Abstract
AbstractGovernment involvement in the venture capital (VC) market has become an important catalyst of the entrepreneurial ecosystem of young and innovative firms. There is an extensive literature describing the VC model, but the models of its government backed variants are not comprehensively discussed. The article focuses on the model of purely government backed venture capital (GVC) and hybrid venture capital (HGVC). The conclusion of this article is that, by the logic of their models, GVCs are destined to underperform than private VCs. Many articles see HGVCs as a step forward compared to GVCs, as they involve private participants. The novelty of the current article lies in bringing out the drawbacks deriving from the system of hybrid venture capital funding by creating a complex theoretical framework of the HGVC model. We show that due to the crowding in of private participants, this scheme creates a two-goal system where the private profit maximising interests conflict with the economic policy goals. The complex system of HGVC is exposed to increased moral hazard issues that might lead to higher distortions than GVC. The conclusions are especially relevant in the case of developing industries.
Highlights
Young and innovative small firms play an essential role in modern economies
Brander et al (2015) provided a detailed discussion about the effects of different type of government funds. Their general result was that the government backed venture capital (VC) underperformed than their private venture capital (PVC) peers, but they found evidence that HGVCs improved the exit prospects of firms compared to the pure government backed venture capital (GVC)
A research investigating the effects of HGVCs and GVCs of the Hungarian investments made in 2010–2016 found evidence that the hybrid venture capital backed firms generated lower growth and employment than their purely government backed VC financed peers
Summary
There are many studies emphasising their importance in bringing radical innovations to market (Abernathy – Utterback 1978; Scherer – Ross 1990; Kirchhoff 1993; Bower – Christensen 1995; Baumol 2002; Roszko-Wojtowicz – Białek 2018) Such enterprises have a spurring effect on employment and economic growth. Government agendas aiming at the development of VC markets worked under the presumption that the inefficiencies of the supply side lag behind the relative underdevelopment of the market; the public sector tried to support private investors through direct interventions and filled in for them in their absence by providing a VC type funding. While in theory the primary goal of both types is to alleviate the funding problems of young and innovative enterprises and, in this sense, they are similar to market-backed private venture capital (PVC), the underlying incentives are different and they – by their very nature – lead to different results on the market.
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