Young innovative firms face many difficulties accessing seed and early-stage finance and these difficulties have increased over the past several years. Banks have been reluctant to provide loans to start-ups as a result of the financial crisis. Meanwhile, venture capital firms have become more risk averse and, in many cases, have focused on later-stage investments.

Angel investors have become more visible and active through groups, syndicates and networks and increasingly are playing an important role in seed and early-stage finance.37 There has been increasing concern from policymakers around the world about the growing financing gap for high-growth firms, particularly in the seed and early stage.

As a result, governments in many countries have sought to address the financing gap and perceived market failures by supporting the seed and early-stage market.38 However, the objectives behind these interventions often go beyond addressing financing gaps.

Many countries recognize the critical role that young, innovative firms play in creating jobs and economic growth and are seeking ways to facilitate the creation and growth of these firms.39 Many policy measures have been on the supply side, ranging from grants, loans and guarantee programs to tax incentives and equity instruments.

Support for all of these programs increased from 2007 to 2012 as a result of the financial crisis. However, in equity instruments, there has been a shift in focus in OECD countries from government equity funds that invest directly in start-ups to more indirect models such as co-investment funds and fund-of-funds. These later approaches seek to leverage private investment through various incentive structures.

The demand side is critical to success of seed and early-stage financing; however, it is often overlooked in favor of supply-side actions. For firms to launch and grow successfully, human capital development is important. This could be in the form of education, training and/or on-the-job experience.


Many successful entrepreneurs are serial entrepreneurs, starting more than one company. As they start new companies, they share their experience, knowledge and networks with others. There is increasing evidence of the importance of social capital, both local and global, as high-growth firms need to grow beyond national borders. International expansion and investment can be critical to the success of these firms.

The framework conditions in a country can perhaps have the most impact on the provision of seed and early-stage finance. The development of financial markets and exit opportunities, whether through IPOs on a stock exchange or mergers and acquisitions by other firms, directly influences the availability of seed and earlystage financing. Bankruptcy regulations, labor market restrictions and other framework conditions also impact the creation and growth of innovative firms.

Regulatory barriers and administrative burdens on institutional investors, venture capital funds, angel investors and high-growth firms can have a direct result on the provision of seed and early-stage finance. In particular, securities legislation and more stringent capital requirements on institutional investors could reduce the supply of investment in venture capital from banks, pension funds and insurance companies, traditionally three of the largest types of private institutional investors.

Financing for innovative start-ups is complex, as different financing instruments are needed for various stages of a firm’s development. Policymakers in a number of countries have sought to address the prevailing seed and early-stage financing gaps by intervening in multiple areas simultaneously. Therefore, policy interventions should not be seen in isolation, but as a set of interacting policies. A systems approach is needed that covers both supply-and demand-side intervention as well as framework conditions. Evaluation and periodic adjustment of the specific policy instruments as well as the full policy mix is important, although it can be challenging in practice.


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