Determinants and effects of Venture Capital and Private Equity ...

1. Introduction
In the few last decades there has been an increasing emphasis on the dynamism of small
medium enterprises (SMEs), as a major source for speeding up the economic path which
coupled with a greater focus placed upon the efficiency of financial markets in meeting the
needs of these businesses. In the specific case of Italy, whose economy has always taken
advantage of the wealth produced by the industrial districts, this interest should be particularly
binding.
On the one hand, several studies have shown that small‐medium enterprises count for a
product innovation rate more than proportional in regard of R&D formal activities, what
explains their high development rates. In particular this is true for high‐tech and industrial
enterprises (Audretsch, Santarelli and Vivarelli 1999). Moreover, Thurik et al. (2002) show that,
as for 18 OECD countries, higher level of entrepreneurship comes with higher rate of growth
and lower unemployment. Furthermore, studies on regional development are in favour of
young and small firms devoted to innovative business as the leading components in the
economic growth of those areas 1 .
On the other hand, the availability and cost of finance is one of the factors which affect the
ability of a business to grow. Carpeter and Petersen (2002a) showed that in a panel of more
than 1,600 US small firms, the growth of most of them is constrained by internal finance,
together with a small leverage effect. In contrast, the small fraction of firms that make heavy
use of new share issues exhibits growth rates far above what can be supported by internal
finance. In particular, the phase which separates the identification of the innovative project
from the marketing of the product appears to be crucial. In part because they do not have the
financial and other resources to withstand a sustained period of poor performance, the rate of
disbandment among small organizations is quite high, so that a potential investor might see the
prospected returns reset to zero as a likely outcome. Accordingly, when looking for external
capitals a small business may be exposed to the rationing of funds because it lacks of a long
track record, a fact that makes the evaluation more difficult.
From the perspective of a new entrepreneur, venture capitalists (VC), acting as professional
investors with a deep knowledge of the market based on former managerial experience, are
often the only available source of financing to start up a company, especially in those cases
where intangible assets are at the core of the business. Additionally, their involvement usually
implies sharp changes to both corporate governance models and relations with stakeholders,
factors which are perceived as basic starting points for better future performance (Hellmann
and Puri, 2002); the latter are common features shared with private equity firms (PE) which
1 As for United Kingdom refer to Hart, Hanvey, (1995). Callejon and Segarra (1999), point out a positive relation
between start‐up and the growth of Spanish regions and industries.
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