An Integrated Approach to VC Financing Policy: 'The Plumber's Model of Entrepreneurial Finance'

Abstract

It is widely accepted by both practitioners and academics that in modern economies entrepreneurship in general and innovation based entrepreneurship in particular are maybe the most important drivers of economic growth and that economic success is highly correlated with the existence of an entrepreneurial infrastructure and a social culture supporting innovative entrepreneurs. Policy makers are interested to learn from the experience of advanced entrepreneurial economies such as USA and Israel and replicate successful models in their countries.This paper proposes a holistic policy model for formation of entrepreneurial capital. The model identifies three actions domains that determine the total investment flow capacity of the system which is equal to the minimum between the local flow capacities of each domain. Since the policy goal is to maximize the total investment capacity, the optimal marginal effort shall be invested in releasing the system temporary bottleneck at the given time.The model is tested in the Israeli innovative entrepreneurial environment in comparison with the Avnimelech and Teubal model predictions. The model proposed in this paper complements the Teubal model and is based on a causal rather than temporal approach. It also provides a tool that allows for adaptation of the Israeli methodology to the local context.