Supporting the pre-commercialization stages of technology-based firms: The effects of small-scale venture capital

Abstract

A large number of studies discuss the financing of small firms from the perspective of bank loans and different forms of venture capital. In this paper, a form of financing that is rarely touched upon in studies is discussed, namely, small-scale capital up to 500 KSEK (1 US$=7.9 SEK) that is provided in the form of soft loans or grants in the very early stages of a firm's development. Drawing upon a sample of 48 firms located in Swedish Science Parks, the authors mapped what the firms used their subsidies for (e.g. development of a business plan or a prototype and marketing). Particular emphasis was paid to the outcome of the financial support. Two main effects were found to be significant. First, the money was spent on activities that enable the companies to establish customer contacts as part of a process of successful market introduction. Second, the mere fact of selecting companies is widely regarded as an indicator of the selected companies' integrity and high potential by private investors and business partners. Thus, the reputation and network position of the young venture is leveraged.