the determinants of venture capital activity - empirical evidence and policy implications

Acknowledgements

I would like to express my sincere gratitude to the supervisor of this dissertation,

Professor Stefano Caselli, for his guidance and his essential assistance in reviewing the

contents of this dissertation. His clear explanations and his helpfulness during both Private

Equity classes and during our meetings have been of great value for me and have deepened

my knowledge on corporate finance, financial regulation and investments. I am also grateful

to Professor Corielli for his constructive criticism and guidance on the econometric techniques

used in my analysis.

My thanks go to both Bocconi University and Scuola Superiore SantAnna for the

exceptional life experience that has provided me during the last five years. Without their

stimulating environments and without the example of their brilliant students and motivated

professors, I would have never had so many studying, working and travelling opportunities in

such a short amount of time.

I owe my most sincere thanks to all the university friends who have strongly supported

me during my studying and working path over the last five years, and in particular to

Alessandro, Mario, Mattia, Marcello, Nicol, Luka and Rushabh. Without their daily

encouragement and understanding it would have been impossible for me to keep pace with all

the challenges of the recent years. My special gratitude goes to Francesca Larosa and to

Andrea Castiglione, who have always been present as both exceptional friends and team-mates

in the most important moments in these years. I am extremely grateful to all my closest

friends from Florence, who have never made me feel guilty for my absence and who continue

stay close to me as brothers. My warm gratitude goes to Lorenzo Fattorini, one of the most

generous people I have ever met, and to Lorenzo Perego for their profound and loyal

friendship.

I am extremely grateful to all those who made it possible for our Start-up Kiwi Local

to grow from a simple idea into a fast growing technology company over the last three years.

Not only my partners have contributed to nurture my passion for entrepreneurship, but also

they have helped me growing as a person. I am particularly grateful to my colleagues and

partners Giulia, Massimo, Mario, Roberto and their exceptional skills, motivation and

entrepreneurial spirit. Building company with them and pursuing a common project is not

only an incredible business challenge, but also a unique human experience.

My last and greatest thanks go to Lisa, for her unconditional support, generosity,

presence and vitality, and to my family. I feel extremely lucky and grateful for all the love,

support, motivation and suggestion received since I was a child from my family and, in

particular, from my parents Antonella and Stefano, and I owe most of the present and future

results of my life to their presence, education and motivation.

Table of Contents

1

Table of Contents

Abstract ..................................................................................................................... 3

1. Introduction ......................................................................................................... 4

1.1 Why is VC and Policy support important? ....................................................... 4

1.2 VC in Italy: why is the market so small? ........................................................ 10

2. The determinants of VC: literature review and research hypotheses .. 14

2.1 Theoretical Background ................................................................................... 14

2.2 The Determinants of VC .................................................................................. 20

2.2.1 Government Investment Schemes .............................................................. 21

2.2.2 Market Dynamism and Funds availability ................................................ 25

2.2.3 Education & Innovation stock ................................................................... 32

2.2.4 Cultural and Social Factors ....................................................................... 45

2.2.5 Regulation & Ease of Doing Business ........................................................ 50

2.2.6 Law System: Common Law vs. Civil Law ................................................. 61

3. Econometric Model and Sample .................................................................... 62

3.1 Our Model ........................................................................................................ 62

Table of Contents

2

3.2 Our Sample ...................................................................................................... 68

4. Empirical Results .............................................................................................. 72

4.1 F-stats and coefficients of Determination ........................................................ 72

4.2 Coefficients Results .......................................................................................... 78

4.3 Empirical Analysis Results Summary .............................................................. 87

4.4 Limitations and Acknowledgements ................................................................. 88

5. Implications for Policy-Makers ...................................................................... 90

5.1 The need for an Ecosystem .............................................................................. 91

5.2 Demand Side Intervention................................................................................ 93

5.3 Supply Side Intervention ................................................................................ 100

Conclusions .............................................................................................................. 104

Bibliography ............................................................................................................ 107

Abstract

3

Abstract

The promotion of early-stage entrepreneurship and venture capital is of critical

importance to stimulate innovation, jobs creation and economic growth in modern

economies. This work analyses the international determinants of venture capital to

shed light on the relationship between macro variables and the different levels of VC

investments across OECD and EU countries. In particular, we focus on the Italian

market, which shows a 2012 VC/GDP ratio 5 times smaller than the European Union

average. The main novelty of this research is the holistic approach used in the choice

of the explanatory variables. While controlling for a large set of factors already

addressed in previous literature such as GDP growth, stock market activity, labor

frictions and legal systems, we argue that also cultural factors, start-up initial costs

and educational variables have an impact on the cross-country level of VC activity.

The dissertation is organized as follows. The first section explains why VC is relevant

for policy makers through a literature review of the sector. The second chapter

continues the review with a focus on individual determinants of VC activity,

highlighting for each variable the specificities of the Italian market. Factors related to

public intervention, financial market dynamism, education and innovation, culture,

ease of doing business and legal systems are discussed. The third section introduces

our regression methodology, using both OLS and GLS models, and data sources. After

presenting our empirical results, we acknowledge limitations and finally discuss about

policies that could have an impact on both the demand and supply-side of venture

capital and contribute to the development of a more dynamic entrepreneurial

ecosystem.

1. Introduction

4

1. Introduction

1.1 Why is VC and Policy support important?

Even though some forms of venture capital (from now on VC) have existed

since ancient times as a way to finance risky, innovative and high-potential projects,

modern VC is a relatively recent phenomenon. Combining theoretical insights from

both managerial and financial economics studies, over the last 20 years both policy

makers and researchers have been analyzing the industry from micro and a macro

perspectives. While from a micro-perspective the main areas of investigation are the

analysis of returns and best practices in funds management, macro researchers1 focus

more on understanding which are the impacts of VC on economies and how policy-

makers can shape laws and design interventions aimed at stimulating the industry. In

this dissertation, we follow this second line of research to investigate which are the

determinants of VC activity at an international level, and how policy makers could

stimulate the sector on both its supply and demand sides. But why should policy-

makers care about stimulating the VC industry? In this section, we briefly review the

main literature contributions on the subject.

1 These include Gompers, Lerner, Cumming, Jeng, Wells and others.

1. Introduction

5

Although there is still much to be studied, a large part of the literature believes that

the answer to the above question is based on three pillars.

1. Technological innovation and entrepreneurship are key for economic growth

and jobs creation;

2. VC can stimulate innovation and entrepreneurship;

3. Government Policies can have an impact on both Entrepreneurial environment

and VC industry development, and can help societies achieving a higher level

of welfare.

(1) First of all, the role of progress and technological innovation as a key driver of

economic growth is widely recognized. Other things being equal, innovation enables

economies to produce goods and services in greater volumes and quality. In its 1957

work, the Nobel price Robert Solow was claiming that the total factor productivity

residual, representing the part of growth that could not be explained by higher level

of labor and capital inputs, accounted for about 85% of economic growth (Solow,

1957). On the same line, the OECD argues that entrepreneurship and innovation will

be crucial for the economic development and competitive advantage of 21st century

nations. In Figure 1, Kauffman foundation clearly shows how start-ups, regardless of

financial crises, have been responsible for most of the U.S. net job creation during the

last 30 years (Kane, 2010).

1. Introduction

6

There is considerable evidence, moreover, that small high-tech companies are among

the most important drivers of economic growth, contributing disproportionately to the

creation and diffusion of innovative goods and services (the World Bank, 1994, 2002;

Kane, 2004; Kauffman Foundation, 2010). Indeed, small firms have a higher growth

potential than larger firms as, with smaller and more flexible organization structures,

they encourage experimentation and reward new ideas through equity and incentive-

based compensation (Almus and Nerlinger, 2000). Based on a wide sample of all

available countries in the World Bank database, Cummings analysis concludes that

entrepreneurship has a significantly positive impact on GDP/capita, exports/GDP,

and patents per population and, moreover, to a negative impact on unemployment2.

(2) Secondly, academics have highlighted the role of VC as the most

appropriate source to finance technology-based firms and their innovations (Gompers

& Lerner, 2001; Denis, 2004; Colombo et Al., 2011). Venture Capitalists not only can

leverage on their sector knowledge to decrease information asymmetries and perform

2 In particular, Cummings recent study claims that on average, 1% increase in new business started in one year improves GDP/capita in the subsequent year by 0.24%, reduces unemployment by 0.13%, and increases patents per population by 0.29% (Cumming, 2013)

0

1

2

3

4

U.S.A. Net Job Change - Million Jobs (Startups)

U.S.A. Net Job Change (Startups)

Figure 1 - The Importance of Startups in Job Creation and Job Destruction. Data on the y-axis representing Net jobs changes in million units. Report written for the Ewing Marion Kauffman Foundation. Data by Kane, T (2010).

1. Introduction

7

better due diligences and investment decisions, but also can add significant value to

their target companies. Through their strategic support, network of contacts and

positive signaling effect to outsiders, VC funds can thus increase success probabilities

of promising, high-risk projects (Colombo et Al., 2011; Hsu, 2006). Hellman and Puri

(2000) estimate that, because of these special characteristics, a dollar of VC could

generate as much innovation as three dollars of traditional corporate research and

development. In the activities associated with tech start-ups and VC, moreover,

innovations usually have deep positive externalities on the surrounding context.

Examples are represented by partnerships between companies, technology licensing

and former entrepreneurs re-investing in new ventures: in each of these cases, the

impact on the system of a successful venture is much higher than its stand-alone

benefits. If this is the case, the promotion of new high-potential business ventures and

VC becomes critically important for economic growth. Gompers, and Lerner (2001),

however, claim that Hellmans and Puris results could be biased, since the real causal

relation between start-ups, innovation, and VC, is unclear. If on the one side a greater

availability of VC enhances growth perspectives of local entrepreneurs, it is also true

that entrepreneurs and innovative ideas seek capital, and that a dynamic

entrepreneurial ecosystem could be the cause of increased VC activity too (Jeng and

Wells, 2000; Hirukawa and Ueda, 2011). Looking at U.S. sector-level data, Hirukawa

and Ueda (2011) argue that it may be innovation activity to lead the development of

VC, and not vice-versa. The same reasoning was applied to patents by Audretsch and

Feldman (1996): patenting activities may both cause and be caused by new VC

investment. In an attempt to assess causal relations, however, Di Giorgio and Di

Odoardo measured a positive effect of VC supply increases on GDP growth. Despite

the lack of an ultimate consensus on the matter, we can probably claim that both

causal relations have some elements of truth: in a virtuous cycle of cross-fertilization,

1. Introduction

8

high-potential entrepreneurship and VC availability positively influence each-other.

Whatever the main direction of the causal relation, concrete examples from the U.S.

about the importance of VC are quite paradigmatic. Over time, the US VC market

has been financing companies which have disrupted entire industries, such as Apple,

Intel, Microsoft, Facebook, Google and Cisco. Analyzing the results of a survey,

EVCA3 reported that 94.5 % of these disruptive firms said they would not exist if they

had not received VC funding (Felix et Al. - 2007). Moreover, literature shows how not

all VC is equal, as 80% of the industry returns, and arguably of the innovation impact,

is concentrated in the top quartile funds (Cumming & Johan, 2013). In the specific

case of Italy, in 2009 PWC showed how VC-Backed companies in the 2003-2008 period

registered, on average, higher revenue growth than their peers (16,4% vs 5,7%), higher

EBITDA growth and higher employment growth (7,5% on a yearly base) (AIFI4, Libro

Bianco, 2011). We hence believe that, although causals relations are still unclear,

presented evidence is sufficient to support the hypothesis that VC activity is a positive

element for a country.

(3) In order to claim that the VC industry should be a key point on policy-

makers agenda, however, we need to support a last argument: that governments

stimulus of the industry is socially optimal, and that policy-makers have the

appropriate tools to accomplish the task. In broad terms, government stimulus can

occur through either direct government subsidy programs or legislative changes that

affect the institutional setting. From an historical perspective, there is evidence that

Policy can effectively support VC industries. According to Lerner (2010) almost all of

the global hubs of entrepreneurial activity, such as Silicon Valley, Singapore, Tel Aviv,

3 European Private Equity and Venture Capital Association. 4 Associazione Italiana del Private Equity e Venture Capital.

1. Introduction

9

bear the marks of government investment. In these cases, in particular, governments

played a very positive role as catalysts and supporters of the ecosystem. In its 2010

work, however, Lerner also stated that for every successful public intervention

spurring entrepreneurial activity, there are many failed efforts, wasting untold billions

in taxpayer dollars. It becomes hence relevant to understand which policies can be

effective and which should be avoided. From a theoretical perspective, government

intervention in the industry can be a reasonable response to both market failures and

mismatches between current investment and socially optimal levels. As to market

failures, many researchers have claimed that a relevant equity gap is often present in

the financing of new technology-based firms, who are usually discriminated in getting

access to external sources of financing (Colombo et Al., 2011). The presence of capital

market imperfections, however, is not the only reason why government support to

high-tech entrepreneurship and VC may be socially optimal. As previously mentioned,

R&D projects are usually characterized by the presence of positive externalities that

may be beneficial for the whole environment. As innovators are not able to capture

all the advantages generated by their ventures, companies incentives to invest in

R&D are often lower than the social optimum (Colombo et Al., 2011). According to

Feldman & Kelley (2003) in order to maximize social welfare, governments should be

particularly supportive of initiatives with the highest potential level of spillovers and

where the gap between private and social returns is higher. Which is the appropriate

role for public policy for stimulating VC and the creation and development of start-

up ecosystems, in any case, is still a widely debated theme in Entrepreneurial Finance

(Jeng & Wells, 2000; Denis, 2004). Agreeing with Lerner, we support the thesis that

far-seeing policies that foster the development of VC should be key on policy-makers

agendas. Our paper is at a broad level related to recent scholarship such as Bonini

(2011) and Felix et Al. (2011), but also to Jeng & Wells (2000) who compare VC

1. Introduction

10

levels and VC to GDP ratios to assess the importance of different determinants and

understand potential policy implications. In the next paragraphs, after showing the

critical differences in VC levels between countries, we will address the subject by

highlighting which macro variables have a significant impact on VC activity levels.

1.2 VC in Italy: why is the market so small?

In the majority of countries for which data are available, organized VC

investments5 into national companies represent a very small percentage of GDP,

usually well below 0.1% of GDP. Even though these numbers are extremely small

when compared to major national expenditures, such as health care and education,

the relationships explored in the last paragraph show how these figures can have a

5 VC investments include seed investments, start-up investments and later-stage investments by VC funds, both foreign and national, in national companies.

0

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0,2

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0,3

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VC Investments as a % of GDP - 2012

Later Stage Venture Capital(%GDP)

Seed Venture capital (% GDP)

Figure 2 - VC Investments in Local Countries as a percentage of GDP. Seed and Later stage breakdown. OECD data, 2012.

1. Introduction

11

deep impact on national prosperity over the long run. The worldwide level of

investments in VC has grown spectacularly over the last three decades, but the

observed rates of growth have been extremely different across countries. Figure 2

shows the level of venture investments in national companies scaled by GDP (we will

call this measure VC/GDP) and highlights how 2012 VC activity has dramatically

different relative sizes from country to country. Israel and the United States lead in

terms of VC activity, representing respectively 0.35% and 0.12% of GDP (OECD

Entrepreneurship Data 2013). We then find a large group of countries, including

France, Germany, Belgium, United Kingdom and others which, although not

comparable to Israel levels, have yearly investments between 0,02% and 0,05% of

GDP. On the right side on the chart, with 2012 activities below 0,01% of GDP, we

then find industry laggards. In OECD statistics, Italy ranks as the third last country

by VC industry development. This means that Israel VC_GDP in 2012 was 78,8 times

the Italian one, while U.S., Canada and UK ratios were respectively 25.3x, 17.6x and

0,4

0,5

0,6

0,7

0,8

0,9

1

1,1

1,2

1,3

1,4

2007 2008 2009 2010 2011 2012VC Investment level (Compared to 2007)

Total VC Investment trends in Europe - 2007-2012 (2007 level = 1)

Germany

France

Italy

United Kingdom

European Union

Figure 3 - Total VC Investments in Italy, France, Germany, UK and UE. 2007=1. EVCA 2014 data.

1. Introduction

12

8.9x. What is even more worrying, however, is that even in countries with more similar

fundamentals, differences with Italy are dramatic. France VC/GDP ratio in 2012 was

5,96 times larger than Italy, Netherlands 6,4x, Belgium 5,25x and even Portugal and

Spain VC markets were respectively 2,1 and 2,4 times larger relatively to GDP. In

general, with 71mm invested in Italian Companies from VC funds in 2012, the Italian

VC_GDP ratio is 5 times smaller than the European Union average.

These figures have very negative consequences on the probability of Italian companies

to be funded and promote innovative projects. In 2012, in Italy only one company out

of 73,000 got VC funding from either local or foreign funds, compared to one out of

637 in Israel, one out of 2,118 in Germany and one in 4,540 in United Kingdom. While

these last figures probably reflect the higher presence of SME in Italy, it is hard not

to see this situation as a strong limitation for Italian innovative companies. Figure 3,

moreover shows how such dramatic differences in investment relative levels are not to

be attributed significantly to the recent financial crises, which affected in a rather

comparable (minus 40% between 2007 and 2012, on average) way most of OECD

countries. In addition to yearly fluctuations of VC, which certainly contribute to the

long term development of countries industries, it becomes hence interesting to study

the structural differences that have determined these differences in investments levels

across high-income countries. The aim of this dissertation is to explore the structural

reasons for the Italian VC Market underdevelopment by analyzing, from a cross-

country perspective, which are the main determinants of the VC Industry in European

Union and OECD countries.

1. Introduction

13

2012 Data - OECD

VC Investments in Local

Companies ( mm)

Absolute Size

Compared to Italy

VC Investments as a

% of GDP

Relative Size to GDP

Compared to Italy

Austria 33,81 0,5x 0,0109% 2,4x

Belgium 90,15 1,3x 0,0239% 5,2x

Bulgaria 0,09 0,0x 0,0002% 0,0x

Czech 5,23 0,1x 0,0034% 0,8x

Germany 549,41 7,7x 0,0208% 4,6x

Denmark 79,12 1,1x 0,0323% 7,1x

Estonia 8,66 0,1x 0,0513% 11,3x

Spain 115,20 1,6x 0,0110% 2,4x

Finland 79,06 1,1x 0,0406% 8,9x

France 552,79 7,7x 0,0272% 6,0x

Hungary 64,23 0,9x 0,0645% 14,2x

Ireland 88,33 1,2x 0,0544% 11,9x

Italy 71,38 1,0x 0,0046% 1,0x

Lithuania 4,28 0,1x 0,0132% 2,9x

Luxembourg 11,06 0,2x 0,0254% 5,6x

Latvia 2,04 0,0x 0,0093% 2,0x

Netherlands 176,26 2,5x 0,0289% 6,3x

Poland 9,08 0,1x 0,0024% 0,5x

Portugal 15,86 0,2x 0,0095% 2,1x

Romania 3,06 0,0x 0,0023% 0,5x

Sweden 222,18 3,1x 0,0541% 11,9x

Slovenia 1,30 0,0x 0,0036% 0,8x

United 722,83 10,1x 0,0378% 8,3x

European 2.905,40 40,7x 0,0227% 5,0x

Euro area 1.793,26 25,1x 0,0189% 4,1x Table 1 VC investments: absolute values, ratios over GDP and relative sizes compared to Italy. Personal elaboration based on OECD Entrepreneurship Database 2012.

2. The determinants of VC: literature review and research hypotheses

14

2. The determinants of VC: literature

review and research hypotheses

2.1 Theoretical Background

A relatively small number of papers have directly investigated the determinants of

VC across countries (Felix et Al., 2007). These contributions, however, have already

shed light on the impact of variables belonging to different families. In particular:

1. macroeconomic variables (inc. GDP growth, expectations, interest rates)

2. financial market variables (inc. Book to Market index, Stock Market and IPO

volumes, M&A activity, Pension Funds presence)

3. competitiveness and regulation (inc. capital gain taxes, labor taxes, corruption

levels, legality indexes)

4. government policies (inc. direct investments, co-funding of hybrid VC funds)

5. legal structures (law systems)

Some of these factors impact on entrepreneurship and have a prevailing effect of

the demand side of capital, while others have either a supply side effect (such as


15

government co-funding or VC capital gains tax reductions) or an effect on both sides

(such as GDP growth and Stock Market activity). In most of the studies, researchers

have been analyzing panel data including both cross-series and historical series

dimensions, but focusing on different perimeters, periods of analysis and explanatory

variables.

(1) Macroeconomic factors have been shown to have a relevant impact on yearly

VC investments fluctuations. The U.S. macroeconomic expansion in the 1969-1994

period led to an increase in the number of start-ups, which in turn increased VC

demand (Gompers & Lerner, 1998, Jeng & Wells, 2000). Better expectations for the

economy, similarly, are associated with higher expected profits from new start-ups and

thus more entrepreneurial activity, while a higher interest rate increases the cost of

capital and should decrease entrepreneurship and VC activities (Poterba 1989).

Analyzing the investments supply side, moreover, Romain and La Potterie claim that

economic expansions are also related to periods of more profitable divestments

(Romain & La Potterie, 2004).

(2) Book to Market, Stock Capitalization, IPOs and M&A activity have been the

main financial market explanatory variables used to understand VC variations. Felix

et Al. (2007) use the market-to-book ratio as a measure of the degree of information

asymmetry and conclude that, coherently with theoretical research a higher ratio leads

to higher VC activity (Felix et Al., 2007).

(3) As one may think, also economies level of competitiveness and policy-maker

regulations have been found to be related to VC activities as well. Cumming et Al.

(2010) use the legality Index introduced by Berkowitz to examine the effects on

different governance structures in 39 countries. Literature has also highlighted the

importance of regulations conformity to global standards in attracting investments.

According to Lerner (2010), international institutional investors are likely to be


16

discouraged if preferred stock structures cannot be employed in a given nation. As one

may expect, taxes also play a crucial role on both the demand side and the supply

side, with higher profit tax rate, for instance, likely to decrease entrepreneurs

incentives to work (Poterba, 1989). Research has been also focusing on bankruptcy

law (Cumming, 2013) and limits to entrepreneurial flexibility (Lerner, 2010), showing

how entrepreneurs-friendly regulation can impact both the entrepreneurial

environment and the VC industry activity.

(4) Government Intervention policies have been studied from both a qualitative

and quantitative way, although cross-country data availability often represents a

major concern. Da Rin et Al. (2006) studied the role of various public policy tools in

the development of dynamic VC markets, focusing on so-called innovation ratios and

using data from a panel of 14 European countries between 1988 and 2001. The study,

however, was heavily criticized by Cumming (2010), who claimed that many of their

measures and conclusions were flawed. Lerner (2010) studies cross-national

government investment schemes and finds out that hybrid PPP schemes are usually

the most effective public mechanisms in the development of target markets. Direct

venture investments by government officials, as opposed to hybrid schemes, have been

widely criticized for their risk of conflict of interest, market distortions and private

investment crowding-out (Lerner, 2010). Due to the fact that due-diligence and

monitoring costs involved for organized Venture Capitalists are too high for seed

investments to be worthwhile, researchers have also focused their attention on the

relevance of Government support to informal VC activities (Dubocage & Rivaud-

Danset, 2002).

(5) Lastly, juridical systems have also been proven to have an impact. In its 2011

study, Bonini classifies countries depending on their proximity to UK, German, French

or Scandinavian juridical system, finding out that UK systems where more suitable


17

for early-stage companies development, while Scandinavian systems provided a more

consistent environment for later stage VC.

In the next chapter we will further investigate individual determinants, investigating

the specific conditions of the Italian market and formulating the research hypothesis

for our further study.

Supply and Demand Side

While studying the determinants of VC, a critical issue that researchers and

policy-makers have been trying to address is whether limitations in the VC activity

of a given country are more on the demand or offer side of capital.

The demand for VC comes from innovators who need to finance their ventures.

The supply of VC corresponds to the risk capital injected into funds. Which of the

abovementioned factors influences demand for and the supply of VC to a greater

extent? And is it more demand or supply of capital the main constraint VC levels in

a given country? The existing academic debates reveal there is no consensus on this

issue, both because of difficulties in isolating the explanatory factors and a mutual

interdependence of the two sides (Felix et Al., 2007). VC activity is linked to the

entrepreneurial environment, but also the other way round is true. From a theoretical

perspective, the demand for VC depends on factors that influence the innovation

Demand of VC

Innovation Potential

Availability of Skilled Labour Force

Propensity to create a venture

Ease of doing business and of

expansion

Ease of completion of a profitable exit

Figure 4 - Demand of VC: possible determinants classification. Personal Model.


18

potential of the country and the set of incentives for entrepreneurship. As shown in

Figure 4, these can include factors that impact the availability of innovative ideas and

skilled labor force, the decision of prospective entrepreneurs to create a venture, the

difficulties of expansions and the ease of completion of a profitable exit. While VC can

certainly support the creation of high potential early stage companies, if a demand

side deficit is present, it is likely that a massive fund injection will not directly

translate into a significantly larger number of successful companies (Da Rin, 2006). In

a similar way to a proverb used in monetary economics, you can lead a horse to

water, but cant make it drink. Several authors argue that the lack of funds might be

more due to the lack of attractive entrepreneurial ideas, rather than of institutional

investors. Coherently with a potential demand-side issue, one of the most consistent

findings in research on informal VC is that business angels are often opportunity

constrained, with the majority unable to find sufficient investment opportunities

(Mason & Harrison, 2002). If we consider the Italian case, several demand side issue

can be mentioned. These include cultural issues, low level of tertiary education

attainment, low university-industry collaboration on R&D, high startup costs, labour

rigidity, bureaucratic and tax burden and a lack of convergence with international

standards, companies difficulties in reaching the minimum scale necessary for VC

investors and a family governance of a large number of companies.

The supply side of VC, on the other hand, depends on how the VC risk-return

profile compares with other assets allocation. Modern portfolio theory suggests that,

as an asset class, VC should be present in a diversified portfolio, but that its optimal

size is affected by return on alternative investments, taxes, regulation and the ease of

exit from their investment. Constraints in the supply of finance can be of two different

natures.


19

In the first case (a), they may be the result of market inefficiency or high

information asymmetries, thus calling for government intervention to alleviate market

failure and close the equity gap. The equity gap can be linked to stock market

underdevelopment, to the lack of appropriate institutional investment structures such

as pension funds and insurance companies, to cultural aversion to financing companies

which are not backed by guarantees (Di Giorgio et Al., 2008), and to the inability to

mitigate information asymmetries. In this last case, as entrepreneurs possess more

information about their own abilities and the prospects of their firm than the providers

of finance, they may misrepresent this information, which creates an adverse selection

risk that can only be mitigated by sectorial experience and long due diligence

processes. The equity gap can be present either across all or just some of the

investment stages. For example, if its true that Italian startups find difficulties in

finding seed capital, the issue becomes even more severe for Series A funding. In these

cases, we can talk about a secondary equity gap, i.e. the situation where no additional

capital providers are prepared to follow-on from the original external investor

(Cumming, 2013).

In the second case of supply-side constraints (b), on the other hand, limited

investments can be the result of rational and well informed decisions by an efficient

market about unattractively priced proposals. The consistency of low VC returns in

Europe over the last decade has been so strong to make institutional investors question

whether the continent has, on the demand side, an attractive early-stage activity (EY,

2004). The debate over the nature of supply-side limitations remains open.

By looking at cross-section aggregate data on European countries, contrary to

what assumed by the prevailing policy approach and coherently with a potential

demand side issue, Da Rin did not find evidence of VC funds shortage. If accepted,

the consequences of such a result for policy makers would be relevant, implying that


20

additional VC injected by governments without a simultaneous stimulus on the

demand side would have little effect on entrepreneurial environment, with the

additional risk of crowding out private investments. Looking at the Italian levels of

VC/GDP, however, we still find it puzzling to attribute the issue exclusively on the

demand side. Is the offer of attractively priced innovative projects really so limited to

justify a VC/GDP level 5 times smaller than the European Average and 78 times

smaller than Israel? The following paragraphs will investigate more on the issue.

2.2 The Determinants of VC

Drawing from previous literature and adding new insights on the impact of

cultural and educational determinants, this chapter investigates more deeply the VC

industry potential determinants. Variables, as shown in Figure 5, have been

clustered into Government Schemes, Market Dynamism, Education & Innovation

Stocks, Cultural and Social Factors, Ease of Doing Business and Legal Systems

categories.

VC Level

Government Investment Schemes

Market Dynamism &

Funds Availability

Education & Innovation

Stock

Cultural and Social

Factors

Ease of Doing Business & Regulation

Legal System

Figure 5 VC Level Determinant Variables Families


21

2.2.1 Government Investment Schemes

Whether the main limitations of VC are present on the supply or demand side

of capital, it is instructive to observe that all VC markets of which we are aware were

initiated with some form of government support (Lerner et Al. 2005). For every

successful public intervention enhancing entrepreneurial activity, as we have already

mentioned, however Lerner (2010) claims that there were also many failed efforts

wasting untold billions in taxpayer dollars. In this paragraph, we briefly analyze

some of the main examples that VC literature has considered as unsuccessful and

successful. Government investment schemes can be classified under two main

categories.

(1) Direct interventions, where governments directly acts as a Venture

Capitalist, undertaking the roles that would otherwise be the

responsibility of a professional intermediary.

(2) Hybrid schemes: where governments co-invest with professional Venture

Capitalists to increase both their incentives and funds availability.

Research shows how direct interventions raise a number of issues related to

market distortion, inefficiencies and private capitals crowding out. Deficiencies of these

schemes include the potential lack of business competences of public officials, public-

private conflict of interests and political pressures, together with a lack of appropriate

incentive schemes for officials to perform well. Moreover, government funding can

distort private markets by offering funds which do not rePect the appropriate risk

premium (Maula & Murray, 2007), which means that, thanks to the received subsidies,

similarly to zombie banks, underperforming and inefficient firms may survive and


22

operate in a market where they would have disappeared otherwise. In its 2009 book,

Lerner described a number of negative real examples.

The Small Business Investment Company program in the early 1960s,

the US Small Business Administration charteredand funded

hundreds of funds whose managers were incompetent or crooked.

Malaysia opened a massive BioValley complex in 2005 with little

forethought about whether there would be demand for the facility. Norway

squandered much of its oil wealth in the 1970s and 1980s propping up

failing ventures and funding ill-conceived new businesses begun by

relatives of parliamentarians and bureaucrats.

(Lerner, 2009)

According to Cumming (2003), another exemplary case of inefficient use of

government money is represented by the Canadian Labor-Sponsored VC Corporations

scheme. By offering massive tax incentives to private investors that only cared about

decreasing their tax rate without regards to economic rates of returns, LSVCCs

accumulated so much capital that fund managers started to overpay for any

investment and outbid private investors. Cumming claims that the key learning for

policy-makers from these examples is that badly designed schemes, such as the

creation of LSVCCs, does crowd out private investment and supports entrepreneurial

activity in a much less efficient way than hybrid co-investment schemes (Cumming &

MacIntosh, 2003; Cumming, 2013). To have a more complete overview of the issue,

however, it is worth mentioning that not all researches have shown a negative impact

of direct-grant schemes. Started in USA in 1982, the Small Business Innovation

Research (SBIR) awards grants to small companies with fewer than 25 employees.


23

Analyzing SBIR investment flows, which amounted to over $1bn out of $23.3bn in

2010, Lerner concluded that SBIR promotes US entrepreneurship, VC and innovation

without crowding out of private investment. Lerner (2009) claims that this was the

case because of the proper design of the program which, by basing funding on research

and not on market potential, was not in direct competition with the private market.

Moreover, SBIR-awarded companies were shown to be more attractive for private

investors, which considered the grant as a quality signal decreasing information

asymmetries. It remains a widespread belief, however, that direct investment schemes

are subject to higher risks than indirect ones.

Indirect government investment schemes, on the other hand, have gradually

emerged as an international element of best-practice. The OECD used the term hybrid

to describe structures where governments and private investors work in concert as

limited partners with asymmetric rights in a fund. Such equity enhancement schemes

better recognize that professional investment skills and proper incentives are key for

the efficiency of these programs (Gilson, 2003; OECD, 2004). A key example in the

history of VC is represented by the establishment of the Yozma VC scheme by the

Israeli government in 1992. Starting from a 100 million dollars fund wholly owned by

the public sector, the goal of the program was to attract foreign Venture Capitalists,

and not local ones, investment knowledge, strategic support abilities and network of

contacts. Yozma was encouraged by a government study showing that 60% of the

entrepreneurs involved in prior public programs had been successful in developing

their technologies but had failed because of lack of go-to-market and funding

experience. Foreign expertise and the adoption of global standards for limited

partnership creations6 were identified as key solutions to this problem. In order to

6 Yozma LP were modeled after the Delaware and had Pow-through tax status.


24

attract foreign investors, Yozma not only committed co-investments in the new funds

through a matching scheme, but also gave to private fund the right to buy-back

government stakes by paying a fixed interest rate between 5 and 7%. In this way,

through a sort of call-option, the government was enhancing the returns of the general

partner in order to reach aggregate investment levels closer to the perceived social

optimum.

According to Lerner (2010), most of the successful VC incentive schemes

worldwide have been shaped on the Yozma model and share a central element: they

use matching funds to leverage private sector returns, co-invest with professional

operators and determine where public subsidies should go. Another notable example

is represented by the European Investment Fund, transformed in 2001 by the

European Commission into Europes largest venture investor with an injection of more

than 2bn.

Lastly, it is worth mentioning that another relevant part of governments

investment schemes has been historically dedicated to funding advisory services, aimed

at supporting the demand side of VC. Partially or fully publicly funded advisory

services and business incubation programs are undertaken in most developed countries

but, unfortunately, evidence on the success of these programs is difficult to track due

to endogeneity issues, and lack of performances data (Cumming & Fischer, 2012). For

the past decade, moreover, government have also attempted to enhance the informal

VC market, i.e. business angels, as a mean to enhance the supply of early stage VC.

The rationale for supporting business angels activities is based on their lower cost

structures compared to those of VC funds7, their ability to address regional gaps in

the availability of finance through their territorial distribution and their experience

7 These lean structures makes them more suitable for seed-investing and low-size deals


25

and contacts contribution to seed-stage startups. The lack of comprehensive data on

angel investing, however, means also in this case that there is relatively little evidence

on the impact of these forms of intervention (Mason, 2009).

A complete classification of the existing policies at a cross-section level goes beyond

the objectives of this dissertation and, hence, we do not formulate any hypothesis on

government schemes. Previous literature, however, shows the impact of policies on the

industry, and we will come back to the point in the specific considerations for the

Italian government.

2.2.2 Market Dynamism and Funds availability

2.2.2.1 GDP per Capita and GDP Growth

When we scale VC investments by GDP to compare the activity levels of

different countries, we are implicitly saying that we expect the size of the economy to

have a large impact on the absolute size of invested funds. As VC is an activity that

8%

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15%

20%

25%

30%

35%

40%

Venture Capital Funding Sources Breakdown: 2007 vs 2013.

Europe Aggregate Values (% of Total Funding for the year).

2007 2013

Figure 6 Major VC funds funding sources. Aggregate values for all Europe. Each column represent the % of total funding represented by that specific source in Europe. Data for 2007 and 2013 from EVCA.


26

deeply involves advanced technologies and services, however, it is also reasonable to

expect that VC_GDP ratio will be higher in more developed economies. Even inside

the EU-OECD high-income cluster, indeed, large differences in countries development

do exist, which can be captured through GDP per capita. Figures 7 and 8 show two

relevant pieces of information. Figure 7 shows how, in international comparisons of

OECD countries, Italy is located close to the averages of both OECD and European

-

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GDP per Capita (USD, x-axis) and VC/GDP (%, y-axis) (2012)

Figure 7 - GDP per Capita - Current USD - 2012. Source: World Bank

Figure 8 VC/GDP ratio (y-axis, in %) and GDP per Capita correlation. GDP per Capita in Current US Dollars.Sources: World Bank and OECD.


27

Union countries8. If its true that VC_GDP is higher in some countries with higher

GDP per capita (USA, Canada, Netherlands, Germany etc.), however, we can already

see from Figure 8 how GDP per capita is not the sole determinant of the ratio: with

a relatively close level of GDP per capita, UK and France levels are respectively 8,3

and 5,9 times higher than Italy, while Portugal and Spain, both with lower GDP per

capita, have VC_GDP twice the size of the Italian one. Even though the variable is

interesting, we decided to exclude it from our analysis. GDP per Capita is highly

correlated with other of our selected explanatory variables, including Tertiary

Education Share of the population and corruption freedom and an inclusion, hence,

would have increased the risk of multicollinearity in the analysis.

In addition to GDP per capita, and coherently with previous research (Gompers &

Lerner, 1998), we find realistic to expect that national growth levels may represent a

relevant determinant of year-on-year fluctuations. Entrepreneurs take their business

decisions also depending on both the current state of the economy and their future

expectations. Inevitably, hence, a fast-growing economy impacts their choices as well

as the investment decisions of their financiers. Gompers & Lerner (1998), analyzing

Unites States investments between 1972 and 1994, confirmed such a hypothesis. Jeng

and Wells (2000), however, in their cross-country analysis of 21 countries claimed that

the relation could not be statistically proven. In this study, we attempt to test the

hypothesis again on a more recent panel data and formally test the following

Hypothesis.

Hypothesis 1: Yearly variations of VC Activity relatively to GDP are positively

correlated with GDP growth.

8 Data from World Bank.


28

2.2.2.2 Exit Markets Dynamism: Equity Market

Excluding other potentially important incentives such as prestige and learning,

entrepreneurs and investors are motivated by high returns expectations. Returns can

take the form of distributed net income or of capital gains upon exit. One important

difference between the European and the U.S. economies is the different importance

of the various exit strategies. In Europe, trade sales and secondary sales have always

been the most commonly exit route, while in the U.S., until 1996, Initial Public

Offerings (IPOs) have been more frequent. Since 1996, however, acquisitions have

started to be the most important exit route in the States as well (Felix et Al., 2007

EVCA and NVCA data). When we talk about new technology-based companies,

divestments through IPO and M&A are usually considered as a more incentivizing

perspective than dividend distributions for companies shareholders. IPO and M&A

markets development, hence, are expected to have an impact on both Venture

Capitalists decision to invest (Black and Gilson, 1998) and on innovators willingness

to pursue an entrepreneurial journey. It comes to no surprise that the link between

00,20,40,60,8

11,21,41,61,8

Listed Market Capitalization on GDP (2012)

Figure 9 Total Capitalization of Listed companies (ratio over of GDP). Source: World Bank (2012).


29

the Stock market activity and VC investment has been one of the most studied in the

field. Gompers and Lerner (1998) and Jeng and Wells (2000) find a positive

correlation between IPO activity and VC investment. Being the listing on a stock

market the exit vehicle with the greatest average return for both entrepreneurs and

investors, the existence of strong stock markets has been associated to more dynamic

VC industries (Black & Gilson 1998, Gompers & Lerner 1998). A strength of the US

VC market has been the existence of well-functioning stock markets across different

listed business sizes. The creation in 1971 of the NASDAQ, which has outpaced all

other US markets by IPO listings, and of the Small Cap Market in 1992, have been

particularly supportive for this development. Many other economies have tried to

follow the US direction. Dubocage and Rivaud-Danset (2002), for instance, claim that

the French Nouveau March, created in 1996, has played a key role in VC

development, with a major cultural impact on the players involved in the industry.

Other studies also suggest that the stock index level, by making exit strategies more

attractive, has a higher effect on high-tech VC investments than on buyout operations

Figure 10 2012 Listed Market Capitalization on GDP ratio vs 2012 tot. VC investments over national GDP (1=0,01% of GDP, 14=0,14%). Source: World Bank and OECD.

Australia

Austria Belgium

Canada

Denmark

Estonia

Finland

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Greece

Ireland

Italy Japan

Netherlands

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MarketCapitalization/GDP (x-axis) vs VC/GDP (y-axis) - 2012


30

(Di Giorgio & Di Odoardo, 2001). This study includes the Stock Market Capitalization

variable and tests the following hypothesis:

Hypothesis 2: The level of VC Activity relatively to GDP is positively correlated

with the size of a country stock market capitalization relatively to GDP.

It is worth to note that recent studies have also shown that M&A exits are important

in explaining U.S. funds performance and that a more vibrant M&A market provides

a favorable environment for VC and tech-entrepreneurs exits (Metrick & Yasuda

2010). M&A market development is usually associated to both the presence of large

corporations willing to target local companies to pursue inorganic growth, and to the

diffusion of market intermediates and specialized advisors such as investment banks

and law firms that make it easier to increase high-potential firms visibility.

2.2.2.4 Local Presence of Large Institutional Investors

The U.S. VC Market development showed how large institutional investors,

such as pension funds and insurance companies, can make the difference on the supply

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Figure 11 - Autonomous pension funds assets as percentage of GDP, 2012. Source: OECD.


31

side of VC funds. Even a minimal reallocation of the assets managed by pension funds

and insurance companies, indeed, can generate a massive flow of capital directed

toward innovative companies. Before 1979, US pension funds were constrained in their

assets allocation decisions, with VC firms being excluded from their potential choices.

By introducing the prudent man rule and enabling a higher extent of diversification,

however, the US Employment Retirement Investment Security Act abolished these

limits and by supported a large boost of venture investments across the country.

Charts 11 and 12 show how Italy is characterized by a structural lack of pension funds

(Di Giorgio et Al., 2008), but also how numbers makes it hard to think about the

Italian issue as a problem connected only to the lack of institutional funds. Across all

VC funding sources, indeed, including Pension funds and Insurance Companies, but

also Government agencies, family offices and private individuals, Italian VC

fundraising over the last 7 years has widely underperformed selected peers. Arguably,

chart 12 supports the theory that deficiencies of Italian VC fundraising are either

0

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1,5

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3Total Funds (bn) raised by VC funds - Sources Breakdown

(2007-2013 totals)

United KingdomFranceSpainItaly

Figure 12 Total funds raised by VC funds by residence of the fund. Sources Breakdown. Reported values are cumulative values for the period 2007-2013 for United Kingdom, France, Spain and Italy. Source: EVCA


32

connected to factors having an impact on the whole supply of VC, rather than or

single sources, or to problems in the ecosystem and on the demand side. Nevertheless,

it is reasonable to expect that an increased size of national institutional investors

assets under management can play a relevant role in the national development of

VC/GDP ratios. Hence, we formally test the following hypotheses:


with local pension funds asset under management volumes scaled by GDP.


with local insurance companies asset under management volumes scaled by GDP.

2.2.3 Education & Innovation stock

Tertiary Education Attainment

Early stage entrepreneurs core business is to combine innovative ideas, funds

and human capital to create high-potential ventures. At the same time, VC general

partners are in the business of employing highly skilled professionals with the right

mix of business, investment and technology background, to look for the most

attractive projects and strategically support them in their business development. In

both cases, skilled human capital availability plays a key role. Thus, a lack of skilled

people could constitute a significant bottleneck to the development of the industry. It

is surprising, however, that relatively little attention has been dedicated to human

capital and education in VC determinants studies. Very few authors have stressed and

empirically tested the importance of human capital in financial intermediation. More

attention, however, has been dedicated to the relation between entrepreneurship and


33

educational barriers to starting a new firm (Autio, Levie et Al., 2008). These studies

claim that, in countries where educational levels are deficient, entrepreneurs may lack

the necessary skills to both grow a business and to access to information that would

increase their success probabilities. Moreover, anecdotal evidence related to

interactions with Start-uppers, shows how co-founders and skilled employees scouting

is among the most challenging tasks for an entrepreneur. The share of the population

that has attained a tertiary level qualification, yearly issued by OECD, is a

key indicator of how well countries are placed to profit from technological and

scientific progress (OECD). Tertiary education includes both theoretically and

research-based programs9 and those designed to provide more vocational-oriented

competences. The tertiary attainment profiles are based on the percentage of the

population aged 25 to 64 that has completed that level of education.

9 These are referred to as A programs, and include different categories of Bachelors.

0

10

20

30

40

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60

Share of 24-65yrs pop. with tertiary qualification attainment

(2012)

Figure 13 Share of population aged 24-65 with tertiary qualification attainment 2012. Source: OECD.


34

Chart 13 shows a particularly worrying picture of Italy compared to OECD peers.

With only 20,4% of the 24-65 years population who has attained a tertiary

qualification as of 2012, compared to 39,2% in Spain, 42,8% in France of 56,5% in

Canada, the differences are pretty impressive. It is worrying to think about how a

country with such a low level of advanced education can compete in a sector where

research and specialized skills are one of the main sources of competitive advantage.

While aggregate percentages for all kind of studies are interesting, it is also important

to analyze more specifically what is the diffusion of tertiary studies in fields that are

more directly related to VC and Start-up creation. In this case, we briefly focus on

the relevance of Business-related studies. As a proxy of high-quality tertiary business

education, we hereby use the AACSB certification for business and accounting schools

and, in particular, the number of AACSB accredited schools per million people in the

country. As the AACSB certification may well have a diffusion in different countries

regardless of the presence of good universities, and as there is no scientific proof about

the correlation between AACSB indicator and the real quality of business education

in the country (Sweden, for example, has no AACSB accredited business schools), we

acknowledge the strong limitations of such a measure. We still believe, however, that

the measure does reflect to some extent the penetration of business schools in most of

the selected countries and, for explanatory reasons, we present it here. It is interesting

to note the difference between Italy, where SDA Bocconi is the only certified school,

and France or United States, with respectively 0,3 and 1,5 certified business schools

per million people. Lastly, it is also worth to notice that what is important is not only

education quantity, but also its appropriateness with industry needs. According to

EY, Italy spends more than the average G20 on its education system, but it is not

delivering the kind of work-oriented skills needed to foster a more dynamic

entrepreneurial sector and innovation (EY, 2013).


35

Figure 15 Accredited Business Schools per Million people by Country Association to advance Collegiate Schools of Business 2014. Source: AACSBa.

The same results are shared by McKinsey (2013), which claims that almost 40% of

youth unemployment in Italy is due to a mismatch between competences supply

coming from schools and the demand of the market. As we believe that advanced

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Correlation between 2012 VC investments and Population with

Tertiary Education Attainment

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Figure 14 Correlation between Population Share that has attained tertiary education and total VC investments as a % of GDP. Source: OECD.


36

education does play a critical role in VC development, in our study we formally test

the following hypothesis:


with the share of the population that has attained tertiary education.

R&D, Patents and Scientific journals

Several studies have claimed that the spectacular growth of VCs in the late

1990s can be attributed to the opportunities derived from a boost in technology

discoveries in the same period (Gompers & Lerner, 1998). Innovations, and especially

platform-innovations, give rise to a number of new entrepreneurial opportunities

through spillovers and spin-offs. Acs (2009) and Bonini (2011) also measure the impact

of country-level R&D expenditures on VC activity. The main aggregate used for cross-

country comparative studies of R&D is gross domestic expenditure on R&D (GERD)10.

The measure includes R&D activities by business enterprise, higher education,

government and private not-for-profit institutions. It is important to acknowledge,

however, that such aggregate numbers may be subject to biases related to divergent

accounting methodologies cross-country, including different coverage of national

surveys on R&D across sectors, use of different sampling and estimation methods.

Gompers and Lerner (1998) claim that, if expenditure on R&D rises, the number of

potential entrepreneurs with promising ideas may increase. Based on the assumption

that a higher R&D can spur innovation and economic growth in the Union, the

10 GERD data is compiled by OECD on the basis of the Frascati methodology, which defines R&D as: Creative work undertaken on a systematic basis in order to increase the stock of knowledge, including

knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications

(OECD).


37

Barcelona European Council of March 2002 set the objective to increase the average

investment in R&D in Europe from 1.9% to 3.0% by 2010. Since research activities

come with an embedded high level of risk, we would also expect VC to be particularly

suited for follow-on investments in the field and, hence, to be positive affected by

increased R&D expenditures. Figure 16 shows how Italy still ranks well below the

European Council goal, positioning itself as one of the last countries in both the

European Union and OECD in terms of R&D expenditures over GDP. According to

EY (2013) it should come to no surprise that Italian small businesses apply for fewer

patents than their international peers. At the same time, we note how some of the

countries with the most developed VC markets in the world, such as Israel and United

States, are well above both EU and OECD average expenditures. Another valid

measure of Innovation activity inside an economy is represented by the number of

patent applications by residents yearly published by the WIPO11. Two advantages of

11 Patent applications are worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national patent office for exclusive rights for an invention--a product or process that provides a new way of doing something or offers a new technical solution to a problem. Data provided by World Bank and collected by World Intellectual Property Organization.

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Figure 16: Research and Development investment as percentage of national GDP. Source: OECD.


38

this measure compared to R&D/GDP are that it is less dependent on national

accounting practices, and that it measures the output of R&D activity, rather than

just the capital input. In this study, we hence decide to use the ratio between patent

applications by residents and national population as an explanatory variable.


with the number of scientific publications scaled by total population

Innovations can be nurtured in a variety of different environments, including large

company laboratories, startups and Universities. In this respect, it is also interesting

to measure the impact of academic research on entrepreneurship and VC. Cumming

(2013) shows how academic R&D is positively associated in a statistically significant

way with VC deals and dollars, as well as patents. A potential measure of Academic

contribution to R&D in scientific subject is represented by the OECD scientific and

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R&D spending as a % of GDP and VC as % GDP - 2012

Figure 17 VC activities as percentage of GDP (y-axis in %) and R&D spending as percentage of GDP (x-axis)

correlation. 2012. Data from OECD.


39

technical journals index, measuring the number of papers published in business,

engineering and scientific subjects by academic researchers12. In our analysis, we will

refer to this index to measure academic impact on VC. Even in this case,

unfortunately, we see how the number of publications in Italy (437 per million people)

12 The index includes, in particular, articles published in physics, biology, chemistry, mathematics, medicine, engineering, earth and space sciences. Data provided by OECD.

Australia

Austria

Belgium

Canada

Czech Republic

DenmarkEstonia

Finland

FranceGermany

Greece

Ireland

Italy

JapanNetherlands

Norway

Poland

Portugal

SloveniaSpain

Sweden


United States

-0,01

0,01

0,03

0,05

0,07

0,09

0,11

0,13

0 200 400 600 800 1000 1200 1400

VC

inv

estm

ents

as

a %

of G

DP

Scientific and Technical Journals per million people

Scientific and Technical Journals per million people (x-axis) and

VC/GDP (y-axis) - 2012

0

200

400

600

800

1000

1200

1400

Scientific and Technical papers per million people (OECD)

Figure 19 VC/GDP (y axis in %) and Scientific and Technical Journals per million people ratio in 2012. OECD data.

Figure 18 Scientific and Technical papers per million people. Source: OECD.


40

is relatively small compared to other developed economies (670 in USA, 855 in Canada,

736 in UK, 931 in Netherlands), even though relatively close to the French, Spanish

and Portuguese ones (respectively 486, 496 and 434 in 2012). In order to try to capture

the impact of academic research on VC activity, we formally test the following

hypothesis.


with the number of scientific publications scaled by total population.

Although they are more difficult to measure, it is finally worth to mention that

academic research without appropriate technology transfer mechanisms, such as tech-

transfer offices in charge of licensing and academic entrepreneurs education, have

much more limited implications on national entrepreneurial ecosystems. According to

Lerner (2010) many regions in the world experience a strong mismatch between the

low activity of entrepreneurs and VC funds and, on the other hand, the strength of

the scientiWc and research base. In the Italian case, for instance, Di Giorgio & Di

Odoardo (2008) claim that the country has historically experienced a structural

0

20

40

60

80

100

120

140

Fin

land

Uni

ted

Stat

es

Uni

ted

Kin

gdom

Swit

zerl

and

Bel

gium

Swed

en

Isra

el

Net

herl

ands

Ger

man

y

Aus

tral

ia

Irel

and

Can

aza

Lux

embu

rg

Den

mar

k

Aus

tria

Por

tuga

l

Cze

ch R

epub

lic

Fra

nce

Est

onia

Hun

gary

Spai

n

Slov

enia

Ital

y

Pol

and

Gre

ece

University-Industry cooperation rank (1=best) - 2012 - W.E.F.

Figure 20 University-Industry cooperation index World Economic Forum Global Competitiveness Report. 1=best.


41

inability to stimulate VC capital demand though a well-designed interaction between

Universities, R&D centers, entrepreneurs and financiers. Attempting to capture the

level of cooperation between universities and corporations, we hereby refer to the

Universities-industry collaboration in R&D index, published every year by the World

Economic Forum in its Global Competitiveness Report13. Even in this case,

unfortunately, Italy ranks in the last positions across OECD countries. With Finland,

Unites States and United Kingdom leading in this index, W.E.F. shows how there is

still much to be done in Italy to increase the impact of academic research on the

surrounding entrepreneurial environment. With respect to this index, we formally test

the following hypothesis:


with the level of Cooperation in R&D between Universities and Industries.

13 http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform/

0

20

40

60

80

100

Internet Penetration (% of population) - 2012

Figure 21 Internet Penetration (% of population) World Bank data, 2012.


42

Internet Users and Digital diffusion

The arrival of the internet has been one of the most disruptive technological

changes in the century. Internet had a dramatic impact on the reduction of

information asymmetries in a number of fields: from education to capital markets,

knowledge sharing and tele-working, is hard to think about economic activities that

have not been affected by the revolution. In the entrepreneurial ecosystem, we believe

that the internet penetration can have impacts on both the demand and the supply

side of VC. From the supply side, internet and digitalization dramatically help deal

flows, make market research more accessible, and increase the transparency on

information sharing. From the demand side, a higher internet penetration makes it

easier to match demand and offer of talents, perform market research, access to

entrepreneurial knowledge and products best practices. Since a significant share of

new ventures are related to the web-industry, moreover, a higher internet penetration

facilitates the entrance in the industry of a larger part of the population. Having said

that, we would hence expect higher internet penetrations to be associated to higher

AustraliaAustria

Belgium

Canada

Denmark

FinlandFrance

GermanyGreece

Ireland

Italy Japan

Norway

PolandPortugal

Slovenia

Spain

Sweden


United States

0

0,02

0,04

0,06

0,08

0,1

0,12

0,14

50 55 60 65 70 75 80 85 90 95 100

VC

act

ivit

y (%

of G

DP

)

% of internet penetration

Internet users (% population, x-axis) vs VC/GDP (y-axis) - 2012

Figure 22: Correlation between Internet penetration and VC Investments as a % of GDP. Data on the y axis in %. OECD and World Bank data.


43

VC/GDP ratios. Even in this case, Italy has unfortunately to be considered a laggard.

Despite its very high smartphone penetration among the younger part of the

population, in terms of aggregate internet penetration, Italy is the second worst

performing country after Greece. In terms of trends, however, we can luckily express

less dramatic considerations. Not only, in line with global trends, the Italian

penetration is growing, but also, more specifically, the number of web queries related

to Start-up and Early Stage entrepreneurship in Italy has been increasing substantially

over the last 3 years (see Picture 23). It is puzzling, however, to see how over the

same period the number of researches related to VC has been declining (see Picture

24). From a Start-upper perspective, we can speculate that this phenomenon may be

linked to an increased awareness of the entrepreneurial population about difficulties

to seek funding through local Venture Capitalists, preferring instead to look for

alternative ways of funding.

Figure 23 Web queries on Google related to Start Up. Regional Data for June 2010, July 2011, July 2012, June 2013, June 2014 and 2005-2013 time series provided by Google Trends.


44

Figure 24 - Web queries on Google related to VC. Regional Data for June 2010, July 2011, July 2012, June 2013, June 2014 and 2005-2013 time series provided by Google Trends.

Figure 25: Google Trends Intensity of Google searches related to Start-up (left) and VC (right) as of May 2014. City-Level visualization. Data provided by Google Trends.

From a Regional perspective, moreover, it is interesting to notice how the increased

digital awareness related to Startups has not been touching all the Italian Regions at

the same time, leaving uncovered a large part of Central, Southern Italy and Sardinia.

Consistently with other evidence on the importance of clusters for startup

development, moreover, Google data also show how Startup and Venture Capital web

searches are mainly concentrated in a small amount of large cities that, with the

exception of Rome, are all in the Northern regions. Although several measures on

Internet penetration are available, most of them are unfortunately highly correlated


45

with previous chosen measures and, in this dissertation, we decided not to formally

use internet-related explanatory variables.

2.2.4 Cultural and Social Factors

Culture is the collective programming of the mind distinguishing the

members of one group or category of people from others

(Geert Hofstede)

National cultures have a fundamental role in shaping behaviors and attitudes

of the population. Geert Hofstede found that the values that distinguished country

cultures from each other could be statistically categorized into four groups, which

became the Hofstede dimensions of national culture. Namely, Hofstede classified

countries depending on their level of Power Distance, Individualism versus

Collectivism, Masculinity versus Femininity and Uncertainty Avoidance. With regards

to entrepreneurship and VC, it becomes important to understand to which extent

activity levels can be conditioned by policy-makers actionable tools, and to which

extent they are linked to structural divergences between countries cultures. The

dimension Uncertainty Avoidance has to do with the way that a society deals with

the fact that the future can never be known and with its attempt to control the future

rather than just letting it happen14. Uncertainty Avoidance also has to deal with people

openness to novelty and innovation, including new ideas, products and processes.

Entrepreneurs in Startups typically take risk in a way that is disproportionate relative

to existing firms and, at the same time, they are characterized by a high ability to

14 http://geert-hofstede.com/


46

innovate and think beyond the status quo. Risks include, but are not limited to,

spending money and time on research and development, developing new products and

services, facing reputational risk (Cumming, 2013). In 2013, Cumming claimed that

data is consistent with the fact that cultural attitudes that are associated with low

risk taking limit the effectiveness of entrepreneurship. Cumming showed that culture

can also have a large impact on macroeconomic performance15. Global

Entrepreneurship Monitor publishes every year an index related to national Fear of

Failure, capturing effects that are similar to Hofstedes aversion to risk. The

advantages of such a measure for our study, however, are the specific relation with

business failure and the fact that, as the index is the result of yearly surveys, country-

data are not time-invariant.

Another p

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