Venture Capital, the Right Mix!

Abstract

There is, surprisingly, a paucity of current (American) academic literature on why certain capital markets have been more conducive to the growth of venture-capital, whereas in other (advanced) capital markets venture-capital has not been able to secure a foothold. Writing almost two decades ago, Gilson suggested a link between an active stock market and a strong venture-capital market. A different viewpoint was presented by Curtis Milhaupt in his article published in 1997, where he explored the linkage between corporate governance and innovation by examining the legal rules and institutional settings in Japan and the US for venture-capital. For Milhaupt, the differences between the US and Japanese venture-capital markets could not be explained simply as a function of market liquidity, and depended on the different corporate governance characteristics of the two systems. Fast forward to 2019, and whilst venture-capital investment in Japan continues to remain low, Germany (a bank-centered capital market system) is the new hot-bed for venture-capital activity. This article explores both Gilson's and Milhaupt's viewpoints and presents an alternative explanation. As growth of venture-capital in India and Germany have shown, so long as there is a conducive environment for a pool of entrepreneurial talent to develop (be it because of proximity of educational institutions such as the IITs in India, or because of affordability and hip sub-culture, as in Berlin), there is fodder for venture-capitalists for spurring innovative enterprise.