ABSTRACT
Stable access to funding in proper ways is crucial for the growth of innovative startups and technology-based small- and medium-sized enterprises (SMEs). In past decades, these firms have relied on banks for external financing; however, after the global financial crisis, available resources from deposit-taking institutions were negatively affected. In recent years, the capital market has been considered as a complementary source of financing for SMEs and startups through equities, debt instruments, and collective investment vehicles (CIVs). Venture capital (VC) is the most common private equity financing instrument. Debt instruments (e.g., corporate bonds) are not usually used by innovative SMEs because of their lack of market liquidity, transparency, and sufficient ratings coverage. However, the shortage could be addressed by creating intermediate vehicles that combine SMEs’ bonds into funds, allowing investors to diversify their portfolios. CIVs mainly include mutual funds and play an important role in financing innovation. Some impediments exist to the complete use of opportunities provided by capital markets for financing technology-based SMEs, especially in developing countries. These barriers must be addressed by an integrated mix of policies on enhancing the demand-side (SMEs), expanding the supply-side (the investor base), and improving the market infrastructure.
