The Legal Road To Replicating Silicon Valley

Must policymakers seeking to replicate the success of Silicon Valley’s venture capital market first replicate other US institutions, such as deep and liquid stock markets? Or can legal reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 13 years of data spanning an entire business cycle. We show that the legal environment matters as much as the strength of stock markets; that government programmes more often hinder than help the development of private equity, and that temperate bankruptcy laws stimulate entrepreneurial demand for venture capital. Our results provide generalizable lessons for legal reform.

[1]  Paul A. Gompers,et al.  The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements , 1996, The Journal of Law and Economics.

[2]  Samuel Kortum,et al.  Assessing the Contribution of Venture Capital to Innovation , 2000 .

[3]  W. Fan,et al.  Personal Bankruptcy and the Level of Entrepreneurial Activity* , 2002, The Journal of Law and Economics.

[4]  Douglas J. Cumming,et al.  Crowding Out Private Equity: Canadian Evidence , 2002 .

[5]  T. Jackson.  Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors' Bargain , 1982 .

[6]  Michelle J. White,et al.  PERSONAL BANKRUPTCY AND THE LEVEL OF ENTREPRENEURIAL ACTIVITY Wei Fan , 2003 .

[7]  Josh Lerner,et al.  When Bureaucrats Meet Entrepreneurs: The Design of Effective 'Public Venture Capital' Programmes , 2002 .

[8]  Alan Powell,et al.  A Complete System of Consumer Demand Equations for the Australian Economy Fitted by a Model of Additive Preferences , 1966 .

[9]  Armin Schwienbacher,et al.  Determinants of Venture Capital Performance: Europe and the United States , 2006 .

[10]  C. Keuschnigg,et al.  Public Policy for Venture Capital , 2001, SSRN Electronic Journal.

[11]  E. Ziegel.  Introduction to the Theory and Practice of Econometrics , 1989 .

[12]  David M. Schizer,et al.  Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock , 2002 .

[13]  Paul A. Gompers,et al.  Money chasing deals? The impact of fund inflows on private equity valuation , 2000 .

[14]  Andy Cosh,et al.  ENTERPRISE BRITAIN Growth , Innovation and Public Policy in the Small and Medium Sized Enterprise Sector 1994-1997 , 2002 .

[15]  V. Kanniainen,et al.  The Optimal Portfolio of Start-Up Firms in Venture Capital Finance , 2000, SSRN Electronic Journal.

[16]  Oliver Hart,et al.  Firms, contracts, and financial structure , 1995 .

[17]  Florencio López‐de‐Silanes,et al.  Law and Finance , 1996, Journal of Political Economy.

[18]  V. Kanniainen,et al.  Start-Up Investment with Scarce Venture Capital Support , 2001, SSRN Electronic Journal.

[19]  W. A. Sahlman,et al.  The structure and governance of venture-capital organizations , 1990 .

[20]  The Structure, Governance and Performance of UK Venture Capital Trusts , 2003 .

[21]  Kenneth J. White,et al.  Introduction to the theory and practice of econometrics--a computer handbook using SHAZAM and SAS : for use with Judge-Hill-Griffiths-Lütkepohl-Lee, Introduction to the theory and practice of econometrics, second edition , 1988 .

[22]  J. Lerner.  Boom and Bust in the Venture Capital Industry and the Impact on Innovation , 2002 .

[23]  Jo‐Ann Suchard,et al.  Venture Capitalist Value-Added Activities, Fundraising and Drawdowns , 2005 .

[24]  R. Gilson,et al.  Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets , 1997 .

[25]  A. Shleifer,et al.  Legal Determinants of External Finance , 1997 .

[26]  Ian F. Fletcher,et al.  The Law of Insolvency , 1990 .

[27]  B. Black,et al.  The Legal and Institutional Preconditions for Strong Securities Markets , 2001 .

[28]  Paul A. Gompers,et al.  The Venture Capital Revolution , 2001 .

[29]  R. Rajan,et al.  Banks and Markets: The Changing Character of European Finance , 2003 .

[30]  Charles G. Hallinan.  The "Fresh Start" Policy in Consumer Bankruptcy: A Historical Inventory and An Interpretive Theory , 1986 .

[31]  Venture Capitalist.  Taxation of a Venture Capitalist with a Portfolio of Firms , 2002 .

[32]  Leslie A. Jeng,et al.  The Determinants of Venture Capital Funding: Evidence Across Countries , 1998 .

[33]  Paul A. Gompers.  Venture capital growing pains: Should the market diet? , 1998 .

[34]  Leibniz-Informationszentrum Wirtschaft.  Financing practices in the German venture capital industry: An empirical assessment , 2002 .

[35]  R. Cressy.  FUNDING GAPS: A SYMPOSIUM* , 2002 .

[36]  Antoinette Schoar,et al.  Private Equity in the Developing World : The Determinants of Transaction Structures , 2003 .

[37]  M. White,et al.  Bankruptcy and Small Firms&Apos; Access to Credit , 2000 .

[38]  Paul A. Gompers,et al.  The venture capital cycle , 1999 .

[39]  Paul A. Gompers,et al.  Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999 , 2003 .

[40]  Josh Lerner,et al.  The Government as Venture Capitalist: The Long-Run Effects of the Sbir Program , 1996 .

[41]  J. Poterba.  CAPITAL GAINS TAX POLICY TOWARD ENTREPRENEURSHIP , 1989, National Tax Journal.

[42]  A. Kirilenko.  Valuation and Control in Venture Finance , 2001 .

[43]  R. Gilson.  Engineering a Venture Capital Market: Lessons from the American Experience , 2002 .

[44]  Per Strömberg,et al.  Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts , 2000 .

[45]  J. Mawson,et al.  Employment , 1992, Between Centre and Locality.

[46]  Josh Lerner,et al.  Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances. NBER Working Paper No. 7464 , 2003 .

[47]  Paul A. Gompers,et al.  Money Chasing Deals?: The Impact of Fund Inflows on the Valuation of Private Equity Investments , 2000 .

[48]  Bankruptcy Law for Productivity , 2001 .

[49]  Allen N. Berger,et al.  The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle , 1998 .

[50]  Josh Lerner,et al.  The Government as Venture Capitalist: The Long-Run Impact of the Sbir Program , 1998 .

[51]  Christian Keuschnigg,et al.  Tax Policy, Venture Capital, and Entrepreneurship , 2000 .

[52]  Tereza Tykvová.  VENTURE CAPITAL IN GERMANY AND ITS IMPACT ON INNOVATION , 2000 .

[53]  Benoit Leleux,et al.  Public versus private venture capital: seeding or crowding out? A pan-European analysis , 2003 .

[54]  G. Reid.  Venture Capital Investment: An Agency Analysis of UK Practice , 2002 .

[55]  Douglas J. Cumming,et al.  A Cross-Country Comparison of Full and Partial Venture Capital Exits , 2003 .

[56]  M. Klausner,et al.  What Economists Have Taught Us About Venture Capital Contracting , 2001 .

[57]  C. Keuschnigg.  Optimal Public Policy for Venture Capital Backed Innovation , 2003 .

[58]  R. Becker,et al.  The Genesis of Venture Capital - Lessons from the German Experience , 2003, SSRN Electronic Journal.

[59]  Raghuram G. Rajan,et al.  Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt , 1992 .

[60]  Josh Lerner,et al.  Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999 , 2003 .

[61]  J. Hubbard.  A Cross-Country Comparison of Full and Partial Venture Capital Exits , 2003 .

[62]  J. Armour.  Financing Innovation : The Role of Insolvency Law , 2002 .

[63]  J. Freear,et al.  Who bankrolls high-tech entrepreneurs? , 1990 .

[64]  Christian Keuschnigg,et al.  Start-Ups, Venture Capitalists and the Capital Gains Tax , 2002, SSRN Electronic Journal.

[65]  Armin Schwienbacher.  An Empirical Analysis of Venture Capital Exits in Europe and the United States , 2005 .

[66]  Paul A. Gompers,et al.  The money of invention: how venture capital creates new wealth , 2001, UBIQ.

[67]  Thomas H. Jackson,et al.  The Fresh-Start Policy in Bankruptcy Law , 1985 .

[68]  Robert E. Carpenter,et al.  Capital Market Imperfections, High-Tech Investment, and New Equity Financing , 2002 .

[69]  Y. Georgellis,et al.  Entrepreneurship and the Policy Environment , 2002 .