Home > Topics > The Public Sector and Entrepreneurship > What the Public Sector Should Know about Venture Capital > Editor's Summary, Implications and Best Practices

This chapter advances the premise that, rather than venture capital driving the creation of new companies, it is the creation of new companies that drives venture capital. Research institutions and the policies of governments can both influence the creation of new companies. The chapter seeks to inform those in public research institutions and government policymakers about the role that venture capital can and does play in technology based entrepreneurship, and the types of environments that can encourage entrepreneurship and thereby attract venture capital.

Venture capital is a specific sector of the financial industry that channels investment from institutional and private investors, corporations, pension funds, and government agencies into venture funds that in turn invest in portfolios of equity in new companies. The model is essentially one that spreads out and shares the technology risks involved in each of the individual companies. It also seeks—to the extent possible—to reduce the risks involved by specializing in a certain field of technology where the venture fund’s management has expert knowledge. Venture capital may also be actively involved in the management of the companies, participating on the board and even providing business services. In return for bearing and managing such risks, venture capital fund expect to achieve sufficiently high internal rates of return, typically between 20 and 40 percent.

The availability of financial capital is not the limiting factor. Individuals and institutions with interests in investing in growth opportunities can be found worldwide—including developing countries. While venture capital is highly concentrated geographically to a few locations, such as California, Massachusetts, and New York, the fundamentals of success, as laid out by the chapter, are simple enough for other regions to emulate: the formation of new companies in an environment that increases their probability for success. Thus, the two essential pieces that need to be provided are:

1. Planting the “seeds” of new companies—encouraging skilled people with new ideas to develop those ideas.
2. Creating an environment favorable for entrepreneurship and success. Universities and research institutes can plant the seeds, while government policies can shape the environment.

A favorable environment for creating and growing new companies consists of:

• an encouraging business culture (one that rewards success and treats failure as a learning opportunity)
• access to intellectual capital (such as that flowing from universities)
• sufficient financial capital
• reliable physical capital (facilities, laboratories, communications)

These are enhanced if a region enjoys a low cost of living and a high quality of life. While governments cannot legislate entrepreneurship, they can encourage it by providing a favorable environment. Once enough companies exist, they will themselves further transform the environment, attracting or creating the skills and capital that can develop into a technology cluster. Ultimately, the practice of venture investing is a skill in-and-of itself. It can be imported to a region or country until it has been mastered by investors locally. Indeed, this chapter clearly implies that the next stage in the growth of the venture capital industry is to spread globally into new regions.

Key Implications and Best Practices

Given that IP management is heavily context specific, these Key Implications and Best Practices are intended as starting points to be adapted to specific needs and circumstances.

For Government Policymakers

• While governments cannot legislate entrepreneurship, they can encourage it by providing a favorable environment. There are numerous tools and policies available for doing so.
• The availability of financial capital is typically not the limiting factor in driving entrepreneurship. Venture capital does not drive the creation of new companies; rather, newly created companies attract venture capital.
• Venture capital is but one key component within a larger set of processes that encompass technology based entrepreneurship. When all of the processes are present and functioning effectively, companies will be formed, venture capital will flow, and a technology-based economic cluster may be able to coalesce and grow.

For Senior Management (university president, R&D manager, etc)

• Venture investing in agriculture and health is particularly challenging, as the number of attractive markets are limited, margins are small, and the number of acquisition opportunities for small agricultural companies is limited. In essence, the risk of investment is too high for venture investors to survive.
• In order to attract venture capital into the agricultural sector, public sector institutions need to take steps to reduce the risk of investing in agricultural technology projects, primarily by making more public investments in applied or translational research, thereby reducing the technical and market uncertainty around potential new agricultural and health technologies.

For Scientists

• Venture capital investors combine a broad view of the market with solid technical expertise. You will need to be prepared to convince them of not only the technical merits of your research, but also be able to understand that they are looking at many other factors as well.
• Venture capital investor can be a great ally, but will also impose very distinct conditions on the project. Hence, be open, patient and willing to work with them.

For Technology Transfer Officers

• When licensing to or creating new ventures, several key attributes are essential to attract venture capital investment. These are a strong management team, a viable technology, a strong IP position, a large potential market, and location in an environment favorable for entrepreneurship.
• Your institution can serve as the seedbed for new companies that will then attract venture capital. Work with your skilled scientists by cultivating their talent, harvesting their ideas, and then promoting their inventions.