Government vs. private VC

By James A. Brander, Edward J. Egan and Thomas F. Hellmann

This paper investigates the relative performance of enterprises backed by government-sponsored venture capitalists and private venture capitalists. The results indicate that enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation, as measured by the likelihood and size of IPOs and M&As, and innovation, as measured by patents. It is important to understand whether such underperformance arises from a selection effect in which private venture capitalists have a higher quality threshold for investment than subsidized venture capitalists, or whether it arises from a treatment effect in which subsidized venture capitalists crowd-out private investment and, in addition, provide less effective mentoring and other value-added skills. We find suggestive evidence that crowding-out and less effective treatment are problems associated with government-backed venture capital. While the data does not allow for a definitive welfare analysis, the results cast some doubt on the desirability of certain government interventions in the venture capital market.

Download the paper at http://www.nber.org/papers/w14029.