Seed Funding for Innovative Ventures: a Survey of Public Finance

The purpose of this paper is to describe and analyse the mechanisms by which innovative new ventures receive publicly funded financial support. It suggests that ‘soft’ and informal small-scale financing provided to new firms and idea owners are important in encouraging entrepreneurs in the start-up process, especially in gaining additional financing for the business. As governments provide increased public sector funding to assist entrepreneurial activity, it is important to understand and analyse the key factors that have influenced the rationale in supporting new businesses. The study has used quantitative methods, e.g. statistical analysis, using SPSS. The results presented are drawn from a Swedish database containing 5839 applications for public soft loans during a period of almost ten years. The database is created from a dataset provided by Sweden Innovation Centre (SIC) covering the years 1994 to 2003. The analysis shows, first, that specific variables such as legal form and industry strongly affect the decision by which governments provide funding to new businesses, and second, that both expressed and tacit selection criteria have affected the process that determines which ideas gain support. INTRODUCTION Many European countries are pursuing policies to increase the number of individuals interested in starting out new ventures and the quality of these ventures (Storey and Tether, 1998a; Bennett and Robson, 2003). In order to stimulate such developments, most European countries use various forms of financial support tools (Lindholm-Dahlstrand and Cetindamar, 2000; North et al., 2001) including seed capital (which is used in the earliest stages of venture development) and public sector sourced financial support (which is usually supplied on a non-equity basis). This small-scale provision (up to k€ 45) to new ventures can include direct financial support in the form of soft loans and subsidies, as well as indirect support mechanisms such as entrepreneurship training and incubator development (Klofsten et al., 1999; Oakey, 2003). According to studies such as Klofsten et al (1999) and Lerner (2002), firms in receipt of grant-funded financial support often increase their credibility in attracting further complementary financing from other sources. In addition, small amounts of money provided to new ventures in the first phase of development can be important in motivating business growth, as this funding is often perceived by the entrepreneur as proof that a third party has evaluated the idea and supported its development. Even