The Effects of Government-Sponsored Venture Capital

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A modest amount of government venture capital finance seems to improve the performance of entrepreneurial ventures relative to ventures supported purely by private venture capitalists.

Some of the world's most influential enterprises, including Google, Intel, and Apple, were financed by venture capitalists. Rapidly growing entrepreneurial enterprises are thought to be important sources of innovation, employment, and productivity growth. Thus it is not surprising that many governments have provided financing to entrepreneurial ventures. The public sector's commitment to venture capital is substantial, including forgone taxes, outright subsidies, preferential regulation, and public provision of investment capital.

In The Effects of Government-Sponsored Venture Capital: International Evidence (NBER Working Paper No. 16521), authors James Brander, Qianqian Du, and Thomas Hellmann compare the exit performance of commercial enterprises that obtained at least part of their funding from government sponsored venture capitalists (GVCs) with those that received funding from only private venture capitalists (PVCs). They conclude that a modest amount of GVC finance seems to improve the performance of entrepreneurial ventures relative to ventures supported purely by private venture capitalists. However, high levels of support from GVCs are associated with weaker performance. According to these findings, a little bit of government support appears to raise investment returns, but too much government support has the opposite effect.

The authors use data on 21,852 enterprises based in 25 countries, which received venture capital funding from 2000-2008. This large sample has broad international coverage of venture capital investment. Just under half of these enterprises were based in the United States, but there was also substantial representation from various European and East Asian economies, along with Australia, Brazil, Canada, India, and Israel. The authors focus on just one important summary performance measure: successful exits. This measure is correlated with other performance measures, such as investor returns, and employment and innovation.

The evidence presented in this paper suggests that GVCs may be helpful in providing certain kinds of support, including financial support, but may become less useful when they have actual control over business decisions. If they lack control, then the usual concerns about governments de-emphasizing economic objectives to achieve alternative objectives are less likely to arise. In other words, GVC finance may be at its most effective when it remains disciplined by private venture capital. The authors also find that there are significant differences between government ownership and government support of venture capital firms, broadly suggesting that support outperforms ownership.

-- Lester Picker