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investors. The objective is to provide a wide choice of financial solutions tailored to complement existing national schemes.9 The EIB provides also venture debt as a next step for firms that have already raised venture capital and need additional financing to accelerate growth. Typical use cases include scale-up from pilot to mass manufacturing, further development of products or services through research and development, and international expansion. Also, the European Scale-Up Action for Risk Capital (ESCALAR) pilot program was launched in 2020 by the EIF, specifically for scale-up companies. Developing the venture debt market is a key element of closing the gap of E.U. scale-up funding relative to the United States.10 All these instruments are very much in line with those needed by HGEs and several European unicorns (startups that have reached a market valuation of over $1 billion) have emerged from EIF financing programs.11

Another modern success story is the development of the venture capital industry in Israel (Avnimelech & Teubal, 2006). Israel’s VC industry is now the global leader on a share-of-GDP basis, and was developed by a government-targeted program. The government set up the industry, overcoming market failures (such as critical mass and asymmetric information), and then withdrew once the VC industry had developed momentum of its own.12 An important feature of this success story is that the government got the incentives right for investors: strong upside incentives (with a five-year option to buy the government’s share at cost), although there were no guarantees against downside losses. Regarding grants for high-growth firms, McKenzie (2017) describes the YouWIN! scheme in Nigeria, according to which grants for high-growth entrepreneurs were randomly allocated to entrepreneurs who had passed some initial preselection stages. Randomization of grants is a simple and powerful tool for distributing grants, that recognizes that the differences between preselected candidates may be small compared to the decision costs (and fees for committees), and also that grant awards may be subject to favoritism or corrupt decision-making. Instead of government bureaucrats picking winners, randomization could provide a fast and transparent method for allocating grants. An added bonus is that randomization makes it easier to identify the causal effects of treatment in the subsequent stage of program evaluation.

9For the list of EIF’s partnership with leading national institutions see Country and sector-specific initiatives (Funds-of Funds and Guarantee Debt funds) at eif.org. 10The European Investment Bank had signed €2.1 billion worth of transactions as of 2019, being the largest venture debt provider in the European Union (EIB, 2019). During 2020, the EIB tripled the direct venture-debt financing to biotech and life sciences companies, as a Covid-19 support (EIB, 2021). 11Europe now counts 52 venture-backed high-tech unicorns and 28 of them are supported by the EIF. This year, 17 were born and 34 raised more than €6 billion in total (EIF, 2021) 12This touches upon another important point: “policy liberalization as a long-term goal” (Elert et al., 2017, p. 5). The goal is not for policy to stay forever, but to pull out once the market failures are overcome and the activities are set up and sustained by market forces.

289Policy Instruments for High-Growth Enterprises

HGE Policy Instruments: Areas for Improvement

Various authors have suggested that boosting the overall rates of entry will lead to more high-growth enterprises, as if increasing the pipeline of entrants will mechanistically lead to a higher number of HGEs (assuming that the conversion rate of entrants to HGEs remains constant). This has resulted in policies seeking to enable entrepreneurs to start their business in a cheap and fast way (Branstetter et al., 2014). However, lowering the barriers to entry will probably only lead to a higher number of lower-quality firms entering (Branstetter et al., 2014; Conti & Roche, 2021). Relevant here is the observation that the better-performing startups tend to choose the legal form of being “incorporated,” which is more expensive than other legal forms such as “sole trader” (Åstebro & Tåg, 2017)—hence making entry cheaper could simply lead to more low-quality sole-trader-type entrants. In general, there is a trade-off between quantity and quality. Countries with higher self-employment rates have lower GDP per capita (Henrekson & Sanandaji, 2014).

In the area of high-growth entrepreneurship, it is crucially important to get the incentives right. Government venture capital funds therefore need to avoid overprotecting investors from the risks of VC investment, even if these investors ask for protection. If losses are heavily guaranteed, while upside incentives are capped at a moderate level, then venture capital schemes can be expected to perform poorly (Gilson, 2003). Also, examples of negative outcomes have been documented in which the VC portfolio firms were managed in a passive rather than active way, with fund managers engaging in minority investments without important control rights, and without provision of mentoring or technological or managerial assistance (Gilson, 2003; Avnimelech & Teubal, 2006; Avnimelech et al., 2010).

While entrepreneurs may request lower tax rates, nevertheless lowering tax rates will not necessarily lead to more HGEs. Tax cuts for capital gains, for example, are unlikely to stimulate additional entrepreneurial activity in a cost-effective way when they are mainly claimed by retiring entrepreneurs who were largely unaware of the scheme when they originally invested (Corlett, 2018). In addition, favorable tax treatment (e.g., inheritance tax relief) for family firms has been identified as a way of allowing low-productivity family firms to continue operations as “zombie firms” even if they earn below-market returns (Bloom & Van Reenen, 2010; also Bloom et al., 2012). Some other areas for improvement can also be mentioned (OECD, 2013). First, if a program changes its objectives too frequently (e.g., regarding the technological focus of portfolio companies), this can be an obstacle for stakeholders’ development of skills and capabilities. Second, support programs that are perceived as being excessively bureaucratic and slow, with long waiting times for startups from first contact to actually receiving support, could deter high-quality startups. Another bureaucratic hurdle could be that, as a business evolves and pivots and redefines its activities, administrative tracking of these businesses should give them space to maneuver flexibly without requiring excessive official authorization and bureaucratic red tape.