Capabilities, policy and institutions in the emergence of venture capital in the UK and US

Abstract

Venture capital (VC) is widely perceived by UK policymakers to be a key requirement for the growth and development of successful and innovative early stage firms. This thesis examines how government policy has impacted the emergence of VC sectors in the UK and US. Using historical, qualitative and quantitative methods it argues that the public rationale behind UK policy has been largely framed in ways that underestimate the importance of capabilities, demand for capital, and institutional differences. The thesis examines venture capitalists’ key supply‐demand relationships: with funded firms; with limited partners; and with the markets that allow exit via IPO. It argues that the US VC sector has developed unique capabilities enabling the assembly of complementary assets to bring firms to successful IPO. In the UK, policy aimed at addressing the ‘equity gap’ has focused on the provision of capital rather than developing the capabilities that have characterised the US sector. We perform quantitative analysis examining the effectiveness of recent UK schemes at providing VC funding to small firms. Drawing upon two proprietary datasets, including one new hand‐collected dataset of all investments made under the Venture Capital Trust scheme, the thesis provides new quantitative evidence on the success of government policy interventions, demand for capital by firms, and investment exit opportunities. The thesis then compares principal‐agent and evolutionary framing perspectives of the VC sector, arguing the evolutionary view explains some nuances more readily than a pure principal‐agent view. It concludes by discussing the theoretical and policy implications of the research