law, innovation and strongfinancestrong a review - altassets.pdf

Preliminary Draft 4 March 2002 Law, Innovation and Finance: A Review John Armour Centre for Business Research, Cambridge University Abstract Venture capital is used to finance a small minority of companies with the potential and ambition to grow rapidly. It is thought to be of disproportionate importance in stimulating innovation. Start-up companies with new business ideas and high growth potential, but lacking liquid assets, may be unable to obtain bank finance because of the high risk they present. Venture capital involves the supply of equity finance—so the investor shares in the benefits of high growth—along with “hands-on” governance so as to assist in bringing about the success of investee companies. A number of recent national and EU initiatives have sought explicitly to encourage innovative firms and venture capital finance. In keeping with the policy debate, this paper focuses explicitly on the role of law and lawyers in facilitating venture capital: that is, both supply by investors, and demand by entrepreneurs. It reviews existing literature in a way that seeks to clarify the links between law and legal institutions and the facilitation of venture capital finance, identifies open research questions and suggests a number of hypotheses. As such, it forms the first part of a wider study which will seek to test these hypotheses. Comments Welcome Address for Correspondence: John Armour Centre for Business Research Cambridge University Top Floor, Judge Institute of Management Trumpington Street, Cambridge