The Small Business Innovation Research Program Challenges and Opportunities (1999) / Chapter Skim
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A. “Public Venture Capital”: Rationales and Evaluation
A. “Public Venture Capital”: Rationales and Evaluation
Pages 113-128
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From page 115... ...
This article reviews the motivations for and the assessment of these efforts. It explores the underlying challenges that the financing of young growth firms poses, the ways that specialized financial intermediaries address them, and the rationales for public efforts to finance these companies.
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From page 116... ...
· some of America's most dynamic technology companies received support through the SBIC and Small Business Innovation Research (SBIR) programs while still privately held entities, including Apple Computer, Chiron, Compaq, and Intel.
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From page 117... ...
Why one would want to encourage public officials instead of specialized financial intermediaries (venture capital organizations) as a source of capital in this setting is not immediately obvious.
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From page 118... ...
Responses by Venture Capitalists The financial intermediary that specializes in funding young high-technology firms is the venture capital organization. The first modern venture capital firm, American Research and Development (ARD)
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From page 119... ...
On the one hand, venture capitalists have backed during the 1980s and 1990s many of the most successful high-technology companies, including Apple Computer, Cisco Systems, Genentech, Netscape, and Sun Microsystems. A substantial number of service firms (including Staples, Starbucks, and TCBY)
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From page 120... ...
It is the mechanisms that are bundled with the venture capitalists' funds that are critical in assuring that they receive a satisfactory return. These circumstances have led to venture capital organizations emerging as the dominant form of equity financing for privately held technology-intensive businesses.3 RATIONALES FOR PUBLIC PROGRAMS At the same time, there are reasons to believe that despite the presence of venture capital funds, there still might be a role for public venture capital programs.
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From page 121... ...
In 1996, a record year for venture disbursements, 628 companies received venture financing for the first time (VentureOne [19971~; to put this in perspective, the Small Business Administration estimates that in recent years close to one million businesses have been started annually. Furthermore, these funds have been very concentrated: 49% of venture funding in 1996 went to companies based in either California or Massachusetts, and 82% went to firms specializing in information technology and the life sciences (VentureOne [19971~.
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From page 122... ...
Venture capitalists may have eschewed small investments because they were simply not profitable, because of either the high costs associated with these transactions or the poor prospects of the thinly capitalized firms.8 Encouraging public investments in small firms may be counter-productive and socially wasteful if the financial returns are unsatisfactory and the companies financed are not viable. Support for these claims is found in recent work on the long-run performance of initial public offerings (IPOs)
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From page 123... ...
. Finally, some institutional investors are displaying an increased willingness to provide capital to first time and seed venture funds.
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From page 124... ...
THE CHALLENGE OF EVALUATION As public venture capital programs have increased in number, policymakers and economists are increasingly grappling with the question of how to assess these programs. Not only do substantial divisions exist between the approaches employed by academics and practitioners, but there is little consensus within the academic community itself about the best evaluation methodologies.
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From page 125... ...
Indeed, Wallsten [19961 shows that the subset of SBIR awarders that were publicly traded reduced their own spending on R&D in the years immediately following the award. However valuable a framework it may be when examining the macroeconomic impact of public expenditures, it is less clear that this econometric approach is appropriate when assessing public efforts to assist small hightechnology firms.
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From page 126... ...
Thus, the evaluation of public venture capital programs remains a subject of lively debate. The choice of appropriate valuation methodologies is likely to be of considerable interest for both academics and practitioners in the years to come.
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From page 127... ...
Stiglitz, and A Weiss, 1984, Information imperfections in the capital market and macroeconomic fluctuations, American Economic Review Papers and Proceedings 74, 194199.
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From page 128... ...
Price, Waterhouse, 1985, Survey of small high-tech businesses shows Federal SBIR awards spurring job growth, commercial sales (Washington, Small Business High Technology Institute)
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