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J Evol Econ (2011) 21:167–189
DOI 10.1007/s00191-010-0189-x
REGULAR ARTICLE
Towards a systemic and evolutionary framework
for venture capital policy
Alessandro Rosiello ·Gil Avnimelech ·
Morris Teubal
Published online: 14 September 2010
© Springer-Verlag 2010
Abstract When compared to the U.S. and Israel, the weak venture capital
(VC) markets and VC policy in Europe up to the early 2000s stimulated two
alternative streams of research. A majority view, which we term traditional,
focuses on the role of VC in overcoming market failure in the financing of inno-
vative ventures. The policy recommendations emerging from this view involve
a mix of monetary incentives and institutional changes that can be applied
irrespective of the local context. The second is an evolutionary perspective
on VC and VC policy. This is based on a dynamic analysis of the co-evolution
between VC and high-tech entrepreneurship, as well as an adaptive view of
policy and policymaking (Metcalfe, Econ J 104(425):931–944, 1994). In this
setting, policy-makers have to overcome not only market failure but also dy-
namic system failure associated with the linked emergence of entrepreneurial
high-tech clusters. Overcoming traditional market failure becomes a necessary
but not sufficient pre-emergence condition for the eventual attainment of the
latter policy objectives. This paper surveys the post-2000 literature on VC
This paper benefited from the Policy Memorandum of the ‘Venture Fun Project’, Prime
Network of Excellence (Teubal et al. 2007). We thank members of Venture Fun,
particularly Terttu Luukkonen, Massimo Colombo and Pascal Petit.
A. Rosiello (B)
ESRC Innogen Centre, University of Edinburgh, Edinburgh, UK
e-mail: alessandro.rosiello@ed.ac.uk
G. Avnimelech
Entrepreneurial Research Center, Faculty of Business Administration,
Ono Academic College, Kiryat Ono, Israel
M. Teubal
Department of Economics, Hebrew University, Jerusalem, Israel
168 A. Rosiello et al.
and VC policy and criticizes some of its assumptions and results. Moreover,
it examines the Israeli and UK/Scotland innovation policy frameworks from
an historical perspective, which allows us to highlight differences in approaches
and impacts. The upshot is that the success of VC policies depends on a number
of factors, including the phase of emergence of a VC market and high-tech
cluster and the specific country/region institutional setting.
Keywords Systems of innovation ·Venture capital ·
High-tech entrepreneurship ·Public policy
JEL Classifications G24 ·G28 ·L22 ·L26 ·L53 ·L65 ·L86
1 Introductory notes
Despite many attempts to develop high impact Venture Capital (VC) policies
in Europe, a consensus seems to exist that the results of most policies imple-
mented up to the early 2000s were below expectations. We propose that such
failure may be related to a rather ‘static’ approach to VC policy, a pervasive
emphasis on monetary incentives and a strong supply-side bias, with little re-
gard for capability generation at both the firm level and the industry level.
For example, some OECD reports (Baygan 2003; Baygan and Freudenberg
2000) on the subject of VC and VC policy suggest that the government’s main
objective was to cover ‘funding gaps’. Three directions of VC policy are
stressed: direct supply of public capital to firms; provision of incentives to VC
investments; and the broadening of investment rules. Baygan (2003) lists ‘sup-
ply side measures’ in support of VC, which include promotion of private VC
investment; removal of barriers to entrepreneurship; development of second
tier capital markets; direct equity investments in start-ups (SUs); and equity
guarantee programs.
In Europe, the UK Government leads in the implementation of OECD-type
recommendations, some of which aim to stimulate investment in technology
sectors. However, UK private equity investment remains biased towards late
stage opportunities. In 2006, 59% of total UK investment funded management
buyouts (MBOs). Not surprisingly, some of the adopted policies, such as the
‘VC Trust Scheme’,1have had the effect to channel much of the investment
(roughly 80% over the past 13 years) towards established companies or MBOs,
1Income tax relieves: (i) exemption from income tax on dividends from ordinary shares in VCTs
(‘dividend relief’), and (ii) ‘income tax relief’ at the rate of 30% of the amount subscribed for
shares issued in the current tax year and onwards (subscriptions for shares issued in previous tax
years: rate is 40%). The shares must be new ordinary shares and must not carry any preferential
rights or rights of redemption at any time in the period of five years. Capital gains tax (CGT)
relieves: (i) Capital Gains Tax not to be paid on any gain you make when you dispose of your
VCT shares. (This is called disposal relief).; (ii) Investors are able to treat gains arising on disposals
around the time VCT shares are issued as postponed to a later year.
Towards a systemic and evolutionary framework for venture capital policy 169
with negligible or even negative effects on productivity, employment levels and
profitability (Cowling et al. 2008).
Another initiative, the ‘Regional VC Funds’ (RVCFs), have been criticized
because of its limited impact in stimulating the emergence of regional VC mar-
kets (Baygan and Freudenberg 2000), excessive emphasis on covering regional
supply-gaps (Mason and Harrison 2003), and the inadequate consideration
given to the “dynamic learning process in which demand and supply processes
combine with their embededness in social networks and individual perceptions
in a mutual reinforcing way” (Martin et al. 2005,p.1).
2Further, while the lack
of funds is not the sole cause of investor-unreadiness, the funds’ commercial
orientation did not allow for experimentation and capacity building, which
may have inhibited the emergence of entrepreneurial capabilities (Sunley et al.
2005).
From the mid-1970s, Germany has also engaged in the creation of a VC
market (Becker and Hellmann 2003). It has done so by relying on a financial
infrastructure characterized by the dominant role of large banks. This strategy
has been criticized by Black and Gilson (1998), ‘it is not merely a stock market
that is missing in a bank-centered systems. .. the banks’ conservative approach,
and social and financial incentives that less richly reward entrepreneurial zeal
over more severely penalized failure are less conducive to entrepreneurial
activity than the secondary institutions of market-centered capital markets’
(p. 273).
From the outset, Germany’s strategy included direct investment, extensive
use of guarantees over invested funds, the involvement of banks, regional
re-distribution of VC investment and an emphasis on supporting young in-
novative firms (Becker and Hellmann 2003; Sunley et al. 2005), rather than
generating commercial returns. While Sunley et al. (2005) stress potential
benefits in terms of the enhancement of entrepreneurial capacity, others point
at the imbalances and conflicts vis-à-vis the management and governance of
public-private VC funds (Becker and Hellmann 2003), which may soften the
impact of the entire policy.
Underlying many VC policies and related research stands the assumption
that the ex ante specification of proper fiscal, monetary and institutional pre-
conditions can be conducive to efficient VC markets. Existing entrepreneurs
will automatically reveal themselves (Gilson 2003) and/or the removal of fiscal
and institutional barriers to entrepreneurship will induce the birth and growth
of a growing number of investable ventures (Da Rin et al. 2006).
Our evolutionary criticism of this approach focuses on three additional
points. First, more attention ought to be paid to the demand-side, primarily the
2The RVCFs main operational criteria are: (i) each fund operates within a regional boundary,
(ii) fund managers manage funds on a purely commercial basis, (iii) fund managers make all
investment decisions, including how the investment should be structured. RVCFs can invest up
to £250,000 in equity or debt into early stage businesses or needing development capital either for
an acquisition or for organic growth.
170 A. Rosiello et al.
prior creation of sufficiently large segment of “investor-ready” opportunities
(Mason and Harrison 2003). Second, it has been argued that the dynamics of
emergence of VC markets can differ from case to case (Florida and Kenney
1988; Sunley et al. 2005) especially when an explicit link is made between
emergence of VC and high-tech clusters (Avnimelech and Teubal 2008a).
Third, a broader analysis of institutional and organizational factors supporting
entrepreneurship and the creation of capabilities in SUs and in VC is required.
Our paper is organized as follows. Section 2surveys post-2000 research on
VC and VC policy that explain how VC resolves pre-existing ‘market fail-
ures’ in the financing of innovative SUs. This research tends to assume that
solving failures deriving from asymmetrical information, moral hazard, agency
problems, and transaction costs, automatically creates not only a VC market
but also one adapted to policy objectives. We term this approach ‘traditional’
since it tends to ignore the links between VC policy and the emergence of
entrepreneurial high-tech clusters.
In Section 3, we review the process of VC policy planning and implementa-
tion in Israel and UK/Scotland, where VC policy has deviated from traditional
ways. In Section 4, we use our findings to criticize traditional approaches to VC
and introduce an alternative view. Such view hinges on the notions of market
emergence, VC-SUs co-evolution, and cumulative learning. Further, from a
VC policy standpoint overcoming market failure is seen as a pre-condition for
the emergence of a new VC market.
The outcome of our analysis is a dynamic view of VC policy, one which
includes both VC-directed and VC-related components (Teubal et al. 2007),
and which may be aimed either at reinforcing pre-emergence conditions (such
as assuring a critical mass of high-quality SUs) or at triggering emergence (such
as assuring the co-evolution of VC and SUs). In this view, supply-side measures
and monetary incentives should be complemented by demand-side policies as
part of a comprehensive VC policy.
2 A review of existing perspectives to VC and VC policy
The ‘finance perspective’ to the analysis of VC and VC policy originated in
the ‘finance literature’ (Gompers and Lerner 1999). It focuses on VC as pool
of money, as a nexus of complex contracts, on the operation of existing VC
organizations (VCs) and, to some extent, on the operation of existing VC
markets. Its policy recommendation relate to incentives to fundraising and
investment.
Lerner (2002) explains that VC constitutes a form of intermediation that
solves a complex contractual problem, in that the relationship between private
equity investors and entrepreneurial ventures is characterized by high risk,
information asymmetries and moral hazard. Given the proper institutional set
up, Lerner (2002) envisages the possibility of a direct intervention by policy-
makers to increase the supply of VC available to SUs. Such intervention is
Towards a systemic and evolutionary framework for venture capital policy 171
justified by market failure and the positive externalities associated with the
growth of technology-based companies. Complementarity can be achieved
between public support for business R&D and VC investments (Lerner 1999).
Gilson (2003) emphasizes the contractual arrangement between entrepre-
neur and VC. The lesson from the successful U.S. experience in generating a
VC market concerns “the extremely effective contracting structure that covers
the entire VC cycle, from initial investment in the VC fund, to the VC fund’s
investment in a portfolio company, to the exit from the portfolio investment to
allow the VC fund’s cash and non-cash investment to be recycled” (p. 1092).
Gilson assumes that the foundations of capital markets already exists and
asks whether this model could be replicated elsewhere via public intervention.
The creation of a VC market is a difficult coordination problem, in that the
supply of entrepreneurs is responsive to VC funding and to the existence of
appropriate financial institutions and viceversa. However, Gilson proposes
that the first successes with VC would reveal new entrepreneurs.
Bottazzi et al. (2004)andDaRinetal.(2006) take a different perspective
and argue that VC market will strongly respond to ‘incentives’ but may not
respond to a public attempt to increase the flow of VC via direct investments.
A major implicit assumption seems to be that a VC market already exists
rather than a situation when it has to be created. These incentives are mainly
related to taxation on capital gains and barriers to entrepreneurship. On
the one hand, excessive taxation on such returns should be always avoided,
as it could reduce their motivation to invest. On the other hand, dynamic
labor markets and the existence of stock markets for technology-based SUs
represent investment decision drivers.
In both papers, the statistical evidence supports the proposed arguments.
Concerning the problems faced by Europe, the authors suggest that the idea
of closing a funding gap through direct public intervention is fundamentally
misleading. Policy-makers should restrain from direct investments and instead
focus on defining the appropriate taxation and fiscal, institutional conditions
to stimulate VC investments and entrepreneurship.
A key assumption of their analysis is that once these conditions are satisfied,
the flow of VC is automatically matched by rising demand from SUs, therefore
stimulating the emergence of a VC market. Thus, while access to skills and
R&D investment are included as independent variables, there is no mention of
the dynamics neither of market emergence nor of VC-SUs co-evolution. These
processes seem to be taken for granted. It remains rather unclear why some
forms of direct support failed, whereas others, for example in Israel, obtained
more encouraging results.
Keuschnigg and Nielsen (2003) offer a comprehensive analysis of the market
and welfare implications of various instruments of VC policy in relation to
the financing of entrepreneurial ventures. In their model, the size and compo-
sition of the VC portfolio is determined by (i) incentives to search for invest-
able opportunities, (ii) expected VC surpluses and (iii) the degree of market
tightness (the imbalance between VC demand and supply). The VC market can
172 A. Rosiello et al.
incur two types of failures: double moral hazard (between VC and entrepre-
neur and visa-versa) and high transaction costs as regards the search for viable
opportunities. The objective of VC policy is to provide investors and investees
with high-powered incentives to succeed. As far as VCs are concerned, this
entails inducing VCs to provide support that adds-value to the investee, to
cover the competence-gaps it may have.
The model is based on a number of assumptions and different degrees of
tightness lead to different optimal solutions in equilibrium. For instance,
an ‘output subsidy’ combined with a tax on initial investments is shown to
stimulate joint effort when ‘the VCs’ bargaining power is well aligned with
their effectiveness in generating deals’ (Keuschnigg and Nielsen 2003, p. 20).
In this case, VCs do not over-invest vis-à-vis the fund size. If policy fails to
recognize that pre-conditions and/or overshoots its target, it is likely to cause
serious distortions.
Similar to Da Rin et al. (2006), Keuschnigg and Nielsen (2003) presume
implicitly that it is generally possible to stimulate the flow of capital towards
VCs and entrepreneurship. Capable investors can always identify viable op-
portunities and add value to them and similarly with potential entrepreneurs.
Without market failure, VC demand and supply will spontaneously converge
towards equilibrium.
2.1 Summary and critique
The traditional approach to VC policy implicitly assumes that a central
problem in creating a VC market is overcoming pre-existing market failure
in the financing of SUs. It is implicitly assumed that the resulting market
equilibrium is a desirable outcome, without consideration for its configuration,
size, dynamics of emergence, and the broader objectives of innovation policy.
Moreover, it is assumed that ex ante fiscal provisions (capital gains reduction)
and institutional changes can push the system closer to VC market equilibrium.
Both sets of measures seem generally applicable, regardless of the structure
of the economy or its institutions. Moreover, any type of economic system,
irrespective of its industrial or institutional configuration and stage of de-
velopment, is expected to react positively to the setting up of new forms of
intermediation and/or the eradication of barriers to entrepreneurship.
Another weakness of some of the traditional approaches surveyed (except
Lerner) is absence of an explicit analysis of entrepreneurial capabilities.
Indeed, while many works recognize the qualitative contribution provided by
experienced VCs and quantitative influence of a cutback in the barriers to
entrepreneurship (Da Rin et al. 2006), most avoid approaching the process
of creation of those capabilities and infrastructures that allow markets and/or
industries to emerge and operate effectively.
Thus, a further weakness of the traditional approach to VC policy is that
it has little or no dynamic analysis of the process linking the mechanisms by
which VC as an institution overcomes market failure with the emergence of
Towards a systemic and evolutionary framework for venture capital policy 173
a VC-market,and its subsequent growth. This can be explained by referring
to the implicit notion of ‘market’ used in the analysis, that is, a market is
any configuration of supply/demand equilibrium that is achieved by solving
the abovementioned market failures. Such an abstract view should be comple-
mented with a vision of the market as a higher-level of organization that may
emerge given a number of pre-conditions.
Another commonality among traditional approaches is the view that VC
supply will inevitably stimulate demand. Hence, policy-makers should concen-
trate on financial incentives and the resolution of contractual problems and
institutional changes that are assumed to induce VC markets to emerge and
operate efficiently. However, the UK/Scottish experience in the domain of the
life sciences and that of the ICT-cluster in Israel show that entrepreneurial and
technological capacity ought to be created if they are not already available.
Thus, the timing of such process is also a critical factor.
3 Empirical cases
In this section, we consider two examples of intertwined VC and innovation
policies that deviated from what we termed ‘traditional’ ways. In both cases,
the policy process and its outcomes have been shaped by a series of pre-
conditions that can be investigated using the dynamic concepts of emergence
and pre-emergence (Abernathy and Utterback 1978; Avnimelech and Teubal
2006).
3.1 The emergence of a VC market and ICT cluster in Israel during the 1990s:
dynamic aspects and policy measures
By the late 1960s a significant science, technology and higher education in-
frastructure had been established, a process which started in 1925 (prior to
the creation of the State of Israel in 1948). In addition, a new institutional
setting for innovation policy was set up in 1969–1973 based on creation of the
Office of the Chief Scientist at the Ministry of Industry and Trade (OCS). Both
stimulated a 25–30 year evolutionary process, which led to the emergence of a
VC market and an ICT-oriented entrepreneurial cluster during the second half
of the 1990s. From the outset, the policy of the OCS was to enhance economic
welfare by inducing an innovation-based economic growth process through the
diffusion of R&D to the business sector.
The evolutionary process involved three phases, of which we will stress
the pre-emergence (1985–1992) and emergence phases (1993–2000). During the
first background conditions phase (1969–1984) three new universities and a set
of public applied research institutes were established. This led also to increas-
ingly large pool of qualified scientists and engineers. In addition, innovation
policy was initiated with the OCS’s Grants to R&D in firms program fol-
lowed by the ‘Bi-national Industrial R&D program’ (BIRD) which promoted
174 A. Rosiello et al.
collaborative commercial innovation between Israeli and US firms. Financial
incentives were extended to multinational corporations that contributed to
a strong multinational presence in Israel (Intel, Motorola, IBM, and DEC).
Finally, huge investments in defense R&D (software, communication and
instrumentation) were undertaken. The outcome was strong growth of R&D
performing companies, particularly in the communications/electronic areas
with significant direct and indirect effect on the future of Israel’s innovation
system (Elscint, Scitex, Tadiran, ECI, Elisra, Fibronics, and RAD among
others).
The second pre-emergence phase (1985–1992) includes a number of do-
mestic macroeconomic and liberalization policies such as the successful price
stabilization program of 1985 and the liberalization of capital, foreign trade
and foreign exchange markets. This phase coincided with global changes,
including enhanced capital movements and opportunities for foreign SUs to
float in NASDAQ, liberalization of communications markets in the US, the
UK and Japan, and the internationalization of U.S. investment banks (and
their search of investment opportunities in Israel). On the real side of the
system, we observe a sharp restructuring of the military industry (which
generated a pool of technological entrepreneurs that could benefit from the
OCS’s Grants to R&D program), and enhanced links with the US. This phase
was also characterized by a strong learning and experimentation process with
respect to entrepreneurship and VC. It led to identification of the Limited
Partnership (LP) form of VC organization, which was subsequently selected
by policy-makers and embodied in the design of the ‘Yozma Program’ in
1993.
The outcome was an expansion of informal VC activity; an increased rate
of SU formation leading to a critical mass of startups (300 in 1992); the ap-
pearance of the first VC funds (starting with Athena in 1985); and the creation
of companies like Lannet and M-Systems, SUs that successfully floated in
NASDAQ. Moreover, individuals (foreign and returning Israelis) and some
organizations such as Advent Private Equity came to Israel to search for
new investment opportunities in high-tech. Underpinning the above was an
additional OCS priority: promoting entrepreneurship and the establishment
of a domestic VC market. New government programs were implemented: the
‘Inbal Program’ (1991) that targeted VC and failed, the ‘Magnet Program’
(1992), and the ‘Technology Incubators Program’ (1992).
The emergence phase (1993–2000) was triggered by the implementation of
the successful ‘Yozma Program’, a policy response to both the weakened im-
pact of the regular Grants to company R&D program during the second half
of the 1980s and the new opportunities for invention and inventor companies
(SUs) opened up by the expansion and globalization of NASDAQ during the
1980s. It targeted a domestic VC market and indirectly, an entrepreneurial
high-tech cluster. It triggered a cumulative process with positive feedback
based on entry of new funds and VC organizations, VC-SUs co-evolution, rep-
utation effects stemming from successful exits in the 1995–1997 period, cluster
effects in the sense of enhanced scope for the local production of intermediate
Towards a systemic and evolutionary framework for venture capital policy 175
goods and services, and enhanced activity in Israel of large multinationals and
foreign investment banks. As a result, the number of SUs increased from 300
to approximately 3000; VCs and Private Equity funds from 3 to more than
100 (total capital under management approximating 10B$ by the end of the
decade); and total IPOs in NASDAQ to about 130. M&As involving a local
SUs and a foreign multinationals increased significantly (40 large M&A deals
between 1996–2000) and exports of software and hardware products reached
levels of 13 B$.
Underlying these events were very favorable external/internal conditions of
the country. The end of the first Gulf War and initiation of the Oslo Peace
Process contributed to reduce Israel’s isolation, making it more attractive for
business and investments; and the disappearance of the Soviet Union brought
in large number of immigrant scientists and engineers who had a strong impact
on high-tech growth. Meanwhile, the ‘Grants to R&D Program’ and the more
recently implemented programs (the technological incubators and ‘Magnet’
supported cooperative R&D involving consortia of firms and Universities)
continued to expand. The outcome was emergence of a high impact domestic
VC market and high-tech entrepreneurial cluster, with strong links with U.S.
product and capital markets. Underpinning this accelerated process of ICT-
oriented growth were the innovation opportunities resulting from the ongoing
ICT revolution, from the liberalization of telecom sector, and from the rapid
growth of the internet. We also observe a monotonic growth of the NASDAQ
index and of global ICT markets.
Table 1presents the quantitative growth of the various Innovation Policy
programs during Phases 2 and 3. They exclude the Yozma program, a
Table 1 OCS R&D support (million dollars)
Year Total grants Grants to MAGNET Technology Royalties BIRD-F*
(growth) business budget incubators (growth) awards
sector R&D
1985 106 (2.5%) 106 0 0 6 (33.3%) NA
1986 110 (2.8%) 109 0 0 7 (16.7%) NA
1987 113 (2.7%) 112 0 0 8 (14.3%) NA
1988 120 (6.2%) 118 0 0 9 (12.5%) NA
1989 125 (4.2%) 122 0 0 10 (11.1%) NA
1990 136 (8.8%) 133 0 0 14 (40.0%) NA
1991 179 (31.6%) 171 0 4 20 (42.9%) 12
1992 199 (11.2%) 177 1 16 25 (25.0%) 10
1993 231 (16.1%) 199 40 24 33 (32.0%) 12
1994 317 (32.2%) 172 10 27 42 (27.3%) 10
1995 346 (9.1%) 294 16 31 56 (33.3%) 12
1996 351 (1.4%) 279 36 30 79 (41.1%) 13
1997 397 (13.1%) 309 53 30 103 (30%) 12
1998 400 (0.8%) 305 61 30 117 (14%) 14
1999 428 (7.0%) 331 59 30 139 (19%) 9
2000 440 (2.8%) 337 67 32 135 (11%) 8
Source: Avnimelech and Teubal (2006)
176 A. Rosiello et al.
successful VC-directed (Teubal et al. 2007) program involving a ‘once and for
all’ 100 M$ disbursement (starting in 1993), and its failed precursor program,
Inbal. All the programs of the table should be considered as VC-related in the
sense that they contributed to create favorable pre-emergence conditions for
the emergence of a VC market and entrepreneurial high-tech cluster.
3.2 The policy-led emergence of a life sciences cluster in Scotland in the 2000s:
pre-conditions and policy framework
In contrast with the Israeli case, the emergence of a VC market and life sci-
ences cluster in Scotland has not been completed (Rosiello 2008). Therefore,
most policies should be interpreted as focusing on creating favorable pre-
emergence conditions.
In this phase, a major issue is whether a country would wish to develop a
local VC market or only a local market with connections to the global industry.
In Israel during the 1990s the only viable option was to develop a local industry
since foreign VCs, with no local agents to collaborate with in syndications,
would not open offices in the country. Thus, the export of VC services from
the U.S. to Israel without a local presence in the country would have been
impossible at the time.
However, this constraint might become less relevant pari passu with the
growth of the global VC industry with Scotland being a case where future
development of a local VC market based would significantly rely on ‘out of
Scotland’ VCs, especially from the London area. Presently, as shown by Mason
and Harrison (2003) and Rosiello and Parris (2009), a VC-market structured
around local LPs does not exist in Scotland.
However, local angel-groups have high visibility. Don and Harrison (2006)
estimate that in 2004, 539 investments involved angels who were therefore
responsible for over £600M of private investment—while in the same period,
Scottish Enterprise (SCEn) co-investment funds were involved in 44% of the
total number of VC transactions. Angels and their networks could be consid-
ered a component of what could be termed the pre-emergence stage, a fact
that suggests a different model of evolution. Thus, they can contribute to solve
some of the above sources of ‘market/system failure’, and this presumption
reflects the fact that they are one of the most important sources of early stage
funding for technology-based and high growth potential companies.
The above is consistent with our view that SCEn focuses on improving pre-
emergence conditions for the development of a bio-cluster and associated VC
market. Alternatively, for VC or bio-cluster emergence to be an objective of
policy it must be that proper pre-emergence conditions prevail. Otherwise,
emergence policies should be delayed with the policy focus shifting to im-
proving pre-emergence conditions. These mainly relate to (a) the definition
of new intermediation forms adapted to domestic conditions, which could be
oriented to overcoming traditional ‘market failure’ (see Section 4); (b) the
promotion of investor-ready entrepreneurship to develop a critical mass of
Towards a systemic and evolutionary framework for venture capital policy 177
SUs; the (c) effective coordination and partnership among various components
of the innovation system; and the (d) creation of links with external players.
3.2.1 Policies
The Israeli experience also suggests that different policies are needed at
different development phases and these policies are linked through time
(Avnimelech and Teubal 2008a,b), a conclusion that can also be applied to
the case of Scotland (Rosiello 2008). For a number of years the performances
of the Scottish economy was influenced by multinationals operating in the
financial services, gas, oil, transport and utility sectors. By the early 2000s,
however, the global downturn led to the severe decline of the Scottish ICT
sector. At that point, the focus of policy interest shifted towards stimulating
indigenous entrepreneurship. Five areas were initially identified as those
where Scotland had a competitive advantage, including the life sciences, later
extended to eighteen.
From the outset, the strategy included VC-directed policies such as the
“Scottish Co-investment Fund” (SCF)—a £45m public/private equity fund that
helps small companies to obtain money from banks and private investors by
investing up to £500k—and the “Seed Fund” that invests up to £100K. More
recently, additional support is available via the “Scottish Venture Fund” that
participates in investments up to £10M. These schemes operate horizontally
across sectors however, the life sciences draw a large proportion of these
resources: 27% of the deals completed up to 2007 via the SCF involved biotech
companies, with an average leverage ratio of private investment of 2.73 (2.48
in all sectors).
Aside from VC-directed policies, we find VC-related policies that target the
demand-side of VC, especially SUs. These initially included: ‘Proof of Concept’
that finances the commercialization of projects across Scottish research insti-
tutes; the ‘Smart and Spur Awards’ that support new ventures to carry out
innovative projects and commercialize new products and services; and the
‘Investor Ready Fund’ that pays 50% of legal and accountancy fees to SUs
seeking a private investment.
Later additions include schemes such as the ‘Score’ and ‘Seekit’ that sup-
port R&D projects jointly undertaken between public research bodies and
private companies with specific technical needs; and ‘Scottish Development
International’ helps Scottish companies gain access to people, technologies and
business partners worldwide.
Among the more recent initiatives, we find examples of targeted schemes
that aim at creating the infrastructure of innovation that is necessary for cluster
emergence. Three Intermediary Technology Institutes (ITIs) have been set up
to remedy the systemic lack of exploitation capacity. Launched in September
2003, ITIs have £450 million to invest over a 10-year period in pre-competitive
research project involving both industry and public research centers. The ITIs
focus on life sciences, energy and multimedia. The ‘Translational Medicine
Research Collaboration’ was launched in 2005 and it involves Scottish
178 A. Rosiello et al.
Universities, the private sector and the National Health System. Activities
include: (i) setting up a centre for the development of biomarkers; (ii) develop-
ing and coordinating clinical trials on defined disease populations; (iii) dealing
with ethical approvals, data collation and statistical analysis of results; and (iv)
coordinating research on collected samples.
Thus, as shown by the Scottish case, it is conceivable that in situations where
economic conditions and institutional setting are appropriate, a country or
region may want to add a measure of formal VC sources of finance and support
to innovation in SU over and beyond what already exists, without developing a
full-fledged VC market. The rationale for this kind of policy can be to reach a
satisfying situation (Metcalfe 1994), a high perceived risk of adopting a policy
oriented to VC emergence, the existence of semi-public financial institutions
that do part of the job, or a wait and see attitude leading to the creation of
new policy options. This may include the future targeting of VC and high-tech
cluster emergence.
A related point concerns policy heterogeneity and the heterogeneity of
outcomes. Research by Martin et al. (2005), Mason and Harrison (2003), and
Rosiello and Parris (2009), suggests that a fully emerged US-type VC model
sector in Scotland, especially in relation to the life sciences segment, may not
achievable nor does it seem to be a sine-qua-non condition to the process of
bio-cluster emergence. These studies show that VCs tend to be concentrated
in the London Area and their investment in the Southeastern area of the
UK. However, Scottish grants and co-investment schemes are compatible with
and stimulate investment in local business by an increasingly organized fringe
of informal investors, which constitute a peculiarity of the Scottish financial
community.
Thus, what still would seem to be critical for the potential emergence of
a future life sciences cluster is a VC market broadly defined to include not
only formal VC organizations but also other related intermediaries, such as
angels. This clarifies that different regional and sectoral clusters—and related
VC markets—tend to follow idiosyncratic trajectories of emergence.
4 From a ‘new’ financial intermediary to a ‘new’ market
This short survey of the policy-backed growth of VC markets and associated
high-tech clusters in Israel and Scotland allows us to expand the critique of
the ‘traditional’ approach to VC and VC policy that we introduced in Section
2.1. Our main objective here is to develop an alternative VC/VC policy theo-
retical framework and to suggest a number of alternative and complementary
policies.
The cases discussed in Section 3suggest the need to clarify the link between
VC as a new institution (Nelson 2008) that deals with pre-existing ‘market
failure’ in the financing of innovative firms, and VC as a new market which, if
it emerges, it does so by co-evolving with components of an emerging en-
trepreneurial high-tech cluster. In our framework of analysis, the former will
Towards a systemic and evolutionary framework for venture capital policy 179
become a key pre-emergence condition, a successful new intermediation form,
for the emergence of such a VC market (Section 4.1 below). We also char-
acterize emergence (Section 4.2) while emphasizing the difference between
our conception of market and that implicit in the traditional approach (see
Section 4.3).
4.1 Qualitative pre-emergence conditions
Gompers and Lerner (1999) argue that VC (‘new supply agent’) mediates be-
tween investors and innovative companies in ways that the traditional banking
system (‘old supply agent’) did not, thereby overcoming ‘market failure’ orig-
inating in asymmetric information, moral hazard and transaction costs. In-
vestors in VC funds are not only interested in drafting contracts and finding
institutional arrangements that reduce transaction costs and agency problems.
They are also motivated to identify financial intermediaries who, by investing
in ventures with a high growth potential and through the ‘additional value’
given, enable them to maximize expected returns.
Thus, a VC that can perform such an intermediation function must be (mu-
tually) adapted to its investees and to the overall institutional framework. In
the Israeli case, this took the form of ‘selection’ towards the end of the 1980s
and beyond of the LP form of VC organization with a focus on investing in
early stage ICT SUs. In the U.S., this mutual adaptation involved a non-linear
process of flexibilization of the rules of investment of pension funds (Gompers
and Lerner 1999,2001) and the gradual dominance of LP over other forms
of VC organization. To this mutual adaptation of supply and demand agents
and of the institutional framework, one must add the definition of the product
being traded in the VC market, that is, equity finance with (non-contractual)
added-value services offered to SUs by VCs in the area of management,
strategy, mentoring, networking and reputation.
The above-mentioned VC-backed new intermediation form is a qualitative
pre-emergence condition since it pertains to the configuration of agents, their
strategy and possibilities of action, including types of contracts with investors
and SUs that are feasible. During technological revolutions that generate many
new technological and business opportunities, the selected ‘form’ involves a
strongly profitable proposition both to VC market demand and to supply. This
is the result of an interactive learning process across different types of agents,
and of individual and collective experience involving network creation and the
identification of VC leaders with knowledge and experience.
Overcoming traditional market failure in the finance of SUs and the stim-
ulation of VCs, is not identical with creation of a new VC market, even more
so of a new market whose emergence will drive emergence of a related en-
trepreneurial high-tech cluster. Emergence is a cumulative process with pos-
itive feedback, which creates and utilizes externalities, and which has to
be triggered and sustained (Avnimelech and Teubal 2006). Numerous sub-
processes may come into play and feed it, including VC-SUs co-evolution and,
in the Israeli case, foreign investments in local VCs and SUs. The dynamic
180 A. Rosiello et al.
economies of scale which characterize this process mean that this may be
difficult to initiate or easy to truncate (diseconomies of small scale). Success
in triggering and sustaining such a process determines the systemic impact of
the selected intermediation form.
The upshot is that overcoming market failure through the identification
and materialization of a VC-based financial intermediation form is a major
preliminary step in the process leading to a VC market that could play a key
role in cluster dynamics. As shown in the cases of Israel and UK/Scotland, this
can be a critical pre-emergence condition. However, one cannot state that it is
equivalent to the new market itself. Moreover, serious obstacles could stand in
the way of full emergence, particularly in blocking cumulative processes with
positive feedback.
4.2 Emergence and policy
We propose that triggering and sustaining emergence of a VC market could
constitute a central target for VC policy and for innovation policy latu sensu.
Israel’s Yozma program (1993–1998) explicitly targeted a domestic VC market
and indirectly, an entrepreneurial high-tech cluster. This could be justified in
terms of possible market or system failures that could block or truncate the
emergence process.
While an appropriate intermediation form leading to market emergence
can result from a dynamic process, there is no assurance that this will occur.
Indeed, the comparison between the Israeli experience and those of Germany
and the UK show that non-emergence can be an outcome. Further, the Scottish
case suggest that the precursor organizations that dominate pre-emergence
need not be of the same type as those that eventually come to dominate the
new market. Less formal organizational precursors, such as business angels,
may constitute a pre-emergence condition leading to subsequent entry of
institutional VCs (Mason and Harrison 2003; Rosiello and Parris 2009).
Central in the emergence of a new VC market is the co-evolution between
VC (the supply agent) and SUs (the demand agent). In the case of Israel, this
was the main driver of the whole process (Avnimelech and Teubal 2006). In
addition to the VC-backed intermediation form, there were approximately 300
SUs in Israel in 1992: some of them of high quality who even had undertaken
IPOs in NASDAQ. While they undoubtedly represented a source of demand
for the services of the future VC industry, their presence suggests significant
excess demand at the time. What Yozma did was essentially to stimulate,
through injections of public money into VC funds of newly created private LP
organizations, the supply of VC funds. This triggered the beginning of systemic
VC-SUs co-evolution and the process of emergence of a domestic VC market
and entrepreneurial high-tech cluster (Avnimelech and Teubal 2006,2008a).
To what extent is the above process new? Although various studies recog-
nize that demand and supply of VC may not only interact but also co-evolve,
most assume that VC demand will undoubtedly respond to public stimuli or
institutional change. The experience of various European countries suggests
Towards a systemic and evolutionary framework for venture capital policy 181
otherwise, that is, even in the presence of favorable fiscal rules, institutional
settings and access to stock markets, a sufficiently responsive process will not
automatically unfold.
There may be a variety of explanations for this phenomenon. One relates
to the difficulty in harnessing and developing the relevant capabilities of
VCs, SUs and other agents. More specifically, it may be that these may not
necessarily available in a timely way through the incentives and institutional
changes proposed by most post-2000 traditional studies. Another relates to the
fact that first mover disadvantage may exist before a critical mass of activity is
achieved. Therefore, entry of VCs into the market, even in the presence of
favorable fiscal rules, institutional settings, would not take place prior to a
coordinated massive entry often stimulated by direct VC policy. Otherwise,
works such Becker and Hellmann (2003) show that the problem may a lack
of entrepreneurial skills and culture. Lerner and Schoar (2005) propose that a
key pre-condition is the degree of enforceability of contractual agreements at
a systemic level.
In our view, both quantitative and qualitative change may be required. From
an investor perspective, qualitative change often coincides with cumulative
learning, that is, a dynamic process of accumulation of experience and network
contacts (see Kaplan et al. 2004;Lerner2002; Zook 2004). In particular, as
sector or clusters mature, a number of VCs specialize in investing and adding
value to companies that operate within defined industrial sectors or techno-
logical spaces (Sorenson and Stuart 2001; Rosiello and Parris 2009). At the
same time, the formation of entrepreneurial, technological and managerial
capabilities at the firm level is crucial to generate ‘investor-ready’ opportu-
nities (Mason and Harrison 2003). Finally, policy-makers learn from previous
experiences and failures (Sunley 2005; Avnimelech and Teubal 2008a,b)to
elaborate more effective strategies.
4.2.1 Crowding out
As far as VC policy is concerned, the limited impact of both fiscal provisions
and direct Government investments stand out against the success of the Yozma
Program (Avnimelech and Teubal 2006,2008a), which we consider as an
extreme case of non-crowding out. Both the emphasis on a fund-of-funds
approach and the existence of favorable pre-emergence conditions explain
why in Israel a strong complementarity was found between the Govern-
ment’s investment contribution and private contributions. Yozma involved a
Government investment component, most of it delivered to hybrid, privately
owned LPs (fund-of-funds function), rather than through a publicly owned VC
company. Out of a total of 254 M$ raised by the VC funds created under the
auspices of Yozma (Yozma Funds) only 100 M$ was public money, the rest
being private investment. The 10 privately owned and managed Yozma funds
together with a 20 M$ Government owned VC fund, raised a further 4,200 M$
until the year 2000.
182 A. Rosiello et al.
The normative implication seems that, in contrast with Da Rin et al. (2006),
public/private VC funding complementarities can emerge (Lerner 2002),
especially when the Government’s investment contribution is made in the early
emergence phase. Further, unlike in Gilson (2003), complementary is context-
dependent and can trigger a self-sustained, private VC-intensive process of
market/cluster emergence.
4.3 What is a ‘market’?
Central in this discussion is the definition of market. We see the market as
a social institution that performs a variety of functions and exhibits different
forms of organization (Antonelli and Teubal 2009). Moreover, the markets is
a dynamical construct: it can be created or emerge spontaneously, its functions
may expand and performance may improve or decline. A similar perspective
constitutes an underpinning of our evolutionary view of VC market/cluster
emergence that follows pre-emergence and the overcoming of traditional
market failure in the financing of SUs.
Our notion of the market hinges on Smith’s (1776)viewofthemarketas
a device that promotes division of labor, learning, innovation, and economic
growth. The characterization of such a dynamic view of markets makes use
of but goes behyond Coase’s facilitation of exchange and reduction of transac-
tions costs (Coase 1988). A decrease in transaction costs is one of the outcomes
of a market after it emerges. However, if markets have to be built, other factors
play a key role, such as asymmetric information, a critical mass of producers
and consumers, and a critical volume of transactions to overcome the fixed
costs of a market place (see more roles in Table 2).
Table 2 Defining characteristics of markets*
A well defined product/service category
A dominant design and product standards
A market place (‘space’, organization or information highway)
A critical mass of supply and demand agents
A critical volume of transactions
A measure of stability of supply and demand
Agent interaction
A measure of reputation
Transparency of transactions
Saves transactions costs compared to an equivalent but disconnected set of transactions
Institutions and rules in relation to (i) product quality and standardization,
(ii) certification of agents, and (iii) transactions’ transparency.
Emergence involves a momentum leading to further growth and diffusion
Other relevant parameters
Thickness, frequency and recurrence of transactions
Density of agents
Formal institutions
Towards a systemic and evolutionary framework for venture capital policy 183
Table 3 Functions of a market
Basic function Links to defining characteristics and specific functions
Stability of supply Critical mass of agents and transactions volume
Agent coordination A market place, interactions, and transactions transparency
Promoting static efficiency Save transaction costs, incentives to producers, selection,
coordination, and management of risks
Promoting dynamic efficiency Signalinga
Division of labor and learning/specialization
System integration mechanisms
Converting uncertainty into risk
Drivers of improvement and disruptive technology/invention
Institutions reducing path dependence
(market demise/substitution by another market)
aBy signaling strength of the underlying need, a large market may provide a stronger inducement
to discontinuous technical change or radical inventions compared to a small market
According to Antonelli and Teubal (2009), the need for a critical mass of
supply and demand agents and of transactions volume derives from the need
to assure stability and reliability in supply and static efficiency. Thus, a market
does not materialize in coincidence with a limited number of transactions;
rather, it builds upon a substratum of prior transactions once a stable threshold
volume is achieved.
We view the role of the market as crucial not only in the allocation of
resources, but also in promoting ‘knowledge-based growth’.3The market can
contribute to growth through the incentives it generates to new inventions and
innovations, particularly adaptations and incremental innovations leading to
diffusion of generic new technologies to an increasingly larger set of uses,
sectors and product classes.4While this diffusion process is linked to lower
transactions costs, other contributing factors are collective learning and capa-
bility accumulation (Rosenberg 1963)—see Table 3.
Following this line of thinking, a VC market may emerge when a set
of previously isolated precursor transactions sparks an emergence process.
As discussed in Section 4.2, for this to happen a number of pre-conditions
are required that may be context-specific context (Section 4.1). Frequently
these will include interaction and information flow among agents together
with experimentation and learning concerning product characteristics and
user/producer organization and strategy. In some cases, these led to qualitative
3This notion presupposes a distinction between simple markets and multilayer super-markets, such
as NASDAQ, which enable participants to relate to a number of markets simultaneously thereby
better coordinating their needs to the capabilities offered.
4Innovations may affect the value chain and increase the degree of ‘roundaboutness’ in the
economy. For an analysis on these lines see Rosenberg’s study of the machine tool industry in
the US in the nineteenth century which resulted from processes of vertical disintegration and
technological convergence. It is clear from his analysis that the economic impact of the new set
of machine tool innovations depended on the creation of an industry and, by implication, a market
(Rosenberg 1963).
184 A. Rosiello et al.
and quantitative change in the shape of a new and effective intermediation
form, such as VC in the U.S. and in Israel.
4.4 Heterogeneity
The traditional approaches discussed in Section 2are also at odds with the
heterogeneous patterns of emergence of both VC markets and high-tech
clusters presented in Section 3. As noted by Mayer et al. (2003), heterogeneity
relates primarily to the types of financial institution involved, including VCs,
angels, public equities, Corporate VC, internal corporate venturing, govern-
ment R&D grants, banks offering credits to new firms, and public sources
of VC such as co-investment schemes or funds-of-funds. Heterogeneity also
concerns investee companies and the agents who provide funds to VCs, which
often results in different portfolio characteristics across countries with respect
to stage, geographical scope, and sectors. Further, heterogeneity can be related
to the characteristics of the higher education system, law system, and industrial
structure of the region/country.
Keuschnigg and Nielsen (2003) use comparative statistics to examine how
policy can help reach equilibrium under a variety of VC-market conditions.
Other authors examine the fitness of different institutional environments to
the emergence of a U.S.-type VC market and/or use of U.S.-style VC contracts.
Black and Gilson (1998) examine the greater strength of VC in market-centered
systems. They explain it in terms of the ‘opportunity to enter into an implicit
contract over control, which gives a successful entrepreneur the option to
reacquire control from the venture capitalist by using an initial public offering’
(p. 1). The presence of a stock market for high-tech SUs is a crucial but not
sufficient condition, since the emergence of a ‘strong venture capital market
reflects an equilibrium of a number of independent factors’ (p. 40).
Lerner and Schoar (2005) argue that U.S.-style contracts are more suitable
for ‘common-law’ countries, essentially because investors can achieve minority
shareholder control without a controlling equity stake. Enforceability is a
central notion, as the use of similar contractual provisions declines when the
authors consider declining enforceability in developing countries. However,
Kaplan et al. (2004) argue that in Europe U.S.-style contract are used across a
range of legal systems, even in places with non-common-law tradition. The
effectiveness and frequency of this practice, however, depends on the VC
firm’s experience. Black and Gilson (1998) and Becker and Hellmann (2003)
add that cultural differences and alterations of the business environment, such
as global or national financial crisis, can play a significant role, not only across
countries but also at different points in time (Sunley et al. 2005).
4.4.1 Post-selection heterogeneity
There are clear path dependencies (Arthur 1994) that shape VC markets even
during pre-emergence. The Israeli experience provides several examples. To
start with, from the failure of programs such as Inbal, policy-makers realized
Towards a systemic and evolutionary framework for venture capital policy 185
Fig. 1 Scottish life science
strategy—a sample of policy
measures
the need for a domestic LP-based VC sector to support SUs and learned how to
trigger such an event. This process was later reflected in the design of Yozma,
a VC policy that was not conventional in 1993. Another instance was the
Government of Israel’s decision in the mid 1980s to cancel the Lavie fighter
plane project, whose enormous cost and utilization of critical labor might have
partially blocked civilian oriented ICT invention (a backbone of Israel’s high-
tech cluster of the 1990s). Thirdly, the timing of Yozma assured on the one
hand sufficient maturation of domestic pre-emergence conditions while on the
other hand, sufficient time for a high impact VC market to emerge before the
global crisis of year 2000.
On the other hand, the Scottish case shows that a VC-led profile, while
having been so in the case of Silicon Valley and Israel, is not the only possible
profile of emergence. Indeed, the institutional context and organization of
finance may differ across regions or countries, and this may affect the dominant
forms of VC organization and the dynamics and profiles of emergence (Fig. 1).
We conclude that the existence of heterogeneity in the sense of post
selection variety is a central point in evolutionary perspectives to VC and VC
policy. We are interested in analyzing its nature and sources, both during pre-
emergence and emergence of a VC market and associated cluster. In principles,
the heterogeneity found during the pre-emergence phase is common to both
the evolutionary and the traditional approaches to VC and VC policy. This
follows from the fact that a significant part of the traditional analysis is part
of that phase in an evolutionary framework (Section 3). Hence, the sources
of heterogeneity in the evolutionary model include the views discussed in this
section and others relating to VC market emergence (see Sections 4.2 and 4.3).
5 Summary and conclusions
The motivation for this paper was the differential performance of VC policy
across countries, and some differences in the policies adopted, up to the first
half of the 2000s. We surveyed VC policies in Scotland and in Israel (and more
186 A. Rosiello et al.
briefly in the UK and Germany) and pointed out key differences in approaches
and impacts. Throughout we made a distinction between VC-directed policies
and VC-related policies, such as institutional change, support of business
sector R&D, and science and technology infrastructure.
We also surveyed post-2000 theoretical perspectives on VC and VC policy
and discussed the differences between traditional approaches and the evolu-
tionary perspective that inspires this paper. The latter perspective helped us in
the interpretation of the UK/Scottish and Israeli cases.
A major focus of the paper was to point out some limitations of the
traditional approach to VC and VC-policy, including a static and equilibrium-
oriented thinking; a VC policy focus on overcoming market failure in the
financing of SUs; and, with some exceptions, an emphasis on remedying such
failure via financial incentives or institutional change. The traditional approach
often implies that those types of policy are sufficient to overcome market
failure and will lead to a VC market. Moreover, because of the commonalities
in the instruments used and innovation system components that are being
affected, and the view that emergence of a VC market is a likely outcome,
the traditional approach also seems to indicate that some mild form of one size
fits all VC policy is possible, independent of context and whatever the set of
available capabilities.
Such conclusion does not seem to be empirically acceptable since VC
policies have a wide diversity of impacts. This led us to explain the differences
between post-2000 traditional and evolutionary approaches. First, contrary
to the evolutionary approach, the traditional approach assumes an abstract
definition of a market, a view where a policy-relevant market will automat-
ically be created once market failure is overcome, with no discussion of the
dynamics of such creation. In fact, since VC policy is seldom linked to high-tech
cluster policies, no distinction is made between the market that was generated
from overcoming market failure and the entrepreneurial high-tech cluster. In
this respect, a critical omission of traditional views is not considering that the
capabilities of both agents (VCs and SUs) and public players are crucial for the
success of VC policies.
The evolutionary perspective to VC and VC policy introduced in this paper
suggests that, in addition to traditional market failure, there may be dynamic
system failures blocking the emergence of a dynamically efficient VC market
and associated high-tech cluster. In this sense, a key aspect is the potential
complementarity of a public capital component of VC policy with private
investments. This notion presupposes strong VC-SUs co-evolution as a central
process leading to VC market emergence.
A major conclusion from the evolutionary perspective to VC policy is that
the profile of such a policy may differ from case to case and may change from
phase to phase within a particular country. In certain contexts, such as the
Scottish life sciences cluster, VC policy could be aimed at strengthening pre-
emergence conditions rather than inmediately aiming at creating a full-fledged
VC market. Some aspects of this strategy would require VC-related rather
than VC-directed policies (Teubal et al. 2007). In other cases, including
Towards a systemic and evolutionary framework for venture capital policy 187
Israel in the 1990s, VC Policy should also be directed to trigger and sustain
emergence both of a VC market and of an entrepreneurial cluster.
A major difference between a traditional or equilibrium approach and
an evolutionary approach to policy, relates to uncertainty (Metcalfe 1994;
Metcalfe and Georghiou 1998). Under uncertain conditions, it may be that
what looked like a successful adaptation of policies at a specific point in time,
may become a poor fit of a country’s policy portfolio to a changed global
environment. However, when radical uncertainty does not encompass all
possible phenomena and there are some possibilities for learning about how
to adapt to the future, policy-makers must be capable of defining policy
objectives and strategic priorities, in a coordinated way across the relevant set
of policy areas, industrial sectors and technological fields (Avnimelech and
Teubal 2008b).
At times, this strategic aspect of policy should precede (or proceed in paral-
lel with) the actual design and updating of a new policy portfolio. Moreover, by
focusing explicitly on updated policy objectives and on the links among them,
a strategic level of policy could enhance the likelihood of timely adaptations of
a country’s policy portfolio.
Finally, our evolutionary perspective entails an explicit focus on capabilities,
not only on monetary incentives and on institutions. Thus, in Israel, VC and
SUs capabilities during the 1990s resulted from innovation capacity accumu-
lated in the business sector since 1969, partly in response to policy and partly
because of defense R&D. Further, we acknowledge a very fast learning process
occurring especially after 1993 with the implementation of Yozma.
Underlying this process was the unique design of Yozma that required each
‘Yozma Funds’ to have accessed intelligent capital in the form of a reputable
foreign financial institution which acted as limited partner. It is also telling that
according to the Baygan (2003) the strong science and technology background
of VC entrepreneurs in the 1990s made the Israeli VC market more similar to
the U.S. VC market than to that prevailing in Europe at the time.
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