ABSTRACT
This chapter presents theoretical model that shows a simple way the plausible reasons for a decline in venture capital in supporting innovation, and outlines the crucial problems of this form of external financing. It is important to underline that venture capital activity includes, but is not confined to, new technology financing. Relevant phenomenon in the United Kingdom venture capital market is that of the geographic concentration in restricted areas of the activity of both real and financing units which operate in innovative sectors. The chapter presents encompassed model that provides a formal framework capable of explaining all relevant phenomena and connecting the explanations to the rationales often quoted in literature. The "encompassing" representation indicates how positive spillovers may arise in a game between an innovating unit and a venture capitalist unit. The possibility for the innovating unit to be financed while maintaining full property rights on the venture is precluded by the "small ticket" problem of the financier.
