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Cord Siemon

Financing 6th Kondratieff’s Start ups: A Schumpeterian Problem Reconsidered from

an Evolutionary Perspective

Arbeitsberichte aus der KMU-Forschung der Fakultät für Wirtschaftswissenschaften der Hochschule Bremen

Herausgeber / Editors: Hans H. Bass und Dietwart Runte

Bremen University of Applied Sciences (Germany) SME Working Papers No. 2

Februar 2010

Cord Siemon

Financing 6th Kondratieff’s Start ups: A Schumpeterian Problem Reconsidered from an Evolutionary Perspective Arbeitsberichte aus der KMU-Forschung der Fakultät für Wirtschaftswissenschaften der Hochschule Bremen Herausgeber: Hans H. Bass und Dietwart Runte Veröffentlichungen in der Working Paper Series unterliegen einem peer-to-peer / double blind Reviewing. SME Working Papers No. 2 Bremen, Februar 2010 ISSN: 1869-5000 Bestelladresse: Fakultät für Wirtschaftswissenschaften der Hochschule Bremen Werderstraße 73 28199 Bremen [email protected] Schutzgebühr € 5,00

Über den Autor

Cord Siemon, Jahrgang 1969, ist geschäftsführender Gesellschafter der Ahead Management & Start up Consulting GmbH und seit 1997 – u.a. als Kooperationspartner für das Marburger Förderzentrum für Existenzgründer aus der Universität (Mafex) – als freiberuflicher Dozent, Coach und Berater tätig.

Nach Abschluss einer Lehre zum Sparkassenkaufmann und anschließender Angestelltentätigkeit hat er ein Studium der Volkswirtschaftslehre an der Philipps-Universität Marburg absolviert. Bereits während seines Promotions-studiums und seiner Tätigkeit als wissenschaftlicher Mitarbeiter in der Abtei-lung „Wissenschaftslehre und Dogmengeschichte“ hat er praktische Erfahrun-gen als Business Angel, Berater und Coach für Start-up-Unternehmen aus unterschiedlichen Branchen sammeln können und sich dabei insbesondere auf die Ausgründungsproblematik akademischer Unternehmen spezialisiert.

Dr. Siemon ist Dozent an der Hochschule Bremen für das Lehrgebiet “Innovationstheorie und Innovationspolitik im internationalen Vergleich” und an der Fachhochschule Düsseldorf für das Lehrgebiet “E-Business: Entwicklung von Business-Plänen”. Er war im Wintersemester 2005/06 DAAD-Dozent an der Technischen Universität Tallinn/Estland und ist Autor von zahlreichen deutsch- und englischsprachigen Artikeln zu den Bereichen „Entwicklungs- und Evolutionsökonomie“, „Existenzgründung und akademisches Unterneh-mertum“, „Innovationsfinanzierung“ und „Innovationspolitik aus schumpeter-scher Sicht“. Hervorzuheben ist in diesem Zusammenhang, dass er den Ein-führungstext für die 2008 erschienene Neuausgabe der „Konjunkturzyklen“ von J.A. Schumpeter geschrieben hat. Dr. Siemon hält Vorträge zu den ge-nannten Themen und ist als Gutachter für verschiedene Schriftenreihen tätig. Seine beiden Monographien „Unternehmertum in der Finanzwirtschaft – Ein evolutionsökonomischer Beitrag zur Theorie der Finanzintermediation“ und „Knabenmorgenblütenträume – Innovationspolitik, Wissenstransfer und der 6. Kondratieff“ erschienen beide in der Mafex-Publikationsreihe.

Kontakt: [email protected]

Abstract

Since the pioneering work of Schumpeter, innovation is regarded as a driving force of economic development and growth. Schumpeter’s second important (and often neglected) cornerstone is financial capital. The endogenous meaning of money in terms of economic growth remains controversial today, in part, due to the many different kinds of Keynesian and monetary economists. As Schumpeter notes, some theoretical and empirical work has been done to enhance the endogeneity of money in the context of economic growth, e.g. on the basis of capital market efficiency. Furthermore, some work has been done to evaluate long-term financial cycles induced by entrepreneurial activity, with reference to Schumpeter's business cycles theory ("Kondratieff waves"). However, there is still a lack of an underpinning microeconomic basis regarding early stage financing as a problem of qualitative microeconomic aspects, e.g. as a question of property rights, competencies and motivation. Regarding the forthcoming 6th Kondratieff (nano/biotechnology) these insights into the problem of financing innovative start-ups become a starting point for policy formulation.

In this context, the role of money and the process of raising funds has caused some controversy; e.g. Schumpeter’s thesis that the “genuine banker” takes on the role as a financier of innovation (and start-ups) has found no empirical support. The volume of venture capital has risen in the last decades – not least because of the economic incentives provided by economic policy. However, formal venture capital and bank intermediaries continue to lose their capabilities to finance seed and start-up stages. Early stages are mainly dominated by “bootstrap-finance” and the informal market of venture capital (“business angels”). The goal of this paper is to shed light on the connection between innovation, financial capital and entrepreneurial activity. Thus, “financial entrepreneurship” will be discussed as the key to overcoming problems of variety as a result of market and behavior risks.

Key Words: Innovation and Finance, Financial Entrepreneurship, Economic Development and Business Cycles, Kondratieff Waves, Endogeneity of Money, Bootstrapping, Business Angels, Venture Capital

Journal Classification: B5, G2, O1, O3

Financing 6th Kondratieff’s Start ups:

A Schumpeterian Problem Reconsidered from an

Evolutionary Perspective

by Cord Siemon, Ahead Management & Start-up Consulting GmbH, Marburg

Contents

1. Introduction............................................................................................................... 5 2. Entrepreneurship, Evolution, and the 6th Kondratieff ................................................ 6 3. Financing Innovation: An Evolutionary Perspective on a Schumpeterian Problem.. 12 4. Conclusion.............................................................................................................. 25 References ................................................................................................................. 27

1. Introduction

Economic science has examined the question of the causes of prosperity and the influence of the state since Adam Smith (and already before; see Reinert 1999). Schumpeter, whose innovation-oriented explanation of growth and development was adopted by different economic disciplines, may have submitted the most profound framework in this field. Schumpeter identified innovation as an endogenous driving force of economic development, triggering long-termed up- and down-swings (“Kondratieff waves”). His ideas shaped the development of the neoclassical growth theory as well as the theory of evolutionary economics. In this context, the financing of innovation is often the first step in a plan to promote economic growth and development following Schumpeter’s theory (1939, 1934/2002) of the complementary pillars of innovation and financial capital. According to Schumpeter, the credit-drawing bank system and the value-drawing entrepreneurial system must be counterparts. Additionally, Schumpeter used the capital term – in contrast to the dominant neoclassical opinion – in a balance sheet-oriented sense as ‘financial capital’. The main hypothesis of Schumpeter’s work is the strong conjecture that money has an impact on economic development and growth. This endogenous meaning of money in terms of economic growth remains controversial today, especially because of the many different kinds of Keynesian and monetary economists. Generally, the neoclassical growth paradigm includes the idea of

6 Cord Siemon, Financing 6th Kondratieff’s Start ups

money neutrality, meaning that financial capital does not affect the process of economic growth. This opinion is supported by monetarism (Friedman) and by several theorems of neoclassical capital market theory (e.g. Modigliani/Miller’s irrelevance theorem or Fisher’s separation theorem). In contrast to this, financial entrepreneurship is an important cornerstone of economic development from an evolutionary standpoint. Some empirical work has been done supporting the endogeneity of money in the context of economic growth (“Schumpeter might be right”).1 However, the crucial question has not been raised in this context: The empirical facts do not support the existence of “genuine bankers” who finance innovation and/or new firms at early stages. Regarding the topic of financing forthcoming 6th Kondratieff’s start ups, the theoretical and practical problem arises: Where to go when the bank says “No”?

2. Entrepreneurship, Evolution, and the 6th Kondrat ieff

The neoclassical paradigm gives a production-technological explanation of economic growth by focusing on the rise of factors such as human capital, research & development, capital etc. (“input logic”).2 Evolutionary economics reverses this causality by referring to Schumpeter’s Theory of Economic Development: The inputless new combination of given production factors from a pre-existing process moves into the center of a socio-technological explanation. Entrepreneurial skills to out-compete the given resources and to actualize the new combination, are the main scarcity (“development logic”). Throughout this process, those input impulses are released by the dynamic entrepreneur, who releases the growth process as accompaniment to the economic development. During the course of progressive globalization, the question of the origin, the emergence and the loss of such abilities has arisen as a special topic of evolutionary economics3 (“evolutionary logic”). This evolutionary bases contains 1 See e.g. King/Levine (1993). With regard to our evolutionary perspective, based on Schumpeter’s framework, the title of King and Levine’s work is noteworthy: “Growth and Finance: Schumpeter might be right”. 2 Especially the so-called “New Growth Theory” refers to some extent to Schumpeterian thoughts of the innovation process. These theories combine e.g. special parts of market theory (“imperfect competition”) with theories of market failure (R&D, knowledge and human capital partially as a public good due to spillover-effects). Some of them are more or less innovation-oriented. Well-known growth models have been elaborated by Lucas, Romer, Aghion and Howitt. The common ground of these models is the analysis of an input-stimulated growth path under specific production-technological circumstances and the search for an integrated, theory-based reference point to influence this path by economic policy. 3 In the following text, we do not want to trace all the methodological struggles regarding whether or not there are linkages between evolutionary economics and the process of biological evolution. Furthermore, we neither want to raise the old Schumpeterian question again, of whether there is something approaching a state of equilibrium in reality or not; nor to elaborate the role of competition and market structures within an evolutionary market process. Regarding those aspects of Evolutionary Economics, see Nelson/Winter (1982), Röpke (2005 a/b), Hodgson (2000).

Arbeitsberichte aus der KMU-Forschung der Hochschule Bremen 7

rights, competencies and motivation as entrepreneurial variables of action to analyse the inputless roots of economic development and growth (Röpke 1977, 2002, 2005a/b, 2006). This adds another point of view to the micro-economic foundation of economic development, by neglecting the linear relationship between R&D and the innovation process and by rejecting a governmental input-logical support of R&D efforts to foster economic growth. Figure 1 illustrates the relationship between these aspects of input, development and evolutionary logic.

Figure 1: Input, Development and Evolutionary Logic

Source: Author’s

Following this perspective, the static remainder of Schumpeter’s theory is his idea of an entrepreneur, who combines given production factors in a new way with given competencies. This is the innovation function that makes Schumpeter’s entrepreneur different from the bulk of routine entrepreneurs (“Wirte”) who act in the state of equilibrium (“routine function”). “Entrepreneurs” according to Schumpeter, are innovators, the bearers of new recombinations of given amounts of factors of production. This type of entrepreneur is the creator of wealth, productivity and net employment. This distinction may seem trivial, but it is not. An economy populated only by routine entrepreneurs can only grow by the infusion of additional factors of production, called “input logic”. As soon as we implement “some” innovators in our theoretical system, an economy can


develop not only by additional input but by new recombinations of the inputs already at hand. “This makes a huge distinction in the development path of an economy and requires a very different set of policies and institutions. Input can be virtually anything which contributes to increase output (capital, labor, infrastructure, and: knowledge)” (Röpke, 2005a, p. 7).

Kirzner added – referring to theoretical insights of Austrian economists’ analyses of market processes (von Mises, von Hayek, Lachman) – an arbitrage function to this perspective. Thereby entrepreneurial “alertness” leads the economic system from the state of disequilibrium to equilibrium, i.e. the use of different prices at one point of time (“spatial arbitrage”) or of different prices at different points of time (“temporal arbitrage”).4 The disequilibrium caused by innovation and characterized by pure uncertainty, (in terms of Knight and Shackle) is the soil for Kirzner’s arbitrage entrepreneur. The arbitrage function of entrepreneurship is connected with entrepreneurial alertness that leads the system by tracing all opportunities back to a situation of neoclassical equilibrium – characterized by certainty and human behavior’s focus on adaptation. Thereby, the routine function of entrepreneurship is strongly linked to successful arbitrage. Routine, arbitrage and innovation are the bearers of the evolutionary function (Röpke, 2002, 2005a/b, 2006). Their energy of action relies on given competencies that can be lost by diffusion of knowledge during the market process. They reflect different solutions to overcome economic scarcity over time. Evolutionary logic is focused, however, on the creation of that capability, i.e. the evolution of new competencies, which are important for maintaining the function of innovation and also necessary for the survival and success of routine and arbitrage functions.5 An evolutionary entrepreneur is a learning entrepreneur who has (and gains) the capability to reflect on visions, weaknesses, strengths and on “getting things done” (Schumpeter). Thereby he brings inter- and intrafunctional stability into the routine, arbitrage and innovation functions.6

Figure 2 shows the relationship between these different entrepreneurial functions.

4 According to Kirzner (1984), innovation is just another form of temporal arbitrage. 5 “In the three types mentioned so far, we assume the competencies (capabilities, capacities) of the entrepreneurs to be given or unchanging. An entrepreneur acting in an evolutionary function changes his competencies. (...) An increase in innovational capabilities is, in the long-run, the most important contributor to economic development. There are, in addition strong, ’co-evolutionary’ interactions between innovation and evolution. To continue with innovation, an entrepreneur must increase his capabilities. And increasing capabilities enable an entrepreneur to discover and implement new opportunities for innovation” (Röpke, 2005a, p. 8/9). 6 An example of interfunctional evolution is a routine entrepreneur who evolves to an arbitrage entrepreneur (or innovative entrepreneur). An example of intrafunctional evolution is an arbitrage entrepreneur who learns within his arbitrage function to innovate to keep his arbitrage function.


Figure 2: Evolution, Innovation, Arbitrage and Rout ine

Source: Author’s

This line of economic thought can be interpreted with the theoretical insights of Ashby, Varela and Maturuana. They refer to system theory as a basis to explain the process of evolution of biological systems. Ashby considers the need of subsystems’ variety in order to dominate environmental variety (“Ashby’s Law”). Maturana and Varela propose the theoretical idea of closed, inputless7 (“autopoietic”) self-reproduction of systems. In a further sociological approach, this can be connected to the work of Luhmann, who – in contrast to most godfathers of modern system theory – demands an interpretation of social systems (i.e. economy, politics etc.) as autopoietic, “structurally linked” systems

7 “…I consider an entrepreneur a ‘closed system’ in the sense of modern systems theory. This means: the system (the entrepreneur) is (operationally) closed for inputs from the environment. This could seem a purely a theoretical point butt is not. It is of utmost importance for the practice of entrepreneurship. In our engineering task, we can make use of only a limited number of tools, that allow us to influence the ‘machine’ we want to construct. We cannot change the entrepreneur, but we can influence him by teaching, training and coaching in such a way that he transforms, by his own endeavours, into an entrepreneur, or realizes, that he is already functioning as an entrepreneur. We raise his entrepreneurial consciousness. Constructing the entrepreneur as a closed system implies the consideration of an entrepreneur not as an agent passively reacting on environmental stimuli (inputs). What an entrepreneur makes of stimuli depends on himself” (Röpke, 2005a, p. 2). Thus, this line of thought refers to the epistemology of “constructivism”: For the paradigm of constructivism, reality is not “out there”, it has no ontological quality independent of human experience. Knowledge is not objective and constructed by each individual. When we discuss various functions of entrepreneurship, each entrepreneur, operating in a specific functional system (routine, innovation, etc.) constructs his own reality.


that reproduce by communication (Luhmann, 1999).8 The economic system reproduces ‘autopoietically’ (e.g. without inputs) by payments, representing a mechanism of communication within the subsystems of the economy. But Luhmann never proposed a differentiation of functions within the system “economy”; thus, the explanation of evolution and development seems empty without a deeper entrepreneurial analysis. However, by referring to Luhmann’s ideas, there appears to be an intuitive link to Schumpeter’s opinion of financial capital as a driving force for the entrepreneurial (autopoietic and structurally linked) functions ‘routine’, ‘arbitrage’, and ‘innovation’. The idea of this paper is to connect these fields to a broader view of financial entrepreneurship. The explanation of impact would thereby refer to the evolution (and involution) of financial entrepreneurship (and its functions) within the process of economic development causing (as a vehicle of entrepreneurial communication) the transmission of monetary impulse for development and – as a by-product – economic growth.

How do entrepreneurial functions play a vital role in the real and financial sphere from a Schumpeterian perspective? Let us focus on certain points that have been raised several times by Dosi, Perez and Freeman9: (1) to get in and out of path dependencies and (2) the role of knowledge and entrepreneurial skills to make use of this knowledge, thereby causing paths which can be characterized by long- and short-term up- and down-swings. Of course, Schumpeter’s theory of business cycles (as an inherent part of a theory of economic development) has several times been the subject of controversy. In the following, we do not want to ascertain if long-term (40 up to 60 years) Kondratieff waves can be proven and measured (see Kleinknecht, 1987). Furthermore, we do not want to trace methodological struggles concerning the “real” existence of an equilibrium state, the logical problems of combining static and dynamic aspects and the “reality” of cyclical effects of entrepreneurial activity.10 We want to focus on the special feature of the forthcoming 6th Kondratieff wave and on the theoretical and empirical implications for the problems of financing its start-ups. We assume that the 5th Kondratieff wave (informations technology based on communication needs) is running out

8 Of course, much work has previously been done by economists (like Adam Smith and Friedrich August von Hayek) to explain social phenomena explicitly and implicitly by system theory, but without referring to the aspect of autopoietic reproduction of systems. 9 See Dosi (1982), Perez (2003), Freeman/Perez (1988). For the difference between incremental and basic innovations see Christensen (2003). 10 Well known are Kuznets’ doubts on Schumpeter’s causal link between clustering of innovations (causing long waves) and the bunching of entrepreneurial capabilities (Kuznets, 1940, pp. 261-2). Those aspects can be seen in the context of McClellands “need for achievement”. The innovator’s effort leads the bulk of imitators in a situation of a lower task difficulty allowing them to unfold their entrepreneurial capabilities effectively. In the following text, we will discuss those (and similar) theoretical aspects as a by-product.


gradually. According to Hayek’s term “arrogance of knowledge”, we do not know the exact results during the 6th Kondratieff wave. It needs patience and time (up to 50 years) to describe the results of an evolutionary process where entrepreneurial hypotheses have to be tested by the market and where competition serves as a “discovery process” detecting scattered knowledge by a capable price system. But scientific curiosity compels us to enter terra incognita and there are some “weak signals” and scientifically discussed speculations on which we can rely.

For more than a decade, “holistic health” has been assumed to be the ‘basic need’ for the forthcoming 6th Kondratieff (Miller et al., 2005),11 and as a solution for satisfying this need an “NBIC” paradigm of “convergent technologies” has been developed. The phrase “convergent technologies” has arisen, and refers to the synergistic combination of the four compartments “nano-bio-info-cogno” (“NBIC”), each of which is currently progressing at a rapid rate: (a) nanoscience and nanotechnology; (b) biotechnology and biomedicine, including genetic engineering; (c) information technology, including advanced computing and communications; (d) cognitive science, including cognitive neuroscience (Miller et al., 2005). In the early decades of the 21st century, concentrated efforts can unify science based on the unity of nature, thereby advancing the combination of nanotechnology, biotechnology, information technology, and new technologies based in cognitive science. With proper attention to ethical issues and societal needs, converging technologies could achieve a huge improvement in human capabilities, societal outcomes, the nation’s productivity, and the quality of life. Imagine a world where people make lunch plans via telepathy, acquire genius-level mathematical skills in an instant, and learn to golf (and to have a bit on the side...) by downloading the neural impulses of Tiger Woods. This is a broad, cross-cutting, emerging and timely opportunity, of interest to individuals, society and mankind in the long term.12

Convergence of those technologies is based on material unity at the nanoscale and on technology integration from that scale. The building blocks of matter that are fundamental to all sciences originate at the nanoscale, involving elements as small as a nanometer, or about one hundred-thousandth the diameter of a human hair. Revolutionary advances at the interfaces between previously separate fields of science and technology are ready to create key transformational tools for NBIC technologies. Developments in systems approaches, mathematics and computation in conjunction with NBIC allow us

11 For statistics-based hints see Fogel (1999), who stresses the inclining income elasticity of demand for “education” and “health”. 12 For an extreme standpoint of longevity (“Immortality is within our grasp...”, “Death is an outrage...”) see Kurzweil (www.kurzweilai.net), Freitas (www.rfreitas.com) and De Grey (e.g. www.longvitymeme.org).


for the first time to understand the natural world, human society, and scientific research as closely coupled, complex, hierarchical systems. At this moment in the evolution of technical achievement, the improvement of human performance through integration of technologies becomes possible (Miller et al., 2005). Thus, according to the NBIC paradigm, the seemingly diverse fields of nanotechnology, biology, information technology, and cognitive science are headed toward convergence. As a basic innovation, it would lead a system into Schumpeter’s area of conflict: “creative destruction”.

3. Financing Innovation: An Evolutionary Perspectiv e on a Schumpeterian Problem

According to Schumpeter’s and Kondratieff’s theory of long waves, and to Schumpeter’s hypothesis of endogenous meaning of money, Perez (2003, p. 47) differentiates – as a heuristic device, not a straitjacket – between four phases of each surge of development: (1) irruption phase, (2) frenzy phase, (3) synergy phase and (4) maturity phase (see figure 4).

Similarly to cycle-economists like Huess, Vernon and others, Perez characterizes each phase in order to explain investors’ behavior within the techno-economic paradigm. Let us focus on the core problem: The problem of early-stage financing during the irruption phase – the financing of basic innovations. Is it caused by input-spending investors from outside (as Schumpeter claimed for bank intermediation: “genuine banker”) or is there something else, an inputless evolutionary process hidden in the background? Perez (2003, p. 49) argues:

There is a mass of potential investment money in the market, still being generated by the firms of the old paradigm. These are looking for opportunities and migrating further and further away, together with industry or alone. Soon the amazing growth and productivity feats of the new industries attract investors and the new products, even better and even cheaper, begin massively to attract consumers and new competing entrepreneurs. The very intense activity of the new paradigm carriers contrasts more and more with the decline of the old industries. A techno-economic split takes place from then on, threatening the survival of the obsolete and creating the conditions that will force modernization.

Perez’ techno-economic paradigm strongly refers to Schumpeter’s entrepreneurism-caused business cycle theory and Heuss’ well-known market cycle concept. However, her paradigm differs by leaving out the innovator as an exogenous factor for long waves. Implicitly, she refers to the process of knowledge diffusion caused by market feedback and imitators following the innovator’s effort.13

13 Perez (2003, p. 40) is, for example, right, of course, when she claims, “So diffusion occurs through intricate feedback loops”. In this context it is noteworthy that e.g. Kuznets’ critique of


Figure 4: Technological Revolutions, Financial Bubb les and Paradigm Shifts

Source: Perez (2003, p. 74)

Analogously to Schumpeter, Perez (2003, p. 33) regards (borrowed) money as a “truly dynamic force”, but a microeconomic analysis of this hypothesis, causing macroeconomic effects (“long waves”, “techno-economic paradigms”) is still lacking. She excludes the microecomic dimension of entrepreneurial functions and the role of money as a vehicle for communication (between entrepreneurial functions), thereby supporting the autopoietic process of economic development. The analysis of macroeconomic techno-economic paradigms considers innovative entrepreneurial functions and thereby the (inputless and evolutionary) microeconomic basis of financial entrepreneurship

Schumpeter’s Business Cycle leaves out the different forms of challenges within the market process and thereby neglects the endogenous force of innovators as Freeman or Perez do, too. There is a lack of a microeconomic basis of entrepreneurship for their macroeconomic debate of long waves/techno-economic paradigms, because it is human behavior’s effort under certain circumstances (within a certain paradigm phase) that causes innovation and new cycles. Thus, the necessity of compartmentalizing different forms of entrepreneurship (imitation, arbitrage etc.) can be shown and connected with ideas of system theory quantitatively and qualitatively (Ashby, Maturana, Luhmann) to shed light on entrepreneurial variables of action. Schumpeter’s model of entrepreneurial energy can be viewed as an embryonic forerunner of McClelland’s Theory (“need of achievement”), Miner’s psychological typology of entrepreneurs or Röpkes theory of evolutionary competencies. Especially the latter aspect can be found in his first edition (1911) of Theorie der wirtschaftlichen Entwicklung, where he gives a broad overview of the whole economy system and the need for entrepreneurial energy within in his 7th chapter. The second edition has been shortened by Schumpeter for several reasons.


as an exogenous factor. Money is flowing “somehow” into the new techno-economic paradigm due to diminishing rates of returns within the realm of established trajectories. “As the low-risk investment opportunities in the established paradigm begin to diminish, either in innovation or in market expansion, there is a growing mass of idle capital looking for profitable uses and willing to venture in new directions” (Perez, 2003, p. 33). This point of view is strongly related to a macroeconomic perspective and similar to Kondratieff’s (and Tugan-Baranowski’s) analysis of long-term business cycles.

Interestingly enough, Schumpeter’s theory of economic development is closely related to input logic on an elementary point: The innovator needs financial capital for the new combination of given resources from the outside, made available from the bank system in the form of credit. In addition, he supplies a theoretical reason: Schumpeter uses static equilibrium as a reference point. To move beyond static equilibrium, dynamic skills in the sphere of financial and monetary systems as well as in the realm of public and private goods are necessary. Schumpeter believed it would be possible for genuine bankers to steer economic surplus units into innovation-conditioned deficit units. Therefore, he attributes special financial business abilities to them:

Even if he confines himself to the most regular of commodity bills and looks with aversion on any paper that displays a suspiciously round figure, the banker must not only know what the transaction is which he is asked to finance and how it is likely to turn out, but he must also know the customer, his business and even his private habits, and get by frequently “talking things over with him”, a clear picture of his situation. But if banks, whether technically so called or not, finance innovation, all this becomes immeasurably more important. It has been denied that such knowledge is possible. The reply is that all bankers who at all answer to type have it and act upon it. The giant banking concerns of England have their organs or subsidiaries which enable them to carry on that old tradition: However, at the same time it is clear that this is not only highly skilled work, proficiency in which cannot be acquired in any school except that of experience, but also work which requires intellectual and moral qualities not present in all people who take the banking profession (Schumpeter, 1939, p. 116-7; emphasis added).14

Today, banks have lost their innovative perspective by acting as an intermediary for their depositors and shareholders (Siemon, 2006, 2009). Over the course of time, banks have been forced to be price-competitive, and are faced with typical problems of institutional economics when assessing and selecting “good” and “bad” innovative enterprises.

The need for banks to be price-competitive has discouraged the development of sophisticated risk assessment techniques. Consequently, banks are faced with a serious adverse selection problem in which they risk making two types of

14 Also, Schumpeter refers to the historical soundness of his financing thesis, especially by the example of the brothers Pereire (founders of the Crédit Mobilier in the 19th century) which is seen as the starting point of the modern banking system. This might be an important starting point for an evolutionary theory of financial intermediation (Siemon, 2006, 2009).


error: type 1 errors, in which they make loans to businesses which subsequently fail, and type 2 errors, where they reject loan applications from businesses which turn out to be successful. Banks are most concerned to minimize type 1 errors due to their business charter (see chapter below) and so interpret the willingness of an entrepreneur to offer collateral as a signal of his or her confidence in the quality of the project (Lumme/Mason/Suomi, 1998; Siemon, 2006, 2009).

Some economists illustrate that there are still entrepreneurial possibilities for the banking system, such as gaining comparative advantages compared to capital market investors (Burlamaqui/Kregel, 2005; Perez, 2004). Thus, there is no empirical support for a general trend of disintermediation in the form of capital markets (Schmidt, Hackethal and Tyrell, 1999), as long as banks and other intermediaries are still able to evolve their intra-functional skills of arbitrage. Accordingly, the oft-articulated claim that banking systems are close to death loses its validity. However, seen from an evolutionary approach, it is clear that the banking system has not evolved interfunctionally from entrepreneurial arbitrage to innovation as proffered by Schumpeter. Thus, the crucial question has not been raised: The empirical facts do not support the existence of “genuine bankers” who finance innovation and/or new firms at early stages. Regarding the topic of financing forthcoming 6th Kondratieff’s start ups the theoretical and practical problem arises: Where to go when the bank says “No”?

Empirically, there is informal financing (“bootstrapping” and “business angels”), which is responsible for the bulk of innovation financing in its critical seed-/start-up-stages. Eighty to ninety-five percent of all innovative start-ups are financed more or less by bootstrapping in order to cover their liquidity requirements.15 This astonishing phenomenon is observable for well-developed financial markets as well as for low-industrialized countries:

It boggles the mind to contemplate the economic value those companies [Microsoft et al.; C.S.] have created, which is – of course – what business is about. Bootstrapping has always been, and continues to be one of the best ways around to do that (Gendron, 2002, www.inc.com).

Founders do not want and/or are not able to fulfill the requirements of a bank credit (collateral) or venture capital financing (high lot sizes, large and realizable growth potentials on short notice).16 Bootstrapping involves the investment of one’s own money, sophisticated use of favorable purchase possibilities, payment and customer goals and/or the long-term deference of payment to the entrepreneur himself/herself (muscle capital), in order to mobilize sufficient

15 See Bhidè (2002, 1992); Winborg/Landström (2001); Freear/Sohl/Wetzel (1995). 16 According to these problems, the use of external financing resources is always connected with “hidden costs of other people’s money” (Bhidé, 1992).


liquidity (“resource-oriented bootstrapping”).17 This form of bootstrapping can be regarded as an unconventional form of internal financing, using one’s own savings and producing short-term cash flow to cover the need for liquidity. “For the great majority of would-be founders, the biggest challenge is not raising money but having the wits and hustle to do without it” (Bhide, 1992, p. 110). Furthermore, friend and family relationships play an important role in financing innovation. This confidence-intensive social network is known as “relationship-oriented bootstrapping”.18 This form of external financing differs in interests in the organization and control of the capital service modalities that are atypical for banks or venture capital firms (“love money”). The three f-components of bootstrapping – founder, family, friends – contradict the Schumpeter argument. This alternative allows them to operate without input and/or beyond the social capability of the founder by using “highly creative ways of acquiring the use of resources without borrowing money or raising equity financing from traditional sources” (Freear, Sohl and Wetzel, 1995, p. 395).

Furthermore, since the 1980s, the theoretical and empirical basis of the so-called “business angels” has become more widely accepted. Business angels invest financial capital as innovation-relevant input, removing the middleman. Successful business angels typically have been successful entrepreneurs themselves and themselves dependent on bootstrapping methods and business angels’ support (money and advice). They invest parts of their wealth in new enterprises. This kind of investment is usually provided as equity capital (“informal venture capital market”). Estimations in the literature even assume that the informal market for venture capital is exponentially larger than that of formal markets. In addition, however, several studies show that these findings do not constitute a region-specific phenomenon.19 Business angels are characterized by their preference to invest smaller amounts of capital into seed and start up-stages: Angels not only exist, they tend to invest into precisely those areas which are perceived as gaps in the capital markets for entrepreneurs (Osnabrugge/Robinson, 2000; Harrison/Mason, 2000; Freear/Sohl/Wetzel, 1995). There are business angels who make available up

17 “It is characterized by high reliance on any internally generated retained earnings, credit cards, second mortgages, and customer advances, to name but a few” (van Osnabrugge and Robinson, 2000, p. 24). In the same way, Winborg and Landström remark, “that the strain of the business is kept to a minimum, in turn implying that the potential for generating internal funds is increased”. In this context, it is interesting to note “that the use of subsidies as a way of meeting the need for resources is not as widespread as could have been expected. Besides, sharing employees and equipment with other businesses is not as frequently used as was assumed” (Winborg and Landström, 2001, p. 243). 18 The categorization in resource- and relationship-oriented bootstrapping refers to Winborg/Landström (2001). 19 See for empirical evidence Gaston (1989), Harrison/Mason (1992), Freear/Sohl/Wetzel (1995) Lumme/Mason/Suomi (1998); Coveny/Moore (1998).


to 500,000 € (“seraphim angels”); in addition, smaller financing needs of up to 5,000 € make it possible for other firms to take off (“cherubim angels”).20

There was a lack of information in this field until the 1980s. Since then, much work has been done to define and categorize the angel phenomenon. Furthermore, some attempts have been made to explore the characteristics and investment behavior with regard to their investment in seed and start-up companies.21 According to their empirical research of 286 innovative companies which are mostly financed by both bootstrap and venture capital, Freear, Sohl and Wetzels summarize their comparison of formal and informal venture capital as follows:

At the seed stage angels invested more funds, in more rounds, for more firms than any other single source. ... At the start-up the business angel continues to be an important player, especially when the capital required is under US$ 500,000 …. Angels clearly are more active in seed and start-up financing than venture capital funds.22

However, there is still a lack of theoretical support to explain the role of business angels within the process of economic development (Siemon, 2009). The roots of financial intermediaries (banks, venture capital firms) can be referred strongly to financial entrepreneurship of business angels. Even nowadays, business angels often unite to form a syndicate if there is need for larger capital requirements (Aram, 1989; Freear/Sohl/Wetzel, 1995), thereby acting in the grey area between formal and informal markets. Empirically, there is a provable and theoretically important complement between the informal and formal venture capital market (Harrison/Mason, 2000; Freear/Sohl/-Wetzel,1995).

Particularly, the phenomenon of bootstrapping represents the necessity of certain evolutionary capabilities – especially for the innovators – to bite the bullet during the financial hell of their early stage. “Bootstrapping is entrepreneurship in its purest form. It’s the transformation of human capital into financial capital, sweat equity into bankable equity. That’s what we mean when we talk about ‘creating value’” (Gendron, 1999, www.inc.com). In order to illustrate this argument further, it is interesting to quote a few more aspects given by Barker (2002, www.inc.com):

� Bootstrapping clears away the clutter and makes you focus single-mindedly on the customer, which is what any smart entrepreneur needs to

20 Furthermore, it is interesting to note that so-called “Virgin Angels” with different investment preferences exist. They are interested in investing in new enterprises in principle (Freear, Sohl and Wetzel, 1994, p. 112). 21 See Gaston (1989); Frear/Sohl/Wetzel (1994); Covene/Moore (1998); Benjamin/Margulis (2000). 22 Freear/Sohl/Wetzel (1995, pp. 89-90). Coveney and Moore come to similar results: “Clearly venture capital firms come in at a later stage in the investment process than Business Angels, and as a result invest considerably larger amounts of money” (1998, p. 25).


do anyway. It compels you to be creative, and it’s an acid test for figuring out whether you’ve got a real business or just a plausible-sounding business plan

� How do you keep acting like a bootstrapper when outside capital suddenly raises your company to a level of comparative affluence? You continue to think very, very hard about how your business allocates its resources. You spend money only to make money.

� Bootstrapping is both bigger and simpler than saving a dime whenever you can. ... lack of money, employers, equipment – even lack of product – is actually a huge advantage, because it forces the bootstrapper to concentrate on selling to bring cash into the business

According to Granovetter’s (1988) term of “social embeddedness”, bootstrappers can additionally rely on “strong ties” by receiving help and resources from their social networks (family, friends). Business angels usually rely on these “positive signals” before they undertake their investments (see Prasad, Bruton and Vozikis, 2000, Coveney/Moore, 1998). Money (“input”) from outside is – in the case of “weak ties” – of course strongly correlated with problems of evaluating market and behavior risks. According to traditional theories of finance, the evaluation of market and behavior risks ex ante is the main obstacle to solving problems of pricing and establishing a suitable business in seed and start-up phases by negotiations. Why do business angels – compared with formal intermediaries like venture capitalists and banks – have advantages in financing early stages of innovation processes? An “evolutionary” answer might be: Business angels are both evolutionary teachers and learners. Even if they are officially retired, they still see themselves as entrepreneurs and allow their entrepreneurial skills to permanently flow into the innovation system. Most active and successful Angels have an entrepreneurial background. “It is worth noting that they never consider themselves as ex-entrepreneurs, but still as entrepreneurs” (Aernoudt, 1999, p. 188).

As a result, the mechanism of systemic (“autopoietic”) reproduction (see chapter 2) is secured between the financial system and the realm of goods and services. A business angel relies on certain property rights that financial intermediaries cannot depend on due to their dependence on input from their investors. The business angel despises the idea of an open invitation forum for presenting business plans. He prefers to remain behind the scenes and relies on his trusted network contacts to control his deal flow. The informal process of making contacts is reasonably successful in overcoming the typical market and behavioral risks of financing a seed or start-up enterprise. Business angels pre-select “certain” founders for their deal flow who – in addition to their promising


ideas – demonstrate the willingness to cooperate and the promise of evolutionary work, rather than one innovative idea that may be obsolete after one or two months. Founders in search of capital, who reach the limit of bootstrapping, can often enter the financial circle of a business angel and thereby profit from their experiences, network contacts, etc. For the founder skilled in evolutionary entrepreneurship, the path to funding by a business angel syndicate or corporation with venture capital firms and banks in the latter financing phases is no longer unreachable. But he has to reflect on the need to search for and convince an angel investor that suits his entrepreneurial enterprise. Evolutionary logic is the key to overcoming the problems of trust rooted in problems of asymetrically distributed information (institutional economics) and/or problems of cash-flow forecasts and pricing (neoclassical capital market theory).23

Figure 5: Financing cycle of innovative firms

Bootstrapping

Business Angels

Venture Capital Firms

Commercial Banks

Profit

= f (R, A, I, E)

Variety

= f (market/behavior risk)

Finance

System

informal

formal

Early

Stage

Development

Stage

Later

Stage

Seed

Stage

Start

up

1st

Stage2nd Stage 3rd Stage Bridge

Replacement

MBO/MBI/LBO

Turn-Around

Profit

time

Profit

Variety

Variety

Source: Author’s

23 See e.g. Sohl (1999, pp. 111-2): “Since the seed and start-up investor is investing predominantly in the entrepreneur and this asset is a very mobile commodity, the vision of the entrepreneur must be in congruence with the investment objective of the business angel”.


Figure 5 illustrates the relationship of information problems, profitability and different sources of financing in early and later stages of development24 by means of a typical financing life cycle of an innovator. Seed and start-up stages are often characterized by low profitability and are dominated by informal financing systems. Their active role in these early stages is replaced and/or supplemented by formal financing systems in later stages, where the demands between established entrepreneurs and financial intermediaries match. Financial investments by banks and venture capital firms often rely on a combination with bootstrapping and/or business angels. Trustworthy signals are created (Prasad/Bruton/Vozikis, 2000), which then support reliable communication in a decision-making situation typically marked by special seed and start-up risks (uncertainty and asymmetrical information).

Some notes on “Theory of Finance” in this context: The neoclassical theory of capital markets focuses on the analysis of systematic (non-diversifiable) market risks. Opportunistic behavior is reduced by the assumption of a perfect capital market. Furthermore, following the theorem of Modigliani/Miller, the capital structure (equity and/or loan) is neither relevant for the costs of capital nor the firm’s value. Depending on the investor’s attitude to risk, a well-diversified optimal portfolio is realized in combination with a riskless fund that ensures annual returns (Tobin’s separation theorem). The well-known Capital Asset Pricing Model (CAPM) is based on considerations regarding general market risks. Uncertainty is represented by empirically observed “betas”. By this kind of variety reduction, one is able to evaluate a firm without doing fundamental analysis. Even though the applicability of the CAPM may contain general methodological problems, the financing of innovation illustrates most clearly the methodological and pragmatic difficulties: How can the issue of financial support of innovative firms be dealt with if there is neither market nor “betas”? The market has yet to be created. In particular, it is very unsatisfying that the entrepreneurial picture of this equilibrium theory of capital markets remains colorless (in that the differentiation of entrepreneurial functions in financing is absent). Financial intermediaries find themselves in a redundant position in this theoretical world (Siemon, 2006, 2009).

In the framework of institutional economic finance theory, however, the neoclassical irrelevance and separation theorems are destroyed by the introduction of agency and/or transaction costs and the impact of property rights. From an institutional economic perspective, the theoretical integration of evaluating market risks thus leads to logical problems. According to the theoretical works of Coase, Williamson, Arrow and other institutional economists, the focal point of this theory lies within the asymmetrical distribution

24 For a characterization of these different phases see e.g. Benjamin/Margulis (2000, p. 96).


of information (e.g. adverse selection, moral hazard, hold up). The external financing of innovations is ridden with contractual problems involving countless occurrences of opportunistic behavior. Especially the continuous specific investments in endangered firms (“living deads”25) can be explained well by this theory. Namely, the specific nature of start-up investments, the statistical rule of start-up failure and the resulting investor apprehension of the uncertainty of returns illustrate the potential beneficial use of institutional economic theory.26 From an evolutionary standpoint, referring to a term of Ashby’s system theory, the situation of a seed/start up investment can be characterized by high “variety”. According to traditional theory of finance, variety can be characterized by a combination of market and behavior risks. Even in these critical phases, a successful setting of evolutionary capabilities is needed to dominate variety by variety. With regard to the empirical picture and the feeder function of the informal financing market, Schumpeter’s thesis can be viewed as an error that has to be relativized with regard to bank’s historical role for financing start ups during the 19th century, compared to bank’s property rights today (Siemon, 2006, 2009).

Banks (and in general all intermediaries) must invest other people’s money (Benjamin/Margulis, 2000) and thereby have (and had) to change to later-stage businesses in order to fulfill the carried interests of their fiduciary capital. Particularly, if these interests represent entrepreneurial non-innovative skills (routine, arbitrage), all the aforementioned problems of market uncertainty and asymmetric information, lead to regulations between funds-investors and the intermediary diminishing innovation-related variety. An intermediary that allows capital – representing entrepreneurial routine and arbitrage interests – to flow into the capital funds leads to a problem caused by input logic: because of this capital input, the demand for a special breed of funds managers arise. The management has to invest its fiduciary money by observing funds-specific rules and laws (Siemon, 2006, 2009). Breaking these rules would lead to repression

25 Thereby, problems of moral hazard and hold-up arise ex post: “No investor wants to suffer in financial purgatory by being left in a venture without liquidity. For many investors, being a member of the living dead has been a dreadful financial experience – hanging in limbo, not wanting to slip backward, but unable to move forward. The money is in, but the investor has no way out” (Benjamin and Margulis, 2000, p. 191). 26 The institutional economic debate gains complexity with respect to the explanation of the existence and behavior of financial intermediaries. If the investor is a financial intermediary, then many problems of opportunistic behavior arise between the intermediary and his investors. Currently interesting is the case of multi-stage intermediation when the liabilities of one intermediary (i.e. a venture capital firm) are provided by another intermediary (i.e. banks or pension funds). Adverse selection effects, moral risks and potential opportunistic behavior occur wherever you look, and the well-known difficulty that investors have in monitoring a firms’ behavior altogether; this leads to the problem for the financial intermediary of drafting a well-constructed business charta (see Siemon, 2006, 2009)


by governments and investors’ “voice” and “exit”, referring to the well-known terms of Albert Hirschman.

It is interesting to note that the venture capital industry followed a similar path of “involution” (in terms of Ken Wilber). Although there is empirical evidence that venture capital has a long tradition of financing innovative enterprises by taking risks and chances,27 the historical roots of venture capital intermediation can be found in the 1920s. Business angels often united as syndicates to finance large-scale enterprises, and they acquired money from wealthy families to invest parts of their financial assets. In the same way as business angels, syndicates operate today as quasi-funds in the grey area between the informal and formal financial markets. During the 1920s, they even elected a lead angel to be responsible for daily transactions. Since the bank system was constrained, especially in the US, in order to finance innovations in their early phases, the formal market of venture capital emerged. The main goal of American Research and Development Corporation (1946) – the first venture capital intermediary – was e.g. “to marry some small part of our enormous fiduciary resources to the new ideas which are seeking support” (R. Flanders, quoted in: Bygrave/Timmons, 1992, p. 17). So Schumpeter’s image of a risk-transforming intermediary must to be modified, since venture capital funds were opened to receive money (“input”) from various depositors (insurance companies, pension funds, private investors etc.).

Similarly to the controversy of the role of banks during the industrial revolution, it continues to be difficult to assess whether the formal venture capital market has ever had an important impact on the process of financing innovations at early stages. But these first venture capital intermediaries were of course more focused on seed- and start-up-stages than current intermediaries. According to initial success stories, formal venture capital became a target for public policy to support the process of economic development by mobilizing more money flowing into venture capital funds. This political standpoint is widespread even today and refers to an (intuitively logical) input-logic interpretation of economic growth. But astonishingly, there is empirical support that these initiatives were restrictive rather than successful. Today, the fundraising of venture capital firms is dominated worldwide by other intermediaries (pension funds, banks). Their money represents 50 to 75 % of the entire market; their influence on strategic decisions and allocation of resources within the venture capital industry increased progressively (van Osnabrugge/Robinson, 2000). The more the quantitative dimension of the formal venture capital industry increased, the more their investment behavior moved significantly away from early stage to large-scale investments (Bygrave/Timmons, 1992; Murray/Lott, 1995; van

27 See Benjamin/Margulis (2000) for venture capital financed enterprises of Columbus.


Osnabrugge/Robinson, 2000).28 In the same way, bank and venture capital firm investments in innovations were restricted after the “milleniumshausse” financial crisis, which led to a rapid and damaging consolidation of the venture capital industry. Venture capital firms shifted away from financing seed and start-up phases of innovation more and more. This type of investment is not only rare within formal venture capital markets, but also only atypical Schumpeter financings are made: Risk capitalists are focused on entrepreneurial heavyweights. Seed and start-up investments are exceptions in the portfolio strategy of venture capital firms, and they are only made if the scale of investments is approximately one million dollars or more (Siemon, 2009). Commercial banks (and venture capital firms as well) have changed their entrepreneurial standpoint of gaining profits from an innovation-oriented to routine-, arbitrage- and/or imitation-oriented view. Especially buy-out-business, representing these latter skills more or less, became more and more suitable to these intermediaries. This change of entrepreneurial skills (“involution” in terms of Ken Wilber) – due to receiving more and more capital input representing deposit money, long-termed loans, shares of equity – is a phenomenon that can be seen as a general evolutionary problem of economic development, and as a special problem of governmental activities supporting start-ups by stimulating financial intermediaries via input-logic.29

28 In their book Venture Capital at the Crossroads, Bygrave and Timmons give an illustrating overview of the changing entrepreneurial attitude of venture capital firms, especially as a result of input-oriented public policy. The first venture capital boom was triggered at the end of the 1970s as a result of the Revenue Act (1978), because the tax-rate of capital gains fell from 49.5 % to 28 %. In 1981, this rate declined to 20 % caused by the “Economic Recovery Tax Act”. This process was strongly supported by the “Prudent man”-Rule in 1979, which allowed pension funds to invest parts of their fiduciary resources as fiduciary money in venture capital funds. As a result of these initiatives, capital flowed into the venture capital market by private investors, banks and pension funds (Bygrave/Timmons, 1992, pp. 23). The number of portfolio investments rose from 375 in 1979 to 1,729 investments at the end of the 1980s (+ 360 %). The amount of investments increased from 460 million dollars to 4 billion dollars (+ 770 %). The average amount of venture capital funds rose from 18 million dollars (1979) to 49.5 million dollars (1989). Despite this quantitative success, a qualitative effect can be observed as well: During the period of growing funds, venture capital firms changed their investment strategy by financing more and more later-stage, large-scale deals, particularly management buy-outs. According to Bygrave and Timmons, there is a clear cut trend from “Classic Venture Capital” to “Merchant Venture Capital”: “Despite the glorification of the super deal of the 1960s and 1970s, the mentality of the industry has changed in recent years. There has been a perversion of both the superdeal focus and the patient and brave money that once dominated industry investing practices” (Bygrave/Timmons, 1992, pp. 9-10). Similar developments could be stated in other countries. The advancement program “Business expansion Scheme” (BES), presented in Great Britain in 1983, was aligned explicitly to use tax incentives to increase the readiness of private people to take part in enterprises directly or (via funds) indirectly in order to advance toward the well-known equity gap. Measured by volume, the initiative was a success, however it was a flop from a standpoint of evolutionary and development logic, since venture capital firms began to feed established firms instead of seed and start up phases of innovations and/or firms. 29 I regard this “involutionary’ effect as a “Dutch Disease of Financial Intermediation”, relying on a term that is used in the theory of international trade. I see some entrepreneurial parallels, but


Today, the role of venture capital industry for the 6th Kondratieff is still controversial. Venture capitalists are, of course, interested in spending their fiduciary resources in the fields of NBIC, but they want (and must!) rely on positive signals produced by informal financing systems:

Many nanotech start-ups are are not yet ready for venture capital investement. First ... the field is still in its infancy. Many start-up companies have just recently run out of breakthroughs in universities and cannot reasonably expect to develop commercial products for at least seven to ten years. Even nanotech companies that can demonstrate functional products lack the ability to scale up for mass production. (...)

Despite this nascency, many investors have identified nanotechnology as the next great technological wave (...). (Miller et al., 2005, p. 196).30

Some quotations31 from venture capitalists and scientists illustrate the ambivalence of whether the venture capital industry is willing or reluctant to enter the forthcoming Kondratieff wave:

� [V]enture capitalists focus on the middle part of the classic industry S-curve. They avoid both the early stages, when technologies are uncertain and market needs are unknown, and the later stages, when competitive shakeouts and consolidations are inevitable and growth rates slow dramatically;

� [Nanotech] cannot yet provide the customary tenfold returns on investments within five years, or fivefold returns within three years, which are usually expected by VCs;

� [venture capitalists do not have] deep enough pockets – or enough patience – to fund such a [nanotechnology] startup to profitability;

� Silicon Valley suddenly became interested in nanotechnology after the dotcom crash;

� We believe that nanotech is the next great technology wave, the nexus of scientific innovation that revolutionalizes most industries and indirectly affects the fabric of society. Historians will look back on the upcoming epoch with no less portent than the Industrial Revolution;

� I have many cold calls from venture capitalists displaced by the dot-com era and looking for the next big thing. A lot are focusing on nanotech as the next big payday – Those who excel at popularizing the field are not

of course other terms referring to “crowding out” or “Gresham’s law” might suit as well (Siemon, 2006, 2009). 30 Of course, there are some exceptions. Large companies especially keep some of their financial resources ready to spend so-called “Corporate Venture Capital” into new firms in order to have a “window on technology”. Coveney/Moore (1998) regard those investors as informal “corporate angels”. 31 All quoted in Miller et al. (2005, pp. 195-7).


necessarily those who understand it (William Stanley – head of Hewlett-Packard’s nanoscience research labs).

It can be concluded that venture capitalists see the potential of nanotechnology to be the next “big thing” after the dotcom crash, but they are not allowed, able and/or willing to pick those winners which multiply their returns on investments within a short-term perspective. Thus, the hard work of taking over the role of financing those critical seed and start-up stages of a firm’s life cycle in the beginning of a new Kondratieff wave must be done by someone else. Venture capitalists and banks rely on successful informal investments producing positive signals to the formal financing systems. Regarding a theoretical discussion of Schumpeter’s thesis of a “genuine banker,” it can be claimed that venture capital intermediaries are not suitable to solve Schumpeter’s problem. And it must be supposed that formal venture capital industry will not be the cutting edge for financing 6th Kondratieff’s start ups.

4. Conclusion

Without any doubt, Schumpeter can be regarded as a pioneer of evolutionary economics. Seen from a modern evolutionary perspective, entrepreneurial functions are either structurally linked to the financial or the real sphere of economic activity. Although economic growth is usually seen to be caused by a raise of inputs (i.e. production factors), this input is strongly determined by the innovative function of entrepreneurship. In order to gain and keep these innovative skills, evolutionary capabilities are necessary. In this line of argument, Schumpeter’s financing thesis must be reconsidered. Thus, this paper aims to demonstrate Schumpeter’s “financing error” by its theoretical and historical background. In Schumpeter’s lifetime, he was (at least) partially right with regards to his considerations of a banking system which was skilled in financing innovative entrepreneurship for certain periods. But times have changed and even a brilliant academic like Schumpeter was not able to forecast the historical (and theoretical) developments which have taken place during the last decades within the financial sphere. He only gives some hints in his Business Cycles for our evolutionary interpretation (Siemon, 2006, pp. 100-103).

In this paper the issues of endogenous money supply, as well as the corresponding transmission mechanisms, have been addressed. In connection to economic growth, firstly, the importance of financial multipliers (bootstrappers, business angels) has been demonstrated. Secondly, we have exposed some problems of financial intermediation (banks, venture capital firms) which can lead to a decreasing rate of innovation financing. In our view,


the main problem of Schumpeter’s theory stems from his dichotomy between static equilibrium as a starting point for economic development and dynamic disequilibrium. In equilibrium, there is no space for uncertainty, innovative entrepreneurship and financial intermediaries. It can be shown that the static remainder of Schumpeter’s theory is his idea of a (financial) entrepreneur who combines given production factors with given competencies in a new way. Thereby, an evolutionary interpretation of financial entrepreneurship is the key to understanding the division of labor between formal and informal capital markets. Nonetheless, there is still a missing link regarding his financing error: One needs to have a theoretical approach that is able to overcome input logic in order to integrate financial entrepreneurship (and transmission-process-causing multipliers) as well as traditional entrepreneurship. Thus, an evolutionary reconsideration of Schumpeter’s financing thesis may give answers to several questions especially needed in the context of financing next Kondratieff’s start-ups:

� How can investors and entrepreneurs control “market risks” and “behavior risks”?

� Why does only the informal financing system play such a strong role in reproducing entrepreneurial energy, needed especially in the context of financing innovations by evolution?

� Why do financial intermediaries have tremendous problems to sustain (and to implement) the innovation function by interfunctional evolution?

� Which factors are accountable for a loss of entrepreneurial energy when financial intermediaries enter the formal market?

� Can we explain the underlying transmission process behind the endogeneity of money?

By providing answers to these kind of questions, evolutionary economics may take a progressive scientific problem shift (in the sense of Imre Lakatos) because financial entrepreneurship is the connecting link between the traditional strands of economic theory. Furthermore, it is the key to a (still lacking) theory of financial intermediation. Such a theory should be able to explain the existence and behavior of financial intermediaries and disintermediaries. In addition, the findings mentioned above will have serious consequences for economic policy advice as well: Traditional ways of promoting the venture capital industry, e.g. by tax-incentives, might threaten rather than help the founder.


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Neue Bücher aus dem Rainer Hampp Verlag

Kleine und mittelgroße Unternehmen im globalen Inno vationswettbewerb. Technikgestaltung, Internationalisierungsstrategien , Beschäftigungsschaffung Herausgegeben von Roland Abel, Hans H. Bass und Robert Ernst-Siebert Können kleine und mittelgroße Unternehmen, die „Jobmaschinen“ der Volkswirtschaft, durch Innovationen Wettbewerbsvorteile auf internationalen Märkten erzielen? Welche Faktoren fördern, welche hemmen ihre Innovationskraft? Und was kann, was soll die Wirtschaftspolitik tun? Antworten auf diese Fragen geben Wirtschaftswissenschaftler und Soziologen in diesem Band. Dabei finden vier Blickwinkel Berücksichtigung: betriebliche, betriebsübergreifende, wirtschaftspolitische und weltwirtschaftliche Perspektiven. Kontroverse Positionen und unterschiedliche wissenschaftliche Ansätze werden deutlich gemacht. Dieser Band ist unverzichtbar für alle, die sich in der aktuellen Diskussion mit dem Mittelstand, mit der Globalisierung, mit Arbeitsmarktpolitik und Innovationstheorie beschäftigen. Mit Beiträgen von Utz Dornberger, Gerhard M. Feldmeier, Jörg Freiling, Ernst Mönnich, Bettina Peters, Axel Sell, Astrid Ziegler und anderen. ISBN 978-3-86618-076-5 400 Seiten, 29,80 Euro KMU im globalen Innovationswettbewerb. Eine Untersuchung des betriebsgrößenspezifischen Innovationsverhaltens und innovationsinduzierter Bes chäftigungseffekte von Robert Ernst-Siebert Innovationen sind die Triebfeder wirtschaftlicher Entwicklung und damit auch maßgeblich für die Beschäftigungsentwicklung. Kleine und mittelgroße Unternehmen (KMU) unterscheiden sich nicht nur hinsichtlich ihrer materiellen Voraussetzungen bei der Durchführung von Innovationsprojekten, sondern auch im Hinblick auf die Art und Weise, mit der Neuerungen generiert werden. Aus Sicht der Innovations- und Technologiepolitik interessieren vor allem die Fragen, inwieweit die Einbindung von KMU in das Nationale Innovationssystem gelungen ist, sowie die Frage, ob die derzeit angewendeten Förderinstrumente geeignet sind, um vorhandenes Innovationspotential zu aktivieren und nutzbar zu machen. Auf der Basis einer empirischen Primärerhebung sowie betrieblicher Fallstudien wird am Beispiel von drei Branchen das Innovationsverhalten von KMU, die Beschäftigungswirkung von Innovationen sowie die Relevanz innovations- und technologiepolitischer Förderinstrumente untersucht. ISBN 978-3-86618-218-9 220 Seiten, 27,80 Euro www.Hampp-Verlag.de

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