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Venture capital is a form of intermediation particularly well suited to support the creation and growth of innovative, entrepreneurial companies (Hellmann and Puri (2000, 2002), Kortum and Lerner (2000)). It specializes in financing and nurturing companies at an early stage of development (’start-ups’) that operate in high-tech industries. For these companies the expertise of the venture capitalist, its knowledge of markets and of the entrepreneurial process, and its network of contacts are most useful to help unfold their growth potential (Bottazzi, Da Rin and Hellmann (2004), Gompers (1995), Hellmann and Puri (2002), Lerner (1994, 1995), and Lindsey (2003)). By contrast, when venture capital is applied to companies at a later stage of their growth, or in companies which operate in technologically mature industries, it has less of an opportunity to ’make a difference’ (Michelacci and Suarez (2004)). Economics thus points to the relevance of providing an adequate share of venture investments in high-tech and early stage companies.

The creation of ’active’ venture capital markets, i.e. venture capital markets which provide strong support for early stage and high-tech ventures has received a high priority by economic policy, which appreciates its importance for achieving continued economic growth and job creation ((Bottazzi and Da Rin (2002a), European Commission (2003), OECD (2001)). As economies become ever more dependent on innovation and entrepre neurship for achieving sustained growth (Bottazzi, Da Rin, and Giavazzi (2003), Nelson and Romer (1996), OECD (2001)), governments around the world have been trying to replicate the diffusion and success that venture capital has achieved in the United States (Megginson (2004)). These attempts absorb large sums of public money. Yet, we still know very little about what policies can help create active venture capital markets, and our study contributes a first step towards filling this gap.