Strong investor protection is a critical element in fostering start-up financing, says a new research report from Deutsche Bank.
Policymakers in many countries struggle with the issue of improving access to finance for technology-oriented startups, DB Research notes in its report. And, it says, while there’s no silver bullet solution to this problem, “research suggests that effective protection of minority investors is one important element to improve investments by venture capitalists, a key metric for access to finance by startups.”
Finance for startup firms often relies on equity, the firm notes, because their risk/reward profile makes them better suited for equity funding. “Usually risks are skewed, meaning that there are many failures and a few spectacular successes. Only an equity investor shares fully in the upside of these successes to make up for the losses accrued on the failures,” it explains.
“However, assets of technology-oriented startups or other innovative firms are often intangible (think of a business concept, design idea or not-yet patented technology), making it easier for controlling stakeholders or other insiders to appropriate such assets at the expense of minority owners. Therefore, strong investor protection is needed to limit abuse,” it concludes. “This encourages investments and reduces financial constraints for startups and innovative firms.”