Plugging the knowledge gap: An international comparison of the role for policy in the venture capital market

Abstract

This paper examines the role of policy in creating venture capital structures that support innovative, high growth companies. It compares the policy challenges and the emerging structures and measures in the US, Germany, Singapore, France, Ireland, the Netherlands and the UK. It argues that policies to stimulate the demand for venture capital are more effective in overcoming inherent information asymmetries in venture capital market. These information asymmetries take the form of risk aversion on the supply side and uncertainty and resistance to venture capital on the demand side. The result is a gap in funding for high growth businesses. Narrowing this gap--often called the equity gap--has been a target of policy makers in the countries studied. The paper provides evidence to demonstrate that the equity gap is actually the measurable outcome of this information asymmetry, or 'knowledge gap' and that policy has been most effective in countries which have approached the development of a venture capital market through demand rather than supply side measures.

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