Venture Capital and the Financing of Innovation

Innovation is associated to high cost and high level of risk. Many firms cannot finance this activity with internal financial resources. They need outside investors to finance their innovative projects. Venture capitalist funding seems to be an appropriate alternative especially when the firm is young. In this paper we study the relationship between a firm's innovation activity and venture capital. We have used different databases on innovative activity and venture capital financing in France's manufacturing sector for the period 1993-2006. First we examine the effect of venture capital financing on innovation, and second the impact of firms' innovation on venture capitalists' behaviour towards these firms. Our results show that the presence of venture capitalists enhances the innovation intensity of a firm. Furthermore we find that SMEs profit more from VC contribution than biggest one.