8 - Is the Spanish public sector effective in backing venture capital?

Abstract

This chapter analyzes the role of private versus public venture capital (VC). The study is based on a highly representative sample of investments made in Spain, which makes this study interesting as Spain is a country where public sector funding played a principal role in the 1980s, sharing this role with private-sector investors since the early 1990s. The role played by venture capitalists in investment firms is thought to be important, as they are specialized financial intermediaries that provide a number of non-financial inputs along with their financial contribution. Firms backed with public funds are expected to grow at a lower rate since such funds are more oriented to social aims and regional development of depressed areas. Focusing on employment growth and using a sample of venture-backed Spanish firms, results show that only private VC has a significant impact on this variable. This chapter also studies whether this result could be related simply to geographical location, since the bulk of public funds are invested in underdeveloped areas that lack the appropriate networks to foster growth. Results show that while the positive impact of private funds is significant both in developed and underdeveloped areas, this is not the case for public funds. This questions the role played by Spanish public VC and points to the importance of the managerial support that is inherent in private venture capital. The implications of these results for policy makers lead to the adopting of alternative management strategies, such as assigning the allocation of public money to experienced private management teams rather than creating management structures that are neither independent in their activity nor experienced in venture capital investing.