Market Failures of Start-up Financing

Erika Jaki, Endre Mihaly Molnar and Gyorgy Walter
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Erika Jaki: Corvinus University of Budapest, Corvinus Business School, Hungary
Endre Mihaly Molnar: Corvinus University of Budapest, Corvinus Business School, Hungary

from University of Primorska Press

Abstract: Young companies with growth opportunities face serious problems when it comes to financing. The private venture capital (VC) market fails to provide sufficient funding for this segment. First, we present the main characteristics of start-up companies and market failures that can lead to government intervention. These failures include asymmetric information embodied in the business plan; high transaction costs of the investment process from the investment decision to the exit; and positive externalities in the economy, as the government prefers other goals than profit realization. Government participation is categorized as direct or indirect intervention. We present international studies showing that indirect government intervention can have also beneficial and negative effects on the VC market. Finally, the Hungarian government’s participation and intervention are evaluated on the domestic VC market.

Keywords: venture capital; state involvement; EU funds; seed stage; start-up (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:prp:micp17:335-346

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