Policy design in practice: how 'premium' demand-side programs can bridge the financial gap

Abstract

New potential high-growth firms, for example new technology-based ventures, represent the vast majority of economic growth and job creation caused by new firm creation. However, these firms often experience difficulties in raising a sufficient amount of capital, which justifies governmental intervention. We provide an overview of difficulties associated with the financing process of potential high-growth firms, and introduce a holistic, conceptual framework, illustrating the dynamics between supply-side and demand-side intervention in private capital markets. Furthermore, we study two demand-side programs that increase firm quality through value-adding activities provided by industry professionals . We examine how these programs (1) are able to pick winners at such early stage of a firm life cycle, (2) make winners through providing business support that reduces firm uncertainty, making them investor ready, and (3) sell winners through reducing information asymmetries in the investment process and trigger investments from private equity investors. Based on our insights, we revise our framework and provide policy makers a conceptual model that can help them identify constraining factors and design schemes thereafter. We argue that governmental programs need to be designed in a value chain of programs that address different stages in the life cycle of early stage companies. Furthermore, industry professionals need to be attracted and incentivized to participate in demand-side programs as they have the ability to identify and tackle crucial areas of firm uncertainty. Lastly, we argue that a significant amount of funding is necessary to produce significant contributions suggesting that policy makers should prioritize a small number of firms when designing programs with the purpose of fostering high-growth firms.