Equity Gap and Innovative SMEs

The debate concerning the financing of Innovative Small and Medium Enterprises (ISMEs) finds that these firms face an equity gap, or in other words, a shortage of risk capital investment. The aim of this chapter is first and foremost to define the concept of the equity gap within the broader concept of the financing gap. We will then investigate the causes of this phenomenon, with specific reference to ISMEs in the start-up and early/sustained growth stages. As we will see, studies on both the demand and the supply sides of the market for risk capital investment in this type of firm reveal that the equity gap is due to market failures, arising above all from information asymmetries. To conclude, we will analyse and assess the methods developed for measuring the equity gap and present empirical evidence obtained from various contexts, with a particular focus on the United Kingdom. The problem of measuring the equity gap for ISMEs, as well as the reliability of the data obtained on its size and characteristics, is especially important at present, since policy makers are currently directly involved in planning public intervention strategies and forms of public-private partnership intended to reduce the scale of the problem. The clear market failures and the importance of ISMEs for economic growth underline the necessity for public measures and public-private partnerships to bridge the equity gap.