A Life Cycle Model for the Creation of National Venture Capital Industries: Comparing the U.S. and Israeli Experiences

Since its inception, the venture capital industry has experienced cycles. During the growth phase of each venture capital (VC) business cycle, local and national governments in various countries initiate policies aimed at establishing VC industries as part of an economic development strategy. Invariably, there is a proliferation of ill-advised policies similar to the ones tried during the previous phase. Not surprisingly, in a large number of cases, the 'new' policies to foster VC meet with minimal success or fail outright. While the causes of failure are undoubtedly multiple, there is ample room for believing that often the policies were based on an incomplete understanding of the roots and dynamics that have led to the development of self-sustaining national VC industries. This paper uses historically informed case studies of Israel and the U.S. to develop an appreciative model of how the VC industries in these two nations came into being.' This perspective can provide scholars and policy-makers with a grounded understanding of the emergence and development of the VC industries. This paper synthesizes detailed discussions of the evolution of the VC industry in the US and of Israel into a common theoretical perspective that could serve as a template for examining the emergence of VC in other nations. The identification of where in the evolution of its VC industry a nation is could lead to policy prescriptions better matched to the state of the industry.