The Indirect Costs of Venture Capital in Canada

Cécile Carpentier and Jean-Marc Suret

CIRANO Working Papers from CIRANO

Abstract: Some analysts and policy makers consider that the growth of New Technology Based Firms (NTBF) is impeded by an insufficient supply of capital. In Canada, as in other jurisdictions, the public authorities have interceded to fill this equity gap by increasing the supply of funds. However, several researchers contend that this gap is mainly associated with information asymmetry that particularly affects technological firms. Agency and moral hazard problems explain why it can be time consuming and costly to get outside equity. We propose the first analysis of these indirect costs of financing. These costs are partially intangible and can be determined only through a field survey and case analyses. In this study, we identify the elements that generate indirect costs of financing and estimate the costs and time frames associated with 18 financing rounds undertaken by 12 NTBF in Quebec, where the supply of venture capital is very abundant. We show that these costs are indeed substantial and heavily penalize small companies, especially during the initial financing round and prior to the commercialization phase. Thus, the classic government intervention policies intended to increase the supply of funds may be largely ineffectual. More specific training and support actions would likely be more effective. Certains analystes et décideurs politiques considèrent que la croissance des nouvelles entreprises technologiques est contrainte par une offre insuffisante de capital. Au Canada, comme dans d'autres juridictions, les pouvoirs publics sont intervenus pour corriger cette lacune des marchés en augmentant l'offre de capital. Toutefois, la plupart des chercheurs défendent que cette lacune est essentiellement due aux problèmes d'asymétrie informationnelle, qui touchent particulièrement les entreprises technologiques. Les problèmes d'agence et d'anti-sélection qui en découlent rendent l'obtention de capital longue et coûteuse. Dans la présente étude, nous étudions les coûts et délais associés à l'obtention de capital de risque par douze entreprises technologiques, au cours de 18 rondes de financement distinctes. L'étude est menée au Québec, où l'offre de capital de risque est particulièrement abondante. Nous observons que les coûts associés à l'obtention du capital sont considérables et de nature à pénaliser les entreprises, notamment au cours des rondes initiales de financement. L'intervention gouvernementale classique, qui consiste à augmenter l'offre de capital, semble donc largement inefficace. D'autres types d'intervention, qui viseraient à encadrer et aider les dirigeants dans la recherche de fonds, devraient être étudiés.

Keywords: financing; indirect costs; public policy; SME; venture capital; capital de risque; coûts indirects; financement; PME; politique publique (search for similar items in EconPapers)
Date: 2005-06-01
New Economics Papers: this item is included in nep-cfn and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2005s-25

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