Academic journal article The George Washington International Law Review

Engineering a Venture Capital Market and the Effects of Government Control on Private Ordering: Lessons from the Taiwan Experience

Academic journal article The George Washington International Law Review

Engineering a Venture Capital Market and the Effects of Government Control on Private Ordering: Lessons from the Taiwan Experience

Article excerpt

I. INTRODUCTION

The basic concept of venture capital is quite simple: a number of investors pool their money to create a venture capital fund. The investors entrust management of the fund to a professional manager who selects and monitors the fund's investments. The companies in which the fund invests are called portfolio companies. Ideally, the portfolio companies eventually provide their venture capital investors with a healthy return. The venture capital fund, in turn, is then able to provide its investors with a return on their investments. The fund manager is compensated for her expert management.

In recent years, considerable attention has focused on the contributions a venture capital market can make to the growth and development of high-technology industries. It is widely agreed that venture capital investment is particularly suited for high-risk, potentially high-return business ventures.1 Investors with no particular expertise in technology can still invest in technology enterprises by entrusting their money to professional fund managers who have experience in high-technology investment. The venture capital fund and the fund manager thus provide the investor with an avenue to potentially lucrative investment opportunities that would not otherwise be available to her because of a lack of expertise. The investor receives the benefit of the fund manager's experience and knowledge and the fund manager is compensated for her efforts.2 An important result of the interaction between the investor and fund manager is the injection of sorely needed capital into relatively risky start-up and emerging technology companies. Capital would not otherwise be available for these emerging companies without the relationship between investor and fund manager because it reduces the transaction costs of these more riskladen investments. In addition, venture capital funds provide portfolio companies with management advice and access to better suppliers, lenders, employees, and investment bankers.3 The particular ability of the venture capital market to provide both financial and non-financial resources to high-risk, high-tech ventures makes the creation of a successful venture capital market so attractive to many countries.

As nations around the world have become aware of the contributions venture capital can make to the economy and, in particular, to the growth and development of innovation and high technology, they have become interested in developing their own venture capital industries. In the United States, the venture capital industry emerged and developed as a result of market forces, not in response to specific government efforts to create a venture capital market.4 Other nations seeking to create venture capital markets, however, may encounter certain historical, political, economic, and legal path dependencies that serve as obstacles to the organic development of a venture capital market. Professor Ronald Gilson has posed the question: What can a government do to promote the successful development of a venture capital market?5 He suggests that a government should play a specific role in the engineering of a venture capital market-namely, solving the simultaneity problem when market forces are not likely to do so.6 The simultaneity problem, as defined by Professor Gilson, is that a venture capital market requires the "simultaneous availability" of three inputs-capital, financial intermediaries, and entrepreneurs-each of which will emerge if the other two are present.7 Professor Gilson suggests that a government attempting to engineer a venture capital market should promote the development and creation of the three inputs, but concentrate its efforts on the development of the first two-capital and financial intermediaries.8 Professor Gilson suggests that "the presence of a venture capital framework [i.e., capital and specialized financial intermediaries] . . . will induce entrepreneurs to reveal themselves. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.