Risk Financing for Knowledge-Based Enterprises: Mechanisms and Policy Options*

New knowledge-based enterprises have several characteristics that limit their options for obtaining financing from external sources: they have little or no collateral, their assets tend to be intangible, and the value of their innovations is hard to calculate. For these reasons, entrepreneurs in the more knowledge-intensive fields tend to rely largely on equity financing. This is a more “patient” form of capital for early stage operations with returns linked directly to firm earnings. Using examples from various countries, this paper surveys the various mechanisms for risk financing and the complementary, yet constantly evolving, roles of business angels, venture capital firms, and government programs in such financing. [Published – Science and Public Policy, 2007] a Center for Strategic and International Studies, Washington DC b Center for International Science and Technology Policy and Department of Economics, George Washington University, Washington DC ♣ Corresponding author: Center for International Science and Technology Policy, George Washington University, 1957 E Street, N.W., Suite 403, Washington, D.C. 20052, U.S.A. Tel: 202-994-6458 Fax: 202-994-1639 E-mail: [email protected] * This paper has been produced in the context of the research project “Knowledge-Based Entrepreneurship: Innovation, Networks, and Systems” (KEINS). We gratefully acknowledge funding by the European Commission, DG Research. We also want to thank an anonymous referee of this journal who provided excellent extensive comments and improved the paper considerably.