Abstract

Venture capital (VC) markets are essential for the development of high-growth entrepreneurship. Previous studies have discussed the importance of formal institutions and regulations in the creation of VC markets. However, the role played by informal institutions—and how they interact with formal institutions—is still puzzling. To disentangle this issue, we performed a 26-year analysis of the case of Chile, an emerging market where formal institutions and regulations had long been in place but a VC market failed to emerge. Based on our findings, we develop a theoretical framework where we propose that (1) the presence of strong formal regulatory institutions that support VC markets is a necessary but not sufficient condition for the emergence of a robust level of VC activity, and (2) informal institutions that legitimate high-growth entrepreneurship are a necessary antecedent to the availability of high-growth entrepreneurs and, therefore, to the emergence of a robust level of VC activity.