Innovation, Start-Ups and Venture Capital

Abstract

Innovation involves the creation of new and improved products, processes and services. It is about doing things in new and clever ways that increase efficiency and add value. Although Australia is a clever country that has world-class universities, respected research agencies and pioneering scientific institutes, its entrepreneurs have often struggled to commercialise their innovations. This has been attributed to a number of factors, including a lack of venture capital funding being available to start-ups. Venture capital is a scarce resource because it is an extremely risky investment that can take many years to provide returns for investors. The venture capital market is highly sensitive to economic conditions and is often disproportionately affected during downturns. Angels and venture capitalists are the two main sources of venture capital funding for start-ups. While it is the founders of start-ups that come up with the revolutionary ideas for new products and services, it is angels and venture capitalists who provide the finance necessary to develop and commercialise these ideas. Angels and venture capitalists are therefore key actors in a country’s innovation system, even though they are not necessarily innovators themselves. By providing much needed capital to start-ups, these investors share in the risks associated with these companies. This chapter discusses the importance of innovation and the critical role that start-ups play in a country’s innovation system. It also examines the nature of venture capital investment and the special roles that angels and venture capitalists play in financing start-ups.