Government Venture Capital Research Articles

Performance of government venture capital (GVC): an Asian perspective

This article compares the exit performance of companies backed by government venture capital (GVC) with that of firms backed by independent venture capital (IVC). Using a sample of 3,817 firms from 9 Asian developing countries during a 26-year period (1991–2017), we run multinomial logistic regressions and initially show that GVC-backed firms are more likely to be financed in the early stage than IVC-backed firms are. In doing so, GVC absorbs the higher probability of an unsuccessful exit associated with firms financed in the early stage. In contrast, we find that in the expansion and later stages, GVC-backed firms perform better than IVC-backed firms. Overall, we show that GVC-backed firms outperform IVC-backed firms. These empirical findings are reinforced by several robustness checks. Thus, we challenge the hypothesis on GVC underperformance tested in the literature on other geographical areas. Finally, we provide evidence that mixed syndication (a combination of GVC and IVC) improves the exit performance of ventures.

Monitoring, mentoring and nurturing value in government venture capital entrepreneur development programmes

PurposeThis research explores the provision of monitoring, mentoring and nurturing in a government venture capital (GVC) entrepreneur development programme and how these activities might create value for high potential startups (HPSUs).Design/methodology/approachA qualitative in-depth case study pursued the research question – how does GVC entrepreneur development programme provision of non-financial monitoring, mentoring and nurturing create value for HPSU businesses? The paper uses quasi-random sampling of case entrepreneurs selected from publicly available lists of HPSUs and interviews with entrepreneurs, employees and co-founders, in tandem with reviewing HPSU documentation.FindingsFindings highlight monitoring, mentoring and nurturing create value for HPSU entrepreneurs, and that GVC entrepreneur development programmes offer greater value to HPSUs than GVC investment alone. Programme activities build capacity by skills acquisition, access to a variety of external experts in non-technical business functions plus national and international private VC networks.Research limitations/implicationsThis study provides evidence that robust monitoring, mentoring and nurturing activities of a GVC entrepreneur development programme creates entrepreneur readiness for private investor engagement.Practical implicationsThis research highlights the influence of monitoring, mentoring and nurturing activities on HPSU entrepreneurs embedded in a GVC entrepreneur development programme. HPSUs seem better prepared for investor interactions by considering “non-monetary needs” in their funding strategies.Originality/valueThe findings illustrate how a GVC entrepreneur development programme can positively impact GVC-entrepreneur influence and outcomes. In offering an in-depth case study of better practice, we extend prior literature on how GVCs can help bridge the equity gap by providing value adding non-financial supports, without creating a false VC market where GVCs crowd out private investors.

Impact orientation and venture capital financing: The interplay of governmental, social impact and traditional venture capital

In addition to traditional venture capital (VC), governmental VC and social impact VC investors have emerged as alternatives to fund entrepreneurial ventures, especially start-ups that incorporate social and/or environmental objectives into commercial operations. Using a sample of 15,510 VC-backed start-ups, we show that impact-oriented ventures are more likely to receive funding from alternative VCs. Both social and environmental orientations increase the chances that a start-up secures funding from impact VCs while social orientation drives results for government VCs. Importantly, we also show that impact-oriented ventures are more likely to secure investment from traditional VCs when impact and governmental VCs co-invest.

Endorsement and firm financing: Evidence from government venture capital market in China

This study investigates the effect of government venture capital (GVC) investment on firm financing and its underlying mechanism, utilizing 31,299 firm-year observations from 2008 to 2022 in China. The findings reveal that GVC investment enhances target firms’ equity financing, and it is the "stamp of endorsement" by the GVC investment that enhances equity financing for firms. Through a series of tests, the mechanism for the impact of GVC investment on equity financing is established via increased government subsidies and reduced cost of equity. In addition, firms with higher market awareness about GVC and privately-owned firms benefit more in enhancing their equity financing; this further confirms that financing enhancement originates from the government's role through endorsement mechanism in venture capital investment. The results remain robust after several robustness checks.

Exploring the Impact of Government Venture Capital (GVC) on Private Venture Capital (PVC) Investment Choices in China's Semiconductor Industry

Can government venture capital (GVC) change the investment choice of private venture capital (PVC) to fulfill its political mission? Most of the previous literatures on GVC and PVC focus on the post venture capital (VC), while there are few studies on the impact of GVC on PVC before venture capital investment. This phenomenon is more obvious in previous studies with China as the research background. Based on the background of China's semiconductor industry, which is strongly supported by the Chinese government, this paper studies whether GVC can affect the investment niche and venture capital investment mode of PVC. Through empirical analysis of the VC data of semiconductor industry in Anhui, Beijing, Jiangsu and Guangdong provinces from 2012 to 2022, I found that in the semiconductor venture capital market of the above four provinces and cities, GVC effectively played a role of leverage and effectively attracted PVC to invest in the semiconductor industry. And as the number of semiconductor GVC data as a percentage of all semiconductor VC data continues to decline year after year, PVC is more inclined to invest in semiconductor R&D firms, and more inclined to invest the firms whose location has served as a target region for government semiconductor related guided funds, and the investment form of PVC is more inclined to syndicate investment with government venture capitalists. It can be said that GVC has effectively influenced the investment decisions of PVC and fulfilled its political mission of promoting the independence of technology and production in China's semiconductor industry.

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.

When government is the solution: creating the arms industry in the Connecticut River Valley in the 1800s

PurposeThis historical example of the creation of the arms industry in the Connecticut River Valley in the 1800s provides new insights into the value of government venture capital (GVC) and government demand in creating a new industry. Since current theoretical explanations of the best uses of governmental venture capital are still under development, there is considerable need for further theory development to explain and predict the creation of an industry and especially those industries where failures in private capital supply necessitates governmental involvement in new firm creation. The purpose of this paper is to provide an in depth historical review of how the arms industry evolved spurred by GVC and government created demand.Design/methodology/approachThis study uses abductive inference as the best way to build and test emerging theories and advancing theoretical explanations of the best uses of GVC and governmental demand to achieve socially required outcomes.FindingsBy observing this specific historical example in detail, the authors add to the understanding of value creation caused by governmental venture capital funding of existing theory. A major contribution of this paper is to advance theory based on detailed observation.Originality/valueThe relatively limited research literature and theory development on governmental venture capital funding and the critical success factors in startups are enriched by this abductive investigation of the creation of the historically important arms industry and its spillover into creating the specialized machine industry.

Venture capital and high-tech start-ups in Europe: a systematic review of the empirical evidence

ABSTRACT Empirical literature on venture capital (VC) and VC-related policies posit that VC can play a major role in helping high-tech start-ups grow and innovate. Motivated by the VC policies recently adopted in Europe and by the heterogeneity of the VC effects across countries and regions, we assess this hypothesis in Europe. Using systematic literature review methods, we summarize the results of 34 firm-level studies published between 2000 and 2023 that estimate value-added effects of VC on funded firms in 17 European countries. The results show a clear preponderance of positive effects on firm expansion and investment. The evidence on the effects on innovation and productivity is more limited and mixed. Regarding the channels of these effects, there is considerable evidence that VC reduces credit constraints of funded firms and limited, but supportive, evidence that VC reduces other barriers to growth. The type of VC emerges as a key moderating factor. Private, independent VC tends to have the largest effects. Government VC tends to have lower, but positive, effects and it often complements private VC. Based on the results of the review and on the current landscape of VC in Europe, we provide recommendations for policy and future research.

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.

The effects of government venture capital: New evidence from China based on a two-sided matching structural model

This study develops a two-sided matching structural model to examine whether government venture capitals (GVCs) crowd out private venture capitals (PVCs) by comparing the pre-money economic valuation of observed and counterfactual investments. The structural model also allows us to study the impacts of GVCs on the post-investment performance of the funded companies. Using China's VC market data between 2000 and 2020, we find that GVC-funded companies are those neglected by PVCs, and the potential economic performance of GVC-funded companies is inferior to that of PVC-funded ones. It means that the data do not support the crowding out conjecture. Moreover, the evidence suggests that the potential innovativeness of GVC-funded companies is higher than that of PVC-funded companies, indicating that GVCs bridge the equity gap left by PVCs in innovative companies. Regarding the impacts on companies' post-investment performance, GVCs are not significantly different from PVCs in improving companies' economic performance, and they are better than PVCs in improving companies' innovative performance. We also explore the impacts of different types of GVCs, the impacts of the co-investment between GVCs and PVCs, and the impacts of GVCs on companies in different stages of development.

Government venture capital and innovation performance in alternative energy production: The moderating role of environmental regulation and capital market activity

Energy shortages and environmental concerns have prompted governments to focus on alternative energy production innovation. Although studies examine the association between government venture capital and green innovation, there remains a gap in understanding how the different characteristics of government venture capital affect innovation. This study examines the effects of government venture capital on the innovation performance of alternative energy production. Using negative binominal regression and system generalised method of moments models with data from 30 provinces in China for the period spanning from 2003 to 2019, we find that government venture capital exerts an inverted U-shaped effect on the innovation performance of alternative energy production. In addition, environmental regulation strengthens this inverted U-shaped effect, while capital market activity alleviates it. Moreover, we confirm that government venture capital affects alternative energy production innovation through the R&D investment channel. Our study enriches the resource-based view, agency theory and the institution-based view by shedding light on how the different characteristics of government venture capital affect alternative energy production innovation. The findings suggest that policymakers should strike a balance between government intervention and market mechanisms.

A legitimacy‐based view of the impact of government venture capital on startup innovation: Evidence from a transition economy

AbstractResearch SummaryThis study examines the role of government venture capital (GVC) on startup innovation in a transition economy context. Drawing on institutional theory, we advance a contextual view of GVC by proposing that GVC positively impacts the innovation of startups in transition economies by serving as a sociocognitive legitimating endorsement. Furthermore, our study offers a contingent framework by showing that GVC endorsement will be more meaningful for startups deficient in organizational sources of legitimacy, such as political ties and social prestige. Regression analyses using a longitudinal data of Chinese venture‐backed biopharma and medical device startups founded during 2002–2017 offer broad support for our theory about the sociocognitive legitimating role of GVC in transition economy contexts.Managerial SummaryWe explore the role of government venture capital (GVC) in promoting startup innovation within transition economies. In such contexts, where startups often face skepticism and legitimacy issues, our research reveals that GVC can play a crucial role by providing socio‐cognitive legitimacy. Our study suggests that this “state backing” enables transition economy startups to gain the trust of external knowledge resource holders, enhancing their innovation prospects. Our findings emphasize the significance of GVC as a means of active government intervention for fostering startup innovation, especially for startups deficient in other avenues of legitimacy. This insight is valuable for entrepreneurs and policymakers in transition economy contexts.

Revolving around political connections: the negative effect of government venture capital backing on IPO valuation

Abstract We examine how government venture capital (GVC)—a specific type of political connection—affected initial public offering (IPO) valuation. Contrary to the well-recognized benefits of political connections in channeling access to financial resources in China, our analysis of 959 IPOs between 2008 and 2014 suggests that GVC backing lowers IPO valuation. This baseline effect is moderated by other sources of political connection (e.g. government ownership, state sector experience of top management team members, private sector partner status, and institutional environments). We argue that it is the negative signaling mechanism revolving around political connections that accounts for this observable pattern. This research enriches the signaling theory by uncovering signal emergence and analyzing the interactions between several signaling sources of political connection. Specifically, it contributes to a better understanding of political connections by specifying an undesirable consequence of state-led financialization, which has timely practical relevance as China’s capital market is steering toward a rule-based system.

Venture capital shareholding, tolerance for technological innovation failure, and technological innovation performance: evidence from China

ABSTRACT This paper studies the impact of venture capital’s tolerance for technological innovation failure on invested companies’ technological innovation performance using Chinese data. The results show that the higher venture capital’s tolerance for technological innovation failure, the better the performance of the company’s technological innovation. The heterogeneity of venture capital is further examined. We find venture capitals that invest jointly, with foreign-funded or governmental backgrounds can positively regulate the effect of tolerance on performance. However, in industries where innovation is of high difficulty, participation of government venture capital inhibits this effect. Our conclusions provide enlightenment for improving companies’ technological innovation performance.

Government Venture Capital and IPO Premium in Emerging Markets: Evidence from China

Government Venture Capital and IPO Premium in Emerging Markets: Evidence from China

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.

Venture capital investment in university spin-offs: Evidence from an emerging economy

From a policy perspective, university spin-offs (USOs) with venture capital (VC) investment are most promising because they are growth-oriented and contribute most prominently to economic growth. Hence, effective policies should consider the motivation of VC investment in USOs. By employing a manually collected novel database that includes all listed high-tech USOs and related VC investment activities prior to initial public offering (IPO) in China over the past three decades, we observe a close relationship between a multi-layered second-tier stock market and a vibrant VC market for USO financing. We find that USOs receive less investment from government VCs and mixed-VC syndicates and receive their investment in an earlier stage than non-USOs but that private VCs have no funding bias against USOs. The result implies the presence of crowding-in effect of government VCs in the context of USO financing. Moreover, VC investment in USOs is more pronounced in deals that have a higher initial equity commitment of academic founders and a noncontrolling strategy, highlighting the importance of delivering “value”, “commitment”, and “trust” signals in winning VC funding. Finally, as private VCs in the form of limited partnerships behave like typical pre-IPO-stage investors, they barely demonstrate any significant preference over these factors.

Retrospective overview of the journal venture capital using bibliometric approach

ABSTRACT The journal Venture Capital (VC) is a well-established highly reputed academic outlet specializing in research on entrepreneurial finance conducted from various methodological standpoints, on a global basis. This study uses bibliometrics to analyze the journal’s impact, prominent topics, most frequent authors, and their affiliated institutions. Between 1999 and 2021, VC published 385 documents receiving 9,892 citations. About 62% of VC papers have more than 10 citations each. Some of the notable themes which may offer future scope for publications include crowdfunding platforms, equity crowdfunding, government venture capital, private equity firm and investment, entrepreneurial finance, market failure, and female entrepreneurship.

Coming to Rescue or Going to Waste? Government Venture Capital in the U.S.-China Trade War

Coming to Rescue or Going to Waste? Government Venture Capital in the U.S.-China Trade War