Financing innovative SMEs of traditional sectors: the supply side

Purpose – The purpose of this paper is to study the funding difficulties of innovative SMEs in traditional sectors (ISTS) and asks whether current conditions represent a financing market failure. Design/methodology/approach – The study explores the financial tools available in Israel and their relevancy to ISTS by conducting in-depth interviews with different key figures in the financial industry. These include managers at venture capital (VC) funds, banks, private equity (PE) funds, mezzanine funds, as well as officials from the public sector. Findings – In this study the authors identify the existence of a market failure relating to the funding of ISTS and suggest that the current VC, PE and mezzanine fund models cannot provide adequate financing solutions for ISTS in Israel. Practical implications – In light of the importance of these firms to the economy, governmental intervention is required, if more innovative activity of ISTS is desired. To this end, the study proposes a funding scheme that addresses the special needs of these companies. Originality/value – The study contributes to the literature by focussing specifically on the challenges of ISTS and by using a qualitative approach to analyzing the relevancy of different financial mechanisms to their needs.