Innovation# Fund# Ireland),# and# events/activities# that# bring# nonHlocal# VCs# into# the#

region#H#including#pitching#events#and#sectorHbased#showcase#events#such#as#the#annual#Slush#tech#startHup#

conference#in#Finland.##

#

New#Zealand#has#adopted#a#consistently#‘external#facing’#approach#in#the#design#and#development#of#its#early#

stage#and#growth#finance#market.#This#includes#establishing#a#joint#fund#with#Taiwan,#importing#expertise#and#

knowledge#from#Israel#and#the#USA#to#help#develop#the#market#in#VC#and#angel#investment,#and#developing#

international#linkages#between#New#Zealand#VC#and#angel#investors#and#VC#agencies#in#the#USA#and#Asia.##

#

Finland’s#innovation#policy#seeks#to#assist#globally#facing#new#businesses#–#‘born#global#businesses’.#To#this#

end#it#has#established#a#global#network#of#technology#and#financing#centres,#with#strong#links#in#North#America#

and#Asia.#On# the# supplyHside,# a# common#criticism# is# that# despite# considerable# government# investment,#VC#

funds#in#Finland#remain#too#small.#One#way#this#is#being#addressed#is#via#catalysing#international#VC#funds#to#

invest# in#Finnish# firms.#Finland’s#developing#global#market#approach#also#allows#public#backed#VC# funds# to#

invest# outside# of# the# country,# where# this# can# be# seen# to# be# widening# and# strengthening# portfolios# and#

encouraging#further#foreign#investment.##

#

Estonia# has# developed#what# has# become# known# as# the# ‘Estonian)Maffia’#model4#which# encourages# global#facing# startHup# companies.# This# began#with# the# location# of# a# government# office# in#Silicon#Valley# promoting#

innovation# exchange# between#Berkeley# and#Stanford#Universities# and#Tallinn#Tech#University,# allowing# pre#

seed#entrepreneurs#the#opportunity#to#learn#what#the#US#accelerators#required.#In#time#this#led#to#high#success#

rates#for#Estonian#entrepreneurs#enrolling#in#US#and#UK#accelerator#programmes#and#reciprocal#US#and#UK#

VC#investments#into#Estonian#businesses.##

#

In#summary,#the#development#of#an#international#mindHset,#and#the#actions#that#go#along#side#this,#or#at#least#

the#recognition#that#one#is#needed,#is#evident#in#all#case#studies,#addressing#scale#and#peripherality#issues.###

#

Theme*2:*Focused*demandNside*stimulation*#

It# is# recognised# in# the# case# study# regions# that# have# been# successful# in# growing# their# market,# that# simply#

increasing#the#supply#of#finance#is#insufficient.#Without#complementary#demand#side#initiatives#there#is#a#high#

4 Estonian Business Angel Network presentation 18/06/2014

risk# that# the# increased# finance#will# be# invested# in# businesses# that# lack# the# potential# to# use# it# productively,#

hence#driving#down#returns.#Consequently,#new# initiatives# to# increase# the#supply#of#venture#capital#must#be#

accompanied# by# interventions# to# increase# the# demand# for# risk# capital.# At# its# most# basic# this# comprises#

investment# readiness# programmes# to# address# misunderstandings# concerning# VC# and# how# to# approach#

investors.#However,# this# is#not#enough.#Broader#efforts#have#been#made#to# increase#entrepreneurial#activity,#

both#technology#startHups#and#growth#businesses.#Finance#initiatives#need#to#be#aligned#with#business#support#

measures,#notably#export#support#and#activity#to#foster#the#demandHside.##

#

Finland#has#traditionally#suffered#from#a#lack#of#entrepreneurial#culture,#with#traditional#leanings#towards#public#

sector#and#professional#work.#Interventions#adopted#to#improve#the#demand#side#entrepreneurial#competence#

gap#include#competence#building#of#startHups#through#an#investment#readiness#programme,#the#introduction#of#

tax#incentives#for#business#angels’#investments,#the#ICTHbased#Vigo#accelerator#programme,#and##the#merger#

of# three#universities# into#Aalto#University,# as#an#explicitly# innovationHfocused# institution,#and#entrepreneurial#

cultural#catalyst#centre.###

#

In#Estonia,#Tallinn#Tech#University#formed#the#Tehnopol#science#park#in#1998#to#help#foster#an#infrastructure#

for# technology#business# startHups,# accelerated#growth#businesses#and#an#entrepreneurial# culture# facilitating#

spin#outs#from#the#university’s#five#R&D#centres.#In#time#it#has#developed#a#20#business#incubator,#attracted#

over#150#existing#businesses# to# locate#on# the#site,#developed#specialisms# in#biotech#and#mechatronics#and#

forged#close#ties#with#international#universities#and#accelerators

5

.#

#

Central# to# the# success# of# the# VC#market# in# the# Republic# of# Ireland# in# the# past# 10H15# years# has# been# the#

significant# growth# in# the# number# of# incubator# and# accelerator# programmes# that# have# helped# to# develop# a#

pipeline#of# young# knowledge/technology#based# firms# seeking# investment# at# seed#and#early# stage.#Demand#

has# also# been# driven# by# Ireland’s# emergence# as# a# major# centre# for# knowledge/technology# multinationals,#

developing# the# enterprise# ecosystem,# and# acting# as# a# source# of# spinHouts# and# startHups# of# firms# requiring#

investment#

#

Some#case#study# locations#have#gone# further,#seeing# the#need# to#develop# their#entrepreneurial#ecosystem.#

With#this#perspective,#and#consistent#with#the#thinking#set#out#in#our#emerging#hypothesis#section,#developing#

the# early# stage# and# growth# finance#market# is# only# one# component# in# a#much#more# comprehensive# set# of#

initiatives# that# include# incubators/accelerators,# mentoring# schemes,# events# and# competitions# and# the#

development#of#‘entrepreneurial#campuses’.##

#

Theme*3:*An*interNregional,*rather*than*local,*funding*model***#

Scale#is#a#major#issue#for#the#six#case#studies.#Whilst#operating#in#different#contexts,#a#number#of#case#studies#

have#sought#to#adopt#new#funding#models#that#operate#at#spatial#scale#larger#than#the#relevant#region/country#

itself#in#order#to#alleviate#the#issue#of#scale,#and#attract#additional#investment#into#the#local#market.##

#

One#example#of#‘regional’#approaches#to#funds#across#the#cases#is#Estonia’s#collaboration#with#the#other#Baltic#

States#through#the#Baltic#Innovation#Fund#(BIF),#a#€100m#FundHofHFunds#initiative#launched#by#the#European#

Investment# Fund# (EIF)# in# 2012# with# the# three# Baltic# States# (Estonia,# Lithuania,# Latvia)# to# boost# equity#

investments#into#Baltic#SMEs#with#high#growth#potential.#BIF#will# invest#€100m#into#private#equity#(PER)#and#

VC#funds#focusing#on#the#Baltic#States#over#four#years#from#January#2013,#through#a#‘fund#of#funds’#process#to#

attract#additional#private#finance#and#implement#the#best#market#standards#for#equity#investing#in#businesses.##

#

Another# example# is# Nova# Scotia’s# collaboration# with# the# three# other# provinces# in# the# Atlantic# Region,#

sometimes# in# conjunction# with# Canadian# federal# agencies,# for# example# through# the# Build# Ventures# Fund#

established# in# 2012# which# invests# across# the# four# provinces# in# Atlantic# Canada,# including# Nova# Scotia.##

Further#examples#include#New#Zealand’s#recent#link#between#the#NZVIF#and#Taiwan’s#National#Development#

Fund,#establishing#a#fund#of#funds#of#up#to#US$160m#that#will#invest#in#companies#in#both#jurisdictions#and#the#

parallel#Bank#of#Ireland’s#Kernel#Capital#Funds#(circa#30mE#in#each#parallel#fund)#operating#in#the#Republic#of#

Ireland#and#Northern#Ireland#(examples#are#detailed#in#Table#3).#

#

(insert*Table*3)*#

Theme*4:*An*open*and*attractive*regulatory*system*#

Leading#on#from#the#perceived#need#for#small#markets#to#enlarge#their#VC#funding#scale#and#work#in#a#more#

interHregional# and# international# fashion,# is# the# need# to# encourage# foreign# inward# investment# and# provide# a#

5 http://www.tehnopol.ee/en/About/Team/Supervisory-Board

more#attractive#regulatory#market#for#this#(as#suggested#by#Wilson#and#Silva,#2013#and#Lerner,#2010).#Whilst#

the# two# case# regions# studied# do# not# have# the# national# regulatory# powers# to# effect# such# changes,# at# the#

national# level# this#has#been#an# important#consideration,#particularly# in#an#emerging#market#such#as#Estonia.#

Here# it# has# been# recognised# that# the# lack# of# a# limited# partnership# (LP)# legal# structure# has# held# back# the#

introduction#of# skilled#overseas#private#VCs# into# the#market,# something#which#New#Zealand#adopted# in# the#

early#2000s,#enabling#the#government#backed#NZVIF#to#attract#high#performing#US#investors#through#its#match#

funding#approach.##

#

Alongside# the# provision# of# a# more# harmonised# internationally# recognised# legal# approach# to# VC# status# in#

tandem#with# the#attraction#of#government#matchHfunded#coHfinancing# initiatives,#a#common#emerging# theme#

has# been# to# provide# a# more# attractive,# simplified# tax# regime# to# attract# foreign# companies# and# investors.#

Examples# include# the# Republic# of# Ireland# offering# the# Employment# Investment# Initiative# and# Seed# Capital#

Scheme# offering# tax# breaks# for# investors# in# small# and# seed# stage# businesses# and# recognition

6

# that# these#

schemes#need# to#be#competitively#attractive#when#compared# to# the#neighbouring#UK#Enterprise# Investment#

Scheme#(EIS)#and#Seed#EIS.##

#

In#Finland#there#is#now#a#widely#held#view#that#more#foreign#VC#investment#is#required#to#stimulate#the#market#

and# improve#business#growth.#One#approach#has#been# through# the# recently#developed#government#backed#

catalyst# fund# (through# Tekes),# which# can# relatively# easily# invest# pari# passu# into# foreign# VC# (following,# for#

example,#the#lead#of#the#UK#Innovation#Investment#Fund).#The#following#quotation#relating#to#the#impact#of#the#

Tekes#annual#20mE#fund#demonstrates#the#potential#value#of#such#schemes:###

#

“One$of$the$reasons$that$we’ve$been$excited$about$Finland$–$we’ve$done$multiple$investments$there$–$is$not$only$is$there$a$lot$of$talent$there,$the$Finnish$government$is$incredibly$supportive$financially”#–#reported#by#London#Venture#Partners,#a#technology#seed#VC7.########

The# overriding# trend# that# is# emerging# from# these# case# areas# is# that# they# are# working# towards# improved#

incentives# and# support# for# inward# investment# by# VCs,# through# a# mix# of# networking# and# promotion# (e.g.#

Finland’s#overseas#offices),#tax#incentives,#coHfinance#schemes#and#international#regulatory#harmonisation#in#

relation#to#VC#activity.###

#

Theme*5:*ExitNcentric*approach*to*market*development*#

The# case# studies# indicate# that# there# has# to# be# recognition# that# the# amount# of# money# invested# is# not# an#

appropriate#metric#in#which#to#measure#the#success#or#otherwise#of#early#stage#and#growth#finance#initiatives,#

particularly#VC#funds.#Indeed,#many#–#possibly#most#–#investments#by#business#angels#and#VC#funds#are#not#

commercially# successful.# Either# the# businesses# fail# or# they# survive# as# ‘living# dead’# investments#which#may#

generate#sufficient#revenue#to#survive#but#will#not#grow#and#will#not#attract#a#buyer.#It#is#therefore#essential#that#

some#investments#lead#to#‘blockbuster’#exits,#involving#the#acquisition#of#the#company#or,#less#likely,#an#Initial#

Public# Offering# (IPO).# Arguably,# it# is# only# those# investments# that# are# commercially# successful# that# will#

generate#economic#benefits,# from# their# growth,# the# recycling#of#wealth#and#expertise#by# their# shareholders,#

and#their#‘signalling#effect’,#both#as#role#models#to#potential#entrepreneurs#in#the#domestic#market,#and#to#nonH

local# investors.# Indeed,# the# Estonia,# Nova# Scotia# and# New# Zealand# cases# all# emphasise# the# impact# that#

‘blockbuster’#or#other#major#exits#has#had#on#the#local#market.#An#excellent#example#of#the#catalytic#effects#of#

‘blockbuster’#exits# is# the# impact#of# the# ‘Skype#Four’#on# the#development#of# the#VC#market# in#Estonia.#They#

were#software#programmers#responsible# for#Skype’s#development#who#received#a# large#share#of# the#$2.6bn#

sale#to#Ebay# in#2005,#and#then#set#up#their#own#VC#fund#Ambient#Sound#Investments.#This#success#helped#

establish# the#nation’s#private#VC#market#and#provided#a#role#model#which#has# inspired#a#generation#of# tech#

entrepreneurs.#

#

Whilst# it# is#not#possible# to#simply# ‘decide’# to#create# firms#with# this#potential,# the# implication# is# that# investors#

need#to#adopt#an#exitHcentric#approach#to#making#investments,#and#that#policy#makers#need#to#recognise#that#

it# is#ultimately#exits# (which#can#often# take# time)# that#will# be#key# to# longHterm#success#and# the#creation#of#a#

functioning#and#sustainable# local#market,#both#directly# through#the# investment# they#create# to#be#reHcycled# in#

the#local#market,#and#indirectly#by#providing#a#demonstrator#effect#to#others#both#internally#and#externally.####

6 Department for Finance (2014) Review of the Employment and Investment Incentive and Seed Capital Scheme. See Report. And also PwC (2014) The Employment and Investment Incentive and Seed Capital Scheme – Tax relief for investing in Irish SMEs. 7 16/07/2014 http://www.tekes.fi/en/whats-going-on/news/new-fund-for-european-gaming-companies--investor-praises-tekes/

#

Theme*6:*A*functioning*finance*pipeline*#

Across#the#cases,#there#is#broad#recognition#that#the#main#funding#gap#is#in#the#£500,000H£3m#range.#This#is#

critical#for#the#emergence#of#high#growth#firms.#£500,000#is#about#the#top#of#the#range#that#can#be#raised#from#

personal# sources,# grants# and# angel# funding,# while# £3m# is# increasingly# the# bottom# end# of# the# private# IVC#

market.#CoHinvestment#funds#have#proved#effective#in#closing#the#bottom#end#of#this#gap,#for#example#in#the#

case# of# the# New# Zealand# Seed# CoHinvestment# fund,# established# since# 2006.# However,# it# is# important# to#

recognise#that#funding#is#a#pipeline,#hence#gaps#earlier#in#the#funding#escalator#will#have#knockHon#effects.#The#

example#of#Atlantic#Canada’s#Build#Ventures#Fund# is# illustrative.# It#was# intended# to# fill# the#gap# in# ‘series#A’#

funding#($1H$3m).#However,#weaknesses#in#the#supply#of#seed#and#startHup#funding#meant#that#the#deal#flow#

has#not#been#large#enough,#and#the#fund#has#had#to#make#earlier#stage#investments.#

#

Whilst#a#shortage#of#early#stage# funding#has#also# limited# the#effectiveness#of#series#A# funds# in#Finland,# the#

North# East# has# experienced# some# success# in# its# early# stage# and# growth# finance# market.# The# region# has#

successfully# evolved# a# £142m# fund# of# funds# suite# of# seven# funds# operating# under# one# coHordinating# body#

(North# East# Access# to# Finance

8

)# offering# a# range# of# seed# to# series# A# funding# including# micro# loans,#

mezzanine,#angel#coHinvestment#and#VC.#This#private#sectorHled,#competitive#approach#to#a#European#Union#

(EU)#JEREMIE

9

#fund#and#sustained#investment#over#the#past#decade#led#to#an#increase#in#the#scale#of#deals#

and#investment#in#the#region.#However,#the#region#has#experienced#challenges#in#attracting#national#funds#and#

a#review#of#the#finance#market#found#that#an#equity#gap#up#to#£3m#persists,#and#that#the#scale#of#the#funding#

gap#may#in#fact#have#increased#over#time

10

.#A#major#constraint#on#these#funds#has#been#the#EU#state#aid#limit#

and#the#increase#in#this#ceiling#for#GVC#funds#in#January#2014,#from#£2m#to#£5m#for#initial#portfolio#company#

investments,# should# help# to# address# this# gap,# alongside# a# more# coHordinated# operation# of# regional# and#

national#programmes#under#the#oversight#of#the#recently#formed#British#Business#Bank.###

#

It#is#therefore#essential#that#in#focusing#on#the#£500,000H£3m#gap#the#R&D/commercialisation#and#seed#stages#

have#adequate#supply.#Moreover,#it#is#important#to#recognise#that#VC#is#not#necessarily#the#appropriate#source#

of# finance# at# all# stages.# Sources# of# nonHdilutive# finance# (e.g.# grants# or# deferred# loans)# are# particularly#

important# for# businesses# at# the# preHcommercial# stage,# as# exemplified# by# the# Business# Development#

Programme#in#Nova#Scotia,#which#has#been#described#as#“the#gem#in#Atlantic#Canada’s#funding#formula”11.##

Theme*7:*Effective*business*angels*networks***#

Related# to# the#previous# theme# is# the# importance#of#a#strong#business#angel#community.#This# is#a#particular#

feature#of#Finland#and#New#ZealandU#and#where#the#angel#network#is# less#strong,#for#example#in#North#East#

England,#and#arguably#the#Republic#of#Ireland,#this#is#recognised#as#an#important#barrier#to#the#development#

of#the#wider#equity#finance#market.#Angel#networks#can#enhance#information#flows,#making#it#easier#for#angels#

and# entrepreneurs# seeking# finance# to# find# one# another# in# what# has# traditionally# been# an# invisible# market#

(Wetzel,#1986#and#1987).#However,#angels#are#increasingly#organising#themselves#in#managed#angel#groups#

which,#on#account#of#their#deeper#pockets#and#wider#skills#sets,#are#able#to#make#potentially#smarter,# larger,#

and#followHon,#investments.##

#

Angel#groups#are#also#increasingly#becoming#the#key#partners#of#government#coHinvestment#funds#(e.g.#New#

Zealand,#Nova#Scotia,#North# East# of# England# and# under# consideration# for# Estonia# and#Republic# of# Ireland#

through#support# from# the#EU’s#European#Angel#Fund).#However,# the#value#of#business#angels# is# reduced# if#

they#are#simply#a#source#of# financeU#business#angels#need#to#be#a#source#of# ‘smart’#money#who#are#able#to#

offer#mentoring#and#advice#to#the#entrepreneurs#that#they#invest#in.#This#has#been#identified#as#a#problem#in#

Nova#Scotia,#where#despite#strong#growth# in# the#volume#and#value#of#angel# investments#the#addedHvalue# in#

terms#of#experience#and#expertise#has#traditionally#been#regarded#as#low.#The#‘best’#kind#of#business#angels#

are# those# who# have# recently# been# in# senior# management# positions# in# entrepreneurial# businessesU# the#

acquisition#of#local#businesses#is#therefore#a#major#boost#to#local#angel#investing.##

#

Nova#Scotia#is#not#a#wealthy#province,#and#there#are#relatively#few#selfHmade#high#net#worth#individuals#with#

the#potential#to#become#business#angels,#and#who#can#offer#expertise#and#experience,#as#well#as#money.#But#

8 North East Finance is the fund of funds umbrella delivery agency 9 JEREMIE - Joint European Resources for Micro to Medium Enterprises, a joint initiative between the European Commission’s European Regional Development Fund (Structural Fund) and the European Investment Bank, with currently programmes operating between 2014-20. 10 Mid-Term Review of the English JEREMIE Funds (2013) – a view supported by UK-wide British Business Bank (2015) evidence 11 Peter Moreira: Atlantic Canada’s ecosystem. http://atlanticventureforum.ca/start-it

the# angel# market# is# changing# H# a# number# of# recent# large# exits# has# provided# a# significant# boost# to# angel#

investing# in#Nova#Scotia,#and# the#wider#Atlantic#Canada#area.#Although# investors# in# these#companies#have#

generally#been#external,#the#founders#and#other#shareholders#have#remained#and#reHinvested#locally.#As#such#

whilst# startHups# in# Nova# Scotia# have# limited# access# to# ‘smart# money’# (i.e.# angels# who# bring# expertise# and#

contacts# as#well# as# capital),# this# is# changing# for# the# better# as# ‘cashed# out’# entrepreneurs#with# expertise# in#

growing#tech#companies#recycle#their#wealth.#

#

New#Zealand’s#performance#in#developing#its#business#angel#base#is#also#instructive.#Whilst#the#emergence#of#

over# 15# angel# networks# (a# large# number,# relative# to# the# size# of# the# country)# appears# to# have# been# largely#

‘organic’,#policy#has#played#an#important#role#through#a#focused#supplyHside#capacity#development#intent,#both#

through#a#coHinvestment#fund#and#more#broadly#developing#a#suite#of#materials#and#systems#(e.g.#protocols,#

advice#notes,#resources),#that#help#to#develop#the#capacity#and#discipline#of#the#angel#investment#process.##

#

Strengthening#the#angel#investment#market#has#been#a#key#driver#to#the#collaborative#arrangements#between#

organised#angel#networks# in#Finland#and#Estonia# in# recent# times.#The#Estonian#example# is#noteworthy#as# it#

demonstrates#how#an#organised#angel#network#can#quickly#develop#international#linkages#and#lever#in#private#

investment,# transforming# a# previously# barren# seed# stage# equity# market.# The# fledgling# Estonian# Business#

Angel# Network# (EstBAN)# was# established# in# 2012# with# government# catalyst# funding# to# assist# with#administration#and#the#50#plus#promotional#events#required#to#generate#interest#and#market#knowledge,#with#a#

target#of#generating#€1m# in#year#one#deals.#The# first# year# review

12

# found#83# investments# in#66#companies,#

representing# over# €4.6m,# with# over# half# of# investments# in# preHseed# and# early# stage# companies.# A# notable#

feature# was# that# 85%# of# investments# were# in# syndication# and# 43%#were# outside# of# Estonia,# into# Estonian#

businesses#that#have#relocated#internationally,#or#through#international#investor#links,#including#close#ties#with#

angel#networks#in#Finland#(FiBAN)#and#St#Petersburg#(SoBA).#EstBAN#has#also#recently#begun#working#with#

the# new#Latvian# national#BAN.#By# June#2014#EstBAN#membership# had# grown# from#25# to# 71# and# included#

international# investors# from#USA,# UK# and# other# parts# of# Europe

13

.# A# key# to# EstBAN’s# success# is# its# open#

operation,# avoiding# gatekeeper# blockages,# with# members# publicised# on# their# website# and# deal# pitches#

publicised#internationally#through#their#angel#crowd#platform#(operating#similarly#to#‘AngelList’).#

#

Theme*8:*Dedicated*institutions*and*agencies*in*immature*markets* #The# case# studies# exhibit# a# range# of# institutional# contexts# that# largely# reflect# their# relative# maturity# and#

development#of#the#entrepreneurial#early#stage#and#growth#finance#market.#Where#the#market#is#less#mature,#

for#example#in#New#Zealand,#North#East#England#and#Nova#Scotia,#dedicated#and#focused#VC#and#access#to#

finance# agencies# have# been# important,# playing# a# wider# set# of# policy# and# advocacy# roles# than# simply# the#

management/distribution#of#finance.#The#New#Zealand#Venture#Investment#Fund#(NZVIF)#has#played#a#central#

role#in#developing#the#country’s#entrepreneurial#finance#sector,#leading#on#the#delivery#of#a#VC#Fund#and#Seed#

CoHinvestment#Fund#which#has#helped#develop#the#angel#investment#market.#It#has#also#played#a#wider#role#in#

policy# advocacy# and# market# development# that# have# helped# to# maintain# the# momentum# of# industry#

development,# providing# a# consistent# focus# on# building# the# capability# of# the# investor# community# (e.g.# by#

bringing# in#skilled#US#VCs# investors)#as# the#key# to#creating#a#sustainable#market# (as#strongly#advocated#by#

Lerner,#2010).###

The# North# East# of# England# has# benefited# from# wellHestablished# and# consistent# agencies# taking# a# lead# on#

developing# the#market#–#North#East#Access# to#Finance#as# the# ‘policy’# lead,#and#North#East#Finance#as# the#

‘delivery’# lead,# acting# as# the#Holding# Fund#manager# for# the# suite# of# funds# operating# under# JEREMIE.# This#

model#has#operated#effectively#and#created#a#credible#fund#management#and#policy#infrastructure.#Whilst#the#

scale# of# the# market# in# the# region# remains# small,# in# process# terms,# the# North# East# of# England# has# made#

significant# progress,# with# its#model# for#managing# existing# funds# and# positioning# for# the# futureU# designing# a#

range#of#funds#to#meet#the#region’s#changing#needs,#encouraging#private#investment#to#take#the#lead#and#coH

ordinating#links#with#local#business#support

14

,#recognised#at#the#national#level#as#distinctive.##

Such# models# may# not# be# appropriate# in# all# cases# –# and# the# Republic# of# Ireland,# for# example,# has# been#

successful# without# a# soleHpurpose# vehicle.# However,# when# the#market# is# small,# the# networks# are# not# fully#

formed,# and# significant# public# investment# is# required,# they# can# help# to# provide# policy# consistency,# delivery#

capacity,#and#a#clear#advocate#and#lead#for#market#growth.#Recent#reviews#of#government#intervention#in#the#

entrepreneurial#finance#markets#in#Finland#(See#Veugelers#et#al.,#2009),#one#of#the#more#established#venture#

capital#market#cases#examined,#have#demonstrated#that#lack#of#coHordination#and#control#over#a#proliferating#

12 http://estban.ee/images/estban-the_first_year_in_retrospect.png ; http://estban.ee/about 13 Estonian Business Angel Network presentation 18/06/2014 14 It was recognised that improved investment readiness programme (IRP) assistance is required (North East Independent Economic Review, 2013)

range#of#policy#measures#which#have#included#poorly#performing#regional#funds#and#insufficient#monitoring#(as#

advocated#by#Lerner,#2010#and#Murray#et#al.,#2009)#has#led#to#the#under#performance#of#GVCFs.#These#have#

demonstrably# failed# to# adapt# to# the# changing# needs# of# markets# over# time,# add# value# to# portfolio# business#

management,#and#encourage#entrepreneurial#activity# (Murray#et#al,#2009).#Such# findings#support# the#notion#

that#overarching#policy#and#financing#agencies,# like#the#German#KfW#bank#(Breedon,#2012),#can#play#a#vital#

role# in#developing#more#effective#entrepreneurial# financing#(Mazzucato#and#Penna,#2014,#provide#a#detailed#

argument#in#support#of#the#role#of#state#investment#banks#in#developing#SME#innovation#finance).##

#

*Discussion*–*Towards*a*new*globalisation*hypothesis**The# paper# has# demonstrated# that# the# need# to# develop# local# sources# of# VC# is# a# basic# tenet# of# economic#

development# policyHmakers.# However,# GVC# initiatives# to# fill# gaps# in# the# supply# of# private# sector# IVC# have#

generally#been#unsuccessful,#at#least#in#part#because#they#have#not#recognised#that#VC#requires#a#supportive#

ecosystem# in# which# to# operate.# The# paper# has# examined# six# cases# of# small,# peripheral# economies# –# four#

countries#and#two#regions#H#to#identify#new#approaches#to#GVC#in#developing#a#potentially#more#effective#and#

sustainable#early# stage#entrepreneurial# finance#ecosystem.#This#has# identified#eight# themes#which# form# the#

basis#of#our#broader#globalisation#of#VC#hypothesis:#

#

1.# An#international#pipeline#to#investors#in#other#regions#

2.# Stimulation#of#the#demand#side#

3.# Collaboration#with#neighbouring#jurisdictions#to#develop#scale#

4.# Open#regulatory,#legal#and#tax#systems,#more#harmonised#internationally#to#attract#investment#

5.# Recognition# that# economic# development# arises# from# investments# that# generate# successful#

businesses#that#achieve#large#exits,#and#not#from#the#amount#of#money#invested#

6.# The#need#to#intervene#at#all#stages#of#the#funding#escalator#

7.# Related#to#this,#support#to#create#an#active#business#angel#market#

8.# Development#of#local#institutions#to#support#the#various#actors#and#organisations#involved.#

*(insert*figure*2)*#

The# findings# from# these# cases# strongly# support# the# need# for# an# overarching# cohesive# and# coHordinated#

approach# to# the# innovation# financing# cycle# and# one# which# embraces# both# a# holistic# (Hughes,# 2009)#

entrepreneurial# ecosystem# and# a# comprehensive# pipeline# model# (Hwang# and# Horowitt,# 2012U# Mason# and#

Brown,#2013).# In# this#sense#Lerner’s#globalisation# thesis# (2009,#2010,#2011)# is#helpful# in#highlighting#crucial#

elements#to#the#ecosystem#development,#but#can#also#be#developed#further.#

#

Here#we#propose#the#following#financial/entrepreneurial#ecosystem#model#(Figure#2),#enhancing#those#recently#

presented# (Hwang# and#Horowitt,# 2012U#Wilson# and# Silva,# 2013)# in# relation# to# our# development# of# Lerner’s#

globalisation#thesis#and#global#syndication#model#underpinned#by#improving#ICT#and#travel#promoted#by#Hopp#

(2010U#Hopp#and#Rieder,#2011).#This#particularly#highlights#the#key#overarching#dual#and#interconnected#roles#

of# government# regulatory/tax# policy# (4)# and# dedicated# policy# and# delivery# institutions# (8).# The# latter# may#

involve#state#investment#banks,#or#holding#fund#and#oversight#policy#organisations#(e.g.#North#East#Access#to#

Finance)#which#deliver#government#funding,#including#GVCs.#Our#findings#suggest#that#dedicated#institutions,#

which# could# include# state# investment# banks# (Mazzucato# and# Penna,# 2014U# Breedon,# 2011),# appear# to# be#

particularly#well# placed# to# plan# and# coHordinate# the# range# of# different# types# of# public# financing# instruments#

required# (e.g.# the# North# East# of# England’s# suite# of# loan# and# equity# funds),# monitor# their# performance# and#

adjust#accordingly#over#time.#They#also#provide#an#important#lobbying#mechanism#in#collecting#evidence#and#

advocating#key#wider#government#policy#interventions,#such#as#entrepreneurial#stimulation,#improved#tax#and#

regulatory# regimes,#developing#an#effective#exit#market# (for# IPOs#and# trade#sales)#and#building# international#

investor#connections.##

#

The#model#(Figure#2)#highlights#the#interconnectivity#between#the#financing#schemes#and#the#range#of#factors#

required# in# order# to# facilitate# the# successful# development# of# a# small#market# VC# ecosystem.# These# include#

linkages# to# entrepreneurial# development# through# demandHside# stimulation# policies# (e.g.# IRP# and# ongoing#

mentoring/advice,# e.g.# as# evidenced# by# Canada’s# Industrial# Technology# Advisors,# or# RTC# North,# which#

delivers#the#UK#GrowthAccelerator#scheme#in#the#North#East#of#England#and#Cumbria

15

)#and#linkages#to#seed#

and#early#stage#business#angel#investors#through#the#development#of#enhanced#business#angel#networks#and#

coHfinancing#arrangements#(highlighted#in#New#Zealand)#which#can#leverage#greater# investment# in#seed#and#

early#stage#business#financing.##

15 The Regional Technology Centre (RTC) North, delivers the UK government’s ‘GrowthAccelerator’ programme (established in 2012) of coaching, mentoring and financial advisory services to potential high growth businesses.

#

Finally,# in#examining#Lerner’s#globalisation# thesis,# the#model# highlights# the# crucial# element#of# enlarging# the#

investment#market#in#the#featured#small#economies#through#crossHborder#investing.#This#applies#both#in#terms#

of#growing#the#scale#and#market#reach#of#regional#and#national#GVCs,#enabling#them#to#invest#across#borders#

(Dittmer#et#al.,#2014),#to#ensure#that#they#have#sufficient#size#and#capacity#to#develop#a#sustainable#investment#

cycle# (as# highlighted# by# the#Baltic# Innovation# Fund),# and# also# to# the# encouragement# of# overseas# business#

angel#and#VC# investment# (Hopp,#2010).#This#can#be#achieved# through#the#support#of# international#business#

angel#network#collaborations#(e.g.#between#Finland#and#the#Baltic#States,#or#Republic#of#Ireland#and#Northern#

Ireland),# but# also# through# GVC# inducements# to# foreign# VCs# (strongly# advocated# by# Lerner,# 2010,# and#

exemplified# by# the#Finnish#Tekes# and#New#Zealand#Venture# Innovation#Fund# examples# presented)# and# by#

international# linkages# between# innovation# institutions# (e.g.# universities,#R&D# centres,# as# exemplified# by# the#

Estonian#case)#and#the#encouragement#of#born#global#startHups#to#enter#overseas#incubator/accelerators#and#

encouragement# of# reciprocal# foreign# corporate# accelerator# investments# into# the# home#market# (Wilson# and#

Silva,#2013).##

#

#

Conclusion*#

In#conclusion,#this#study#has#found#strong#support#for#the#development#of#a#globalisation#of#VC#thesis,#building#

on# the#work#of# Lerner# (2010),#Hopp# (2010)#and#Dittmer#et# al.# (2014)# in# particular.#Also# in# taking#a#broader#

entrepreneurial# finance# ecosystem# approach,# drawing# on# Hughes# (2009),# Hwang# and# Horowitt# (2012)# and#

Mason#and#Brown#(2013)#a#more#holistic#thesis#has#evolved,#revealing#eight#key#thematic#elements#required#

to#foster#the#future#development#of#small#economy#VC#systems#and#which,#if#adopted#by#policymakers,#could#

contribute# to# the# more# successful# operation# of# GVCs# in# the# future# and# ultimately# to# sustainable# VC#

ecosystems#in#these#small#economies.##

#

The# authors# acknowledge# the# limitations# of# this# smallHscale# study.# However,# we# believe# that# we# have#

developed#a#theoretical#groundwork#upon#which#future#research#in#this#field#can#usefully#build.#

#

#

#

############

#

*

References* Aernoudt,#R.#San#José,#A.#and#Roure,#J.#(2007)#Public#support#for#the#business#angel#market#in#Europe,#

Venture)Capital:)an)international)journal)of)entrepreneurial)finance,#9#(1):#71H84.##

Amini,#S.,#Keasey,#K,#and#Hudson,#R#(2012)#The#equity# funding#of#smaller#growing#companies#and#regional#

stock#exchanges.#International)Small)Business)Journal,#30#(8):#832H849# Avdeitchikova#S#(2012)#The#Geographic#Organization#of#‘Venture#Capital’#and#‘Business#Angels’,#in#

Landström,#H#and#Mason,#C#(eds)#Handbook)of)Research)on)Venture)Capital:)Volume)2,*A#Globalizing#Industry,#Cheltenham:#Edward#Elgar#

#

Armour#J#and#Cumming#D#(2006)#The#legislative#road#to#Silicon#Valley.#Oxford)Economic)Papers,#58:#596H635##

Baldock,#R#(2014)#The#Evolution#of#the#UK#Enterprise#Capital#Funds:#A#Post#GFC#Perspective.#Paper#to#the#

Institute#for#Small#Business#and#Entrepreneurship#(ISBE)#conference,#6

th

#November,#Manchester##

#

Baldock#R#(2015)#What#is#the#role#of#public#feeder#markets#in#developing#technologyHbased#small#firms?#An#

exploration#of#the#motivations#for#listing#on#AIM#since#the#GFC.#Venture#Capital:#An#International#

Journal#of#Entrepreneurial#Finance#17(1H2):#87#112,'DOI:'10.1080/13691066.2015.1021028##

Baldock,#R.#and#Mason#C.M.#(2015)#Establishing#a#new#UK#finance#escalator#for#innovative#SMEs:#the#roles#of#

the#Enterprise#Capital#Funds#and#Angel#CoHInvestment#Fund,#Venture#Capital:#An#International#Journal#

of#Entrepreneurial#Finance#17(1H2):##DOI:#10.1080/13691066.2015.1021025#

#

Baldock#R.#and#D.#North,#2015#(forthcoming),##The#Role#of#UK#Government#Hybrid#Venture#Capital#Funds#in#

Addressing# the# Finance# Gap# Facing# Innovative# SMEs# in# the# Post# 2007# Financial# Crisis# Era,# In# Ed.#

Hussain# G.# and# J/M.# Scott# # International) Research) Handbook) on) Entrepreneurial) Finance,# Edward#Elgar#

#

Barry#F,#O’Mahony#C,#and#Sax#B.#(2012)#Venture#Capital#in#Ireland#in#comparative#Perspective.#Irish)Journal)of)Management,#32:#1H27#

#

Beck# T# (2007)# Financing) Constraints) of) SMEs) in) Developing) Countries:) Evidence,) Determinants) and)Solutions.#Working#Paper,#World#Bank,#Washington#DC##

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Bertoni#F#and#Tykvová#,#T(2015)#Does#governmental#venture#capital#spur#invention#and#innovation?#Evidence#

from#young#European#biotech#companies,#Research)Policy,#44#(4),#925–935##

Bhidé,#A#(2007)#The)Venturesome)Economy.)How)Innovation)Sustains)Prosperity)in)a)More)Connected)World,#Princeton#University#Press#

#

BIS#(2014)#Interim#evaluation#of#GrowthAccelerator.#Report#by#the#UK#Department#for#Business,#Innovation#

and#Skills#(BIS),#November,#London#

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/375059/bisH14H1204H

interimHevaluationHofHgrowthHacceleratorH2014.pdf#

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Black# B,# and# Gilson# RJ# (1998)# Venture# capital# and# the# structure# of# capital# markets:# banks# versus# stock#

markets#Journal)of)Financial)Economics,#47#(3):#243H277##

Boue,#A.#R.#(2007):#Value#Added#from#Venture#Capital#Investors:#What#is#it#and#how#does#it#get#into#Venture?#

Wien,#IPO#BeteiligungsHManagement#AG:#pp.#1H38.##

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British#Business#Bank,#2015#(forthcoming),#Interim)Assessment)of)Equity)Schemes)and)Early)Assessment)of)the)ACF.#CEEDR#report.#

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Cetindamar#D#(2003)#the#Growth#of#Venture#Capital:#A#CrossHCultural#Comparison.#Praezer,#Westport.#

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Criscuolo#C#and#Wilson#K#(2013)#Role#of#HighHGrowth#Frims#in#Catalysing#Entrepreneurship#and#Innovation.#

OECD#Science,#Technology#and#Industry#Working#Paper,#OECD,#Paris#

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Darin# M.,# Nicodano# G.# and# Sembenelli# A.# (2006)# Public# policy# and# the# creation# of# active# venture# capital#

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in#New#Zealand#in#the#post#GFC#economic#environment.#Venture)Capital:)An)International)Journal)of)Entrepreneurial)Finance,#DOI:#10.1080/13691066#

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Deakins#D.#and#Freel#M.#(2012)#Entrepreneurship#and#Small#Firms,#McGrawHHill,#London#

Dittmer#J,#McCahery#JA,#and#Vermeulen#EPM#(2014)#The#New#Venture#Capital#Cycle#and#the#Role#of#

Governments:#The#Emergence#of#Collaborative#Funding#Models#and#Platforms.#For#Action#4:#Background#

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Hopp#C#(2010)#When#do#venture#capitalists#collaborate?##Evidence#on#the#driving#forces#of#venture#capital#

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Kallas#U#(2012)#Development#Proposals#for#Capital#Markets.#Report#by#OU#Basel#Financial#Group#to#the#

Capital#Market#Working#Group#of#the#Finance#Estonia#Cluster#–#Finance#Estonia#EU#

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Karaomerlioglu#DC#and#Jocobsson#(2000)#the#Swedish#Venture#Capital#Industry:#An#Infant,#Adolescant#or#

GrownHup?#Venture#Capital#2(1):#61H88#

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Kirk#D.#(2011)#Northern)Ireland’s)Investment)Ecosystem)The)Way)Forward,#Report#to#Invest#Northern#Ireland,#July#

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Leleux,#B.,#and#Surlemont,#B.#(2003)#Public#Versus#Private#Venture#Capital:#Seeding#or#CrowdingOut?#A#PanH

European#Analysis.#Journal)of)Business)Venturing#18#(1):#81–104.#7.##

Lerner,#J.#(2009)#Boulevard)of)Broken)Dreams:)Why)Public)Efforts)to)Boost)Entrepreneurship)andVenture)Capital)have)Failed)–)And)What)to)do)About)It.#Princeton,#NJ:#Princeton#University#Press.#

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Lerner#J.,#2011,#The)Boulevard)of)Broken)Dreams:)Innovation)Policy)and)Entrepreneurship,#Paper#presented#to#the#London#School#of#Economics#

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Maula,#M.,#Autio,#E.,#&#Murray,#G.#(2005).#Corporate#venture#capitalists#and#independent#venture#capitalists:#

what#do#they#know,#who#do#they#know#and#should#entrepreneurs#care?.#Venture)Capital:)An)International)Journal)of)Entrepreneurial)Finance,#7(1),#3H21.#

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Murray,#G.#(1994)#The#European#Union’s#support#for#new#technologyHbased#firms:#An#assessment#of#the#first#

three# years# of# the# European# seed# capital# funds,# scale# economies# and# public# support.# European)Planning)Studies,#2(4):#435H461#

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Murray,#G.,#Hyytinen,#A.#and#Maula,#M.#(2009)#Growth#Entrepreneurship#and#Finance,#in#Evaluation)of)the)Finnish)National)Innovation)System:#Full#Report#by#Evaluation#Finland.#

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State#Investment#Banks,#Institute#for#New#Economic#Thinking,#working#paper#no.7#

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From)funding)gaps)to)thin)markets:)UK)Government)support)for)early`stage)venture)capital.#National#Endowment#for#Science,#Technology#and#the#Arts.#

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(ed.),Entrepreneurship,)Intrapreneurship)and)Venture)Capital)(Lexington,#MA:#Lexington#Books)#pp.#119#H#139.#

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Wetzel,#W.#E.#Jr#1987#The#informal#risk#capital#market:#aspects#of#scale#and#efficiency,#Journal)of)BusinessVenturing,#2:#299#H#313.#

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Wilson,#K.,#and#Silva,#F.#(2013)#Policies#for#Seed#and#Early#Stage#Finance:#Findings#from#the#2012#

OECD#Finance#Questionnaire,#OECD#Science,#Technology#and#Industry#Policy#Papers#No.#9.#

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Zhang,#M.#Y.,#&#Dodgson,#M.#(2007).#“A#roasted#duck#can#still#fly#away”:#A#case#study#of#technology,#

nationality,#culture#and#the#rapid#and#early#internationalization#of#the#firm.#Journal)of)World)Business,#42(3),#336H349.#

#

Table*1:*Key*Population,*Venture*Capital*Investment*and*GDP*Metrics*#

#

Population##

2011#

#

Maturity#of#VC#

market#

(start#decade)#

Total#VC**#

investment#

2012#

Total#VC#

investment#%#of#

GDP*#

Seed/early#stage#VC#

investment#%#of#

GDP*#

Estonia## 1.3m#2000s#

8.6m#E# 0.051# 0.007#

Finland## 5.4m#Late#1960s# 79,1m#E#

0.041# 0.034#

Rep#of#Ireland## 4.6m# 1990s# 269m#E# 0.054# 0.39#

New#Zealand## 4.5m# 2000s# 20.8m#E# 0.04# d/k#

North#East## 2.6m# 2000s# 19.8m#E# 0.038#(UK)# 0.025#(UK)#

Nova#Scotia## 0.9m# 1990s# 16.3m#E# 0.08#(Canada)# 0.022#(Canada)#

Sources:#*OECD#(2013)#–#currencies#converted#to#Euro,#based#on#US#Dollar#average#exchange#rate#for#2012U#

**see#sources#for#Figure#1##

#

#

Figure*1:*Total*Annual*Venture*Capital*Investment*2007N12*(000s)*#

0

50000

100000

150000

200000

250000

300000

350000

Estonia-(Euros) Finland-(Euros) RoI-(Euros) New-Zealand-(NZ$) North-East-(£) Nova-Scotia-(C$)

200720082009201020112012

#

Sources:#Estonia#and#Finland#H#Eurostat/EVCAU#New#Zealand#–#OECDU#North#East#of#England#–#BVCAU#Nova#

Scotia#H#Thompson#ReuterU#Republic#of#Ireland#H#IVCA#

#

Figure*2.*The*financial*entrepreneurial*ecosystem*model*#

Table&2:&Key&Theme&Findings&for&Each&Case&Study&&Small&economy:& Estonia& Finland& Republic&of&Ireland& New&Zealand& North&East&England& Nova&Scotia,&Canada&

Theme%1:%%international%mindset%%%%

%Silicon%Valley%office,%University%Linkages,%encourage%overseas%seed%accelerator%attendance%in%UK%&%US%

Slush%tech%conference?%global%tech%finance%centres%in%USA%&%Asia%%%

Innovation%fund%Ireland%attraction%of%overseas%VC%%%

Joint%Taiwan%VC%Fund?%USA%&%Asia%VC%and%angel%linkages%%%%

Linkages%with%UK%national%policy%%%%

Atlantic%Canada%Venture%Forum,%various%network/conference%events%%

Theme%2:%%demandJside%stimulation%%%%%%%

Talinn%Tech%Uni%Tehnopol%science%park?%University%pre/seed%linkages%with%US%universities%&%accelerators,%Seedbooster%incubator%service%%%

Aalto%University%entrepreneurship%catalyst?%VIGO%accelerator%programme,%IRP%%%%

Incubator/accelerator%programmes?%Encouraging%corporates%&%spinJouts%%%%

Incubators?%R&D%grants%%%%%%%%

Proof%of%concept%funds,%IRP,%alongside%national%incubator%&%R&D%grants%%%%%

%Accelerators,%Mentorcamp%(2011)?%University%startJup,%media%&%tech%specialisms?%Spingboard%Atlantic%connectivity%between%univeristies%and%industry%experts%

Theme%3:%interJregional%funding%model%%%%%%

%EIF%Baltic%Innovation%Funds%(2012),%fund%of%funds%matched%into%private%VC?%KredEx%seed,%early%stage%coJinvestment%VC?%EDF%early/growth%VC%for%tech,%bio%&%energy%sectors%

Tekes%start%up%grants/loans%and%20mE%pa%seed%fund%of%funds,%international%syndication%%%%

Bank%of%Ireland%Kernel%Capital%parallel%RoI%and%N.%Ireland%VC%fund%%%%%

NZVIF%link%with%Taiwan%National%Development%Fund%(2014)%%%%%

Access%to%linked%national%ACF/ECF%schemes%%%%%

Atlantic%region%and%Federal%government%funds:%notably%Build%Ventures?%ACOA%Business%Development%Plan%zero%matched%interest%loans%

Theme%4:%%open,%attractive%regulatory%system%%%%%

Low/nil%corporation%tax,%recognised%the%need%to%adopt%LP%legal%framework%to%attract%overseas%VC%investment%%%%

Tekes%coJfinance%of%foreign%investors%%%%%%

Investor%tax%breaks%for%employment%and%seed%investment%%%%%

LP%VC%attracting%international%VCs%%%%%%

%UKJwide%investor%tax%incentives%S/EIS%%%%%%

Canadian%R&D%tax%breaks%%%%%%

Theme%5:%%exitJcentric%approach%%%%

%Skype%4%VC%reJinvestment%%%%%

Rovio's%high%profile%exit%and%Slush%attracted%foreign%investment%J%gaming%sector%specialism%

Attracting%international%corporate%investment%through%tax%breaks%%

Attracting%US%&%Asian%investors%in%the%absence%of%sizeable%local%institutional%%investment%%

A%cohesive%escalator%growth%funding%%%%

Stellar%exits%attracted%US/CanadianJwide%investment%%%

%Theme%6:%%funding%pipeline%%%%

%International%Angel%and%public%VC%collaboration%%%

%Encouraging%foreign%match%fund%syndication%%%

%Establishing%ties%with%US%diaspora%institutional%investors%%

%Development%of%larger%scale%series%A+%funding,%attracting%foreign%investment%in%absence%

%Established%cohesive%funding%escalator%%%

%Shortage%of%seed%funding%required%flexible%funding%approach,%Business%Development%

%%%

%%%%

%%%%

%%%%

of%local%institutional%investment,%affective%early%stage%R&D%grant%scheme%%

%%%%

Programme%loan%funds%%%%

Theme%7:%%effective%angel%networks%%%%%%%

%Effective%public%funded%EstBAN,%links%with%FiBAN,%Baltics%and%Russia%%%%%%

Established%FiBAN%links%with%EstBAN%and%internationally%%%%%

Developing%angel%networks%and%potential%coJfunding%(Euro%Angel%Fund)%%%%

Thriving%angel%networks%and%coJfunding%%%%%%

Established%angel%coJfunding%%%%%%

Growth%of%angel%coJfunding%%%%%%

Theme%8:%%dedicated%institutions%%%

%EDF,%KredEx%%%%

Finnvera,%FII,%SITRA,%Tekes%%%

Enterprise%Ireland%%%%

NZ%Venture%Investment%Fund%%%

North%East%Access%to%Finance%policy%lead%and%NEF%delivery%vehicle%

ACOA%regional%coJordinating%body%%%

%%%%%%%%

Table&3:&Key&Early&Stage&Public&Funding&Provision&for&Each&Case&Study& Small&economy& Estonia& Finland& Republic&of&Ireland& New&Zealand& North&East&England& Nova&Scotia,&Canada&

Key%early%stage%public%funding%provision:%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

Estonian%Development%Fund%(2006),%direct%matchJfund%investment%agency%focus%on%early%to%early%growth%market%stage%in%tech,%bio,%energy%sectors?%%%Baltic%Innovation%fund%(100mE,%2012),%fund%of%funds%matched%into%private%VC?%%%KredEx%seed,%early%stage%coJinvestment%VC%%%%%%%%%%%%%%%%%%%%%%%%%%

%VIGO%accelerator%(advanced%manufacturing,%cleantech,%life%sciences,%digitech)?%%%Tekes%start%up%grants/loans%and%20mE%pa%seed%fund%of%funds?%%%Finnvera%regional%loan%guarantees%and%direct%match%fund%later%stage%VC?%FII%match%fund%&%fund%of%funds%early/growth%VC?%%%SITRA,%evergreen%life%sciences%fund%%%%%%%%%%%%%%%%%%%%%

%Seed%&%VC%scheme%(175mE)%priority%sectors%(ICT,%hiJtech,%life,%green,%advance%manu)?%various%startJup/seed%funds%(e.g.%AIB%53mE%Seed%Capital%Fund,%inc.%coJinvestment)?%%%Bank%of%Ireland%Kernel%Capital%Funds%for%all%stages%of%investment%(173mE%in%coJfinanced%VC%funds),%includes%Gowth%Fund%(30mE%2013%investing%in%RoI%and%NI)%?%%%Development%Capital%Scheme%(75mE)%into%potential%high%growth%sector%firms%(e.g.%engineering,%food,%medical,%software)?%%%National%Pensions%Reserve%Fund%J%3%funds%providing%establish%business%patient%capital%loans%&%equity%for%restructuring%and%growth%%%%%%%%%

%NZVIF%($160m,%from%2002),%range%of%8%private%led%funds?%%%Seed%CoJinvestment%Fund%($40m,%from%2005)%matched%50J50%with%angels%and%VCs%%Joint%VC%activity%between%VZVIF%and%Taiwan%National%Development%Fund%(US$160m%from%2012)%%%%%%%%%%%%%%%%%%%%%%%%%%%

Regional%7%fund%suite,%from%micro%loans%&%PoC%convertible%loans,%accelerator%and%angel%coJfunds%to%specialist%tech%fund%and%later%stage%growth%funds%up%to%£2m?%%%National%R&D%matchJfund%grants,%startup%loans,%EFG,%ECF%&%ACF%funds%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

%Innovacorp%J%arms%length%J%NS%First%Fund%KB%starts%<$250k%&%CoJFund%with%angels%(est.%1995,%since%2013%only%NS%public%fund),%followJon%to%$3m?%%%Atlantic%VC%Fund%(2x%private%fund%managers),%Build%Ventures%series%A%£1J3m%(regional%scale%fund)?%%%ACOA%Business%Development%Plan%zero%matched%interest%loans?%National%Research%Assistance%Programme%tech%advisors?%angel%tax%credits%to%$50k%investment%%%%%%%%%%%%%%%%%%%%%

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