Building an EU Venture Capital Market: What About Corporate Law?

Abstract

Venture Capital (VC) propels innovation and hence economic growth. Although born as a US phenomenon, it has soon turned into a dream for policymakers around the world. VC-driven value creation depends, however, on a very peculiar capital management process that requires venture capitalists to, inter alia, negotiate with entrepreneurs a vast array of complex and interconnected contractual terms at the portfolio company level. A recent scholarship has highlighted the importance of a flexible corporate law: a rigid corporate law may increase transaction costs, impeding contract formation, and ultimately hindering VC investments. Over the last three decades the European Union (EU) has undertaken several initiatives to stimulate VC investments, but it has largely ignored corporate law as an institutional component that may affect VC investments. One possible reason for this state of affairs seems to be a narrowly-focused approach to policymaking that may stand in the way of providing a comprehensive recipe to support VC investments.

Keywords: corporate law, venture capital, financial contracting, European Union