Government Venture Capital Funds Research Articles

Substantial innovation or strategic innovation? The impact of government venture capital guidance funds on corporate innovation

AbstractBased on a dual‐differential model of the number of patent applications issued by A‐share enterprises from 2014 to 2019, this article analyzes impact of Venture Capital (VC) guided by government on company's innovation and their internal mechanisms. The results show that the number of patent applications increases after enterprises are invested directly or indirectly by the government guiding fund, indicating that this kind of VC has a positive guidance on enterprise innovation. However, after further studying by subdividing patent types, it is found that enterprises pay less attention to invention patents, which hold higher technical requirements, and focus on “quantity” rather than “quality” in patent applications. This result also reflects that the investment of VC guided by government promotes the overall enterprise innovation, but the positive effect on the innovation quality is not significant. Our article not only affirms the positive influence of VC guided by government on enterprise innovation, but also puts forward some suggestions on the management of government guiding fund.

Government venture capital funds: Balancing the impact of social and financial goals on startups

This study evaluates the policy objectives and efficacy of government venture capital funds (GVCs) on the performance of invested entrepreneurial ventures. Analyzing data from China on GVCs, private venture capital funds (PVCs), and foreign venture capital funds (FVCs), it reveals that GVC-supported firms surpass those backed solely by domestic PVCs in R&D investment, return on assets (ROA), Tobin's Q, and corporate social responsibility metrics. Acting as government stewards, GVCs effectively fulfill policy goals. Moreover, GVC-backed ventures attract more venture capital following their lead and achieve higher one-day returns at IPOs compared to firms backed solely by private VC funds.

How to promote the digital business model innovation of high‐tech SMEs through government venture capital? An evolutionary game perspective

AbstractDigital business model innovation plays a crucial role in the growth of high‐tech small and medium‐sized enterprises (SMEs). In this research, we introduced tripartite evolutionary game models that include the government, venture capital (VC) institutions, and high‐tech SMEs, operating within the context of government venture capital. Within the scenarios of government revenue and loss compensation, we assess the evolutionary stable strategies of each stakeholder and analyze variations in the evolution results. Using numerical simulation, we investigate how factors impact players' strategic choices and the evolution of the system. The findings indicate the presence of an indirect transmission mechanism among players' strategic choices, which collaboratively stabilizes the game system. Furthermore, we investigate the policy consequences of various compensation mechanisms and find that high‐tech SMEs' strategic choices are not influenced by these compensation approaches. However, the incentive effects of different compensation on the government and VCs' investment strategies vary. Revenue compensation is more favorable for VC institutions but places a greater financial burden on the government. In contrast, loss compensation is a more efficient approach for the government. This study offers valuable insights for the management and operation of government venture capital funds, and the advancement of digital business model innovation for high‐tech SMEs.

A Review of Government Venture Capital in China: History, Drawbacks and Remedies

AbstractThe past 40 years have witnessed the growth of government venture capital (GVC) in China. This work reviews the brief history of GVC in China, as an example of emerging markets, and puts forward several major drawbacks. First, it is unclear which bureau is exactly responsible for GVC, resulting in redundant, sometimes conflicting regulations. Second, a lack of integrated financial planning leads to a mismatch between the situation of local enterprises and actual investments. Moreover, due to the lack of a market‐oriented management system, GVC fund managers are not fully motivated. We propose corresponding remedies and discuss the implications.

Firm selection for government venture capital funding to youth tech-based startups

PurposeThe purpose of the study is to review and understand firm selection mechanism involved in government venture capital (GVC) funding and identify key factors influencing selection of tech-based firms for GVC funding.Design/methodology/approachThis paper is based on real-time methodology. The data was generated from interviews of 60 young applicants, who applied for startup funding, and analyzed using statistical techniques to draw the results.FindingsThis review identifies financial viability, market viability and technological innovation to have the strongest predictive ability in firm selection process of the GVC funding program for tech-based youth-owned startups in the first round of interview. This review also highlighted that social impact is not a statistically significant variable in firm selection process in GVC funding.Originality/valueThis study tests the validity of the theory of GVC based on quantitative analysis of field data and identifies key factors with strong predictive abilities for GVC funding, more particularly for the youth-owned tech-based startups. This study brings to light the mechanism adopted for GVC funding and addresses gaps in the literature relevant to firm selection mechanism in GVC programs. This study would help GVC Fund Managers to review their own GVC programs in terms of selection mechanism and help them in appropriate designing of such programs.

Spatial Impact of Government Venture Capital on Urbanization and Its Path—Evidence from the Yangtze River Delta Urban Agglomeration in China

Despite being the world’s largest developing country and experiencing rapid economic growth, China’s urbanization process lags behind the global standard. The comprehensive promotion of urbanization development is a critical issue for the Chinese government, with government venture capital playing a significant role in promoting regional economic development. Using urbanization dimension levels extracted through factor analysis, this study analyzes the impact of government venture capital on the urbanization development of the Yangtze River Delta region of China and explores its path to determine its spatial spillover effect on surrounding areas. The results show that government venture capital funds can significantly promote urbanization development in this region, primarily by influencing the residents’ standard of living and urban construction levels. In addition, the spatial spillover effect of urbanization can be realized through the promotion of the urban construction level and the ecological health level of surrounding areas. While previous literature has examined government venture capital from multiple perspectives and dimensions, few scholars have investigated the impact of government venture capital on the critical issue of urbanization development. This study fills that research gap and serves as a reference for the Chinese government to promote high−quality urbanization development.

Can government venture capital guidance funds promote urban innovation? Evidence from China

AbstractDue to externalities and market failure, innovation activities are facing insufficient investment. Venture capital guidance funds (VCGFs) are an important policy implemented by China's government to guide private capital to participate in innovation and entrepreneurship activities, and it can have an important impact on scientific and technological innovation. Based on the panel data of 285 cities in China, this paper empirically analyzed the impact of VCGFs on innovation and its mechanism. VCGFs can significantly promote urban innovation and this role is sustained for three years following VCGF establishment. Further research shows that VCGFs do not have a direct impact on innovation but promote innovation by promoting the accumulation of innovative talent and capital, and the capital accumulation effect of VCGFs is the main path through which they promote urban innovation. Corruption is also a factor that restricts the effectiveness of an innovation policy. Thus, China's top‐down anticorruption campaigns can strengthen the ability of VCGFs to promote urban innovation. This paper opens the black box to show the mechanism through which VCGFs impact urban innovation, affirms the important role of the government in the regional innovation system, and clarifies the debate on government innovation policy.

Did Government Venture Capital Fund Innovative but Less Profitable companies? Evidence from China

Governmental venture capital (GVC) is a typical dual-purpose hybrid entity, which aims to increase social welfares as well as making profits for investors. Yet little is known about how the dual purposes shape GVC’s investment strategies that interact with private venture capital’s (PVC). Applying a two-sided matching model, we develop a structural model to examine whether GVCs invested in innovative but less profitable companies that ignored by PVCs. Using the data of Chinese VC industry in 2000-2012, we find supports for our hypotheses. These fresh results suggest that GVC commendably fulfill their social mission while pursuing economic benefits in a competitive environment. Moreover, GVCs are at least not worse than PVCs in nurturing companies in term of achieving IPO/M&A, and they support company innovation effectively in term of patent application.

The Definition of Money Grand Received as a Key Determinant of Venture Investment Size in IT Russian Based Startups

Since 2006, Russian policymakers have been actively taking various measures to stimulate the venture capital market. Government venture capital funds are being created, for example, the Russian Venture Company with a capital of 15 billion rubles. Since 2011, thanks to the new legal mechanism, state-owned companies begin to invest in private venture funds. These measures have led to increased fundraising for startups. The main mechanism of such financing is grant support for young companies. According to 2018, the amount of grants to the total amount of funds raised in Russia is one of the highest among developed and developing countries, for comparison in the USA, it is more than 2.5 times lower. The venture market specifics is such that when deciding whether to invest in a company, investors inevitably turn their attention to the previous rounds of financing the company. The purpose of the work is to analyze the effect of the money grant received on the volumes of attracting subsequent financing.
 To analyze the impact of the receiving money grant, the determinant approach was used, as the most common in research on this topic. Based on a sample of 184 Russian IT startups, two OLS models have built to show the effect of money grant size to follow-on investment rounds.
 As a result, various sets of determinants were considered that explain the volume of investments attracted by startups for both international markets and the Russian market. In addition, an excursus was conducted to study the effectiveness of government venture funds, which are the main grantors in the Russian venture market. Based on the results of previous studies on this topic, it was shown that the size of the money grant has a positive effect on the amount of funding attracted in both follow-on rounds. For comparison, a number of previous studies of the Russian venture capital market show that the investment size of the current round has influenced only by the previous fundraising. Such a result testifies to the attractiveness for investors Russian IT startups that received grant support.
 The scientific novelty of the article is that the amount of funding attracted by startups is explained by such a specific indicator as grant support. In addition, the results obtained have certain practical value for those who invest in Russian startups. Investing in startups that received grants increases the likelihood of an exit for the investor in the next investment round.

Bridging the equity gap for young innovative companies: The design of effective government venture capital fund programs

Governmental venture capital funds (GVCs) are created by policymakers around the world to support young innovative companies (YICs) with the aim of “bridging the equity gap”. In this paper, we study the heterogeneity in the design of GVC programs in Europe and identify the design features that are most effective in achieving the desired outcomes of this policy. Specifically, we focus on the probability that GVC-backed companies will receive additional funds from private venture capital investors and, ultimately, changes in their growth and innovation outcomes. We find that the choices of location, colocation, syndication and industry focus of a GVC program substantially influence the extent to which it is able to achieve such goals. Important policy implications are discussed.

The role of government venture capital funds: Recent lessons from the U.K. experience

AbstractU.K. Government Venture Capital (GVC)‐backed schemes have evolved to provide more effective targeted funding for high growth potential firms, but policy designers should be cognizant of the changing external financing ecosystem when designing co‐investment schemes. We investigate the effectiveness of government backed venture capital schemes (GVCs) in funding early stage entrepreneurial ventures. Addressing fundamental issues of additionality, crowding out, economic impact, and sustainability, we discover that U.K. GVC‐backed schemes have evolved to provide more effective targeted funding for high growth potential firms. Combining primary data from a number of sources, we discover positive impacts of increase in turnover and employment in funded ventures, along with effective targeting of specific funding gaps. Significant issues remain, including a lack of liquidity in follow‐on funding and a requirement for longer time horizon in funds, as firms typically fall behind in development schedules. There is, therefore, a need for greater flexibility in GVC‐backed funds. Policy designers should be cognizant of the changing external financing ecosystem when designing co‐investment schemes.

The Role of Government Venture Capital Funds: Recent Lessons from the UK Experience

We investigate the effectiveness of government backed venture capital schemes (GVCs) in funding early stage entrepreneurial ventures. Addressing fundamental issues of additionality, crowding out, economic impact and sustainability, we discover that UK GVC-backed schemes have evolved to provide more effective, targeted, funding for high growth potential firms. Combining primary data from a number of sources, we discover positive impacts of increases in turnover and employment in funded ventures, along with effective targeting of specific funding gaps. Significant issues remain, including a lack of liquidity in follow-on funding and a requirement for longer time horizon in funds, as firms typically fall behind in development schedules. There is, therefore, a need for greater flexibility in GVC-backed funds. Policy designers should be cognisant of the changing external financing ecosystem when designing co-investment schemes.

Perceptions of Youths on Government Venture Capital Fund (The Accrued Empowerment Benefits)

Perceptions of Youths on Government Venture Capital Fund (The Accrued Empowerment Benefits)

Government as fund-of-fund and VC fund sponsors: effect on employment in portfolio companies

Governments around the world have set up fund-of-fund programs to increase the supply of venture capital financing to young growth-oriented firms. In these programs, a government fund-of-fund acts as limited partner in a venture capital fund. The venture capital investment process is hereby delegated to external investors, which were selected by the government fund-of-fund. We investigate employment growth in 108 portfolio companies that benefited from the ARKimedes fund-of-fund in Flanders. Accounting for the heterogeneity in the types of venture capital investors managing hybrid funds, and the associated goal diversity and resource endowments, we find that portfolio companies backed by hybrid independent venture capital funds show greater employment growth than those backed by hybrid captive or hybrid government venture capital funds. This finding is relevant because it indicates that the financial objectives of hybrid independent venture capital funds are highly compatible with the government’s objective of employment growth, as providing companies with superior monitoring and value adding services with the objective of realizing a successful exit creates employment in the process.

When Can Government Venture Capital Funds Bridge the Equity Gap?

Several papers find that government venture capital funds do not add (much) value to their investees, underperform their private peers, or crowd out private investment. However, a major objective of public initiatives in the market for start-up financing is to “bridge the equity gap”. This paper addresses the conditions under which government venture capital funds may fulfill this mission in a best possible way. Our data reveals that the competitiveness of a region where a government venture capital fund is located strongly affects its success. Furthermore, potential collusion and regulatory capture detriment the success likelihood of GVC backed start-ups. Nevertheless, the preferable and most simple method to accomplish the mission is if GVC funds gain particular investee-industry experience and learn from their private peers in syndicated transactions.

Research on the performance evaluation of government venture capital fund based on factor analysis and DEA model

According to the existing domestic and foreign research results as well as the characteristics of the guide fund, this paper constructs the index system of guide fund performance evaluation, selects the data of the part of the enterprises shared by the government guide venture capital fund and uses the factor analysis method to optimize the evaluation model, then uses empirical analysis based on DEA-BCC model. The result shows that the optimized evaluation model can fully evaluate the performance of the guide fund. At the same time, empirical analysis based on DEA-BCC model shows that the results can objectively reflect the operating conditions of companies accepted investment, which provides the objective reference for government venture capital fund and companies accepted investment.

Government Venture Capital and Cross-Border Investment

Do government venture capital (GVC) funds crowd-in or crowd-out international private venture capital (PVC) investment? The crowding-in effect arises when international PVC benefits from government...

Government Venture Capital and Cross-Border Venture Capital Investment

Do government venture capital (GVC) funds crowd-in or crowd-out international private venture capital (PVC) investment? The crowding-in effect arises when international PVC benefits from government subsidies through the enhancement of an entrepreneurial ecosystem and investment syndication. The crowding-out effect arises when GVC competes with PVC, bidding up deal prices and lowering returns, thereby spurring local PVCs to invest internationally. We examine data from 26 countries from 1998 to 2013. The analysis indicates that, on average, mixed structured GVC investments crowds-in, and pure-structured GVC investments crowds-out domestic and foreign PVCs. Moreover, the effect of both structures is greater on domestic PVC compared to foreign PVC.

Public economics gone wild: Lessons from venture capital

A recent article in the Journal of Public Economics has asserted, among other things, that government venture capital funds in Europe have crowded out private venture capital. I explain that the findings in that paper are based on empirical measures that are completely flawed. Moreover, I show with data spanning 13 countries and the years 1989–2011 that government venture capital funds in Europe have not crowded out private venture capital investment. Finally, I draw implications for studying venture capital and public policy for other countries such as India and China.

The value added by government venture capital funds compared with independent venture capital funds

Government venture capital (GVC) funds have been a common policy initiative in European countries to overcome funding gaps in the promotion of early-stage ventures. In this work, we focus on the performance of such government funds. We compare the importance for the firm's development of post-investment, valueadded activities by GVC firms and independent venture capital (IVC) firms.We use a unique data set based on the results of a survey addressed to young high-techVC-backed firms from seven European countries. The survey gauged the importance of the contribution by the first lead investor in a variety of activity areas, as assessed by the investee companies. Attention was paid to potential adverse effects of the post-investment engagement of investors.Using a composite indicator of the value added, we find no statistically significant difference between the two types of investors. However, the profiles of value added differ across investor types, and, in particular, the contributions of IVC funds prove to be significantly higher than those of GVC funds in a number of areas, including the development of the business idea, professionalisation and exit orientation.