RESPONSIBLE ENTREPRENEURSHIP VISION DEVELOPMENT AND ETHICS

Impact of risk capital on stimulating innovation: case of Azerbaijan 337
the VC funding have concluded that this type of financing positively effects firms’ innovation
and R&D focus and is highly likely to lead patenting as well (Engel & Keilbach, 2007;
Da Rin & Penas, 2007).
Asta et al. (2015) argues that in addition to providing much needed funding to startups,
VC-backed firms increase in professionalism in human resource management, in innovation
creation potential and gain an upward trend in firms’ performance indicators such as number
of employees, turnover and, solvency ratios. Moreover, selection of early-stage funding
is quite crucial for entrepreneurs.
Schwienbacher (2012) highlights some important reasons to watch out during early-stage
investor selection process for the startups and argues that specialist investors outperform generalist
investors in this stage of funding.
In the case of Azerbaijan startup ecosystem, very little risk capital is available. The National
Fund for Entrepreneurship Support which is founded to provide financing for nonoil business,
ICT Fund, and Azerbaijan Investment Company that is to support nonoil business by
equity investments are the only government initiatives available for businesses. Lack of financial
resources brings about weak financial system where companies have limited access to
financing opportunities. As a result startups face difficulties in raising capital for expansion.
Surveys show high interest rates, heavy collateral requirements as well as lack of risk capital
are often listed as one of the main issues companies face while borrowing in Azerbaijan
(Kuriakose, 2013).
Lerner and Kortum (2000) analyzed the impact of venture capital on innovation and how
legislative change led to an increase in funding opportunities of VCs in the United States.
They analyzed 1979 policy change regarding Employee Retirement Income Security Act in
US that enabled pensions to be invested in VC which after 8 years accounted for over 50 percent
of total VC fund supply. Prior to this change, pension funds could not be invested in
high-risk ventures. Venture capitals have been credited to be more effective than traditional
corporate R&D in terms of their impact on innovation.
After brief review of reasons why startups need financing and a brief literature review
what challenges they encounter during fund raising we overview the source of financing available
for them in the next section.
Sources of funding
Current trend once again proved that share of the risk capital is growing very rapidly in
financing start-ups worldwide (0). Different sources of funding in start-up lifecycle are given
in Figure 1in the ascending order according to the amount provided at each stage of start-up.