By Elisabetta Gualandri, Valeria Venturelli

This ebook explores the concept that Europe's development difficulties might be as a result of weaknesses in capital markets and within the entry to chance capital. It addresses the overview of the monetary wishes and constraints of start-up enterprises and the way those could be bridged. The function of public quarter intervention is analyzed, targeting overseas most sensible practices.

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In the initial stage, costs continue to rise while sales are basically low, leading to growing capital intensity. This stage, therefore, involves both the highest level of operating risk and the need for large amounts of financing, which in most cases must be met from outside sources. In the early growth stage, the level of operating risk gradually decreases, while the financial demand continues to be high, due to the need to fund a distribution network, the high capital intensity required for investments in production capacity and the rapid growth in operating capital.

This implies more difficulty than conventional firms experience in the rapid achievement of a positive cashflow. This sector consists to a large extent of high-tech firms. Innovative firms have high risk levels (Hall, 2002): not only are these businesses in their early stages, but they are also types of business which often require investments with particularly uncertain outcomes and with fairly long time-scales. Innovative business requires a complex process, often with rapid swings in performance, where the lack of adequate financing for one stage in the life cycle may put the survival of the entire project at risk.

Reducing the level of information asymmetry ex ante through these practices becomes more complicated in the case of innovative projects. Signalling theory suggests that potential contractors with the most information to offer have an interest in signalling the quality of the proposed investment to the other party in order to overcome the negative effects of adverse selection. 5 Firms are reluctant to provide full information about a project’s innovative content if this is their main competitive advantage (Bhattacharya and Ritter, 1985; Anton and Yao, 1998).

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