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Can the Government Be an Effective Venture Capital Investor?

Author

Listed:
  • Martina Fraschini

    (University of Lausanne, HEC; Swiss Finance Institute)

  • Andrea Maino

    (University of Geneva)

  • Luciano Somoza

    (University of Lausanne, HEC; Swiss Finance Institute)

Abstract

In recent years, governments have allocated increasing capital to direct startup funding through Government-sponsored Venture Capital funds (GVC). In this paper, we study the role of GVCs in the venture capital market and their relationship with Private Venture Capitalists (PVC). Using European data, we find that GVCs invest consistently with their policy mandates, favoring specific industries, geographical areas, and firms with high innovation potential, but have lower average performances. These findings indicate that GVCs can identify innovative companies and prioritize positive externalities over profit maximization. We build an asset pricing model with heterogeneous preferences to study the role of GVCs in catalyzing PVC investments. We find that PVCs invest less in startups previously funded by GVCs, in line with empirical evidence. At aggregate level, GVC investments can crowd-in private ones if they focus on startups in VC hubs.

Suggested Citation

  • Martina Fraschini & Andrea Maino & Luciano Somoza, 2022. "Can the Government Be an Effective Venture Capital Investor?," Swiss Finance Institute Research Paper Series 22-39, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2239
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    More about this item

    Keywords

    venture capital; public investments; crowd-in; subsidy; industrial policy; patent data; innovation.;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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