Government attempts to provide venture capital are, to me, like government subsidies for stadiums. Both are economic development trends that do NOT work, yet simply won’t die. Check out this NBER Working Paper by James A. Brander, Edward J. Egan, Thomas F. Hellmann (h/t: Alison Kemper):
This paper investigates the relative performance of enterprises backed by
government-sponsored venture capitalists and private venture capitalists. While
previous studies focus mainly on investor returns, this paper focuses on a
broader set of public policy objectives, including value-creation, innovation,
and competition. A number of novel data-collection methods, including
web-crawlers, are used to assemble a near-comprehensive data set of Canadian
venture-capital backed enterprises. 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.
June 5th, 2008 at 8:33 pm
I believe whole-heartedly that best thing government can do to cultuvate startups is to just get out of the way.
However, if the Canadian government didn’t provide some venture capital, who would do so in its place?
At the risk of over simplifying things, the little private capital circulating in the country is trapped by the extreme gravitation of natural resources where the returns are big, easy, and almost gauranteed.
So if you had money a few years back, would you have put it into small oil companies in Alberta, or a couple developing an online photo album in Vancouver? Well capital prudently went to oil, and as a result that online photo album became Flickr, moved to the Bay Area and was bought by Yahoo.
Again, to over simplify matters, for non-resource related startups in Canada it isn’t a choice between getting private or public capital — but between getting capital or leaving the country.
It sounds like the paper’s authors have identified a side-effect of a much bigger problem.
June 6th, 2008 at 10:40 am
Government VC money is best used, if ever, in areas that private VCs won’t pursue. Often times this is because the funding is in pursuit of a public good that is needed, but would not be profitable (hence private VCs wouldn’t fund it).
Let’s not overextend the analysis either, this was Canadian data so it would need further research to determine if it is applicable to the US.
“While the data does not allow for a definitive welfare analysis” that’s the key line in the summary of the research.
June 6th, 2008 at 10:15 pm
Governmental investment in basic research IS government-sponsored venture capital. A truly basic discovery affects many fields at once, over decades. If a private venture capitalist claims ownership of basic data and keeps it private, or kills a project because it doesn’t produce a quick-enough ROI, we all lose opportunities for further scientific progress.
Support the National Science Foundation! And its equivalent in Canada.
June 6th, 2008 at 10:16 pm
Governmental investment in basic research IS government-sponsored venture capital. A truly basic discovery affects many fields at once, over decades. If a private venture capitalist claims ownership of basic data and keeps it private, or kills a project because it doesn’t produce a quick-enough ROI, we all lose opportunities for further scientific progress.
Support the National Science Foundation! And its equivalent in Canada.
June 7th, 2008 at 1:04 am
Government sponsored: ARPANET – whatever become of that project? Good thing the technical folks at CERN fought against privatization of the WWW – which any private venture capitalist would have insisted on.
June 9th, 2008 at 8:33 am
Interesting. Lots of questions come to mind about the data and processes used.
June 9th, 2008 at 4:21 pm
You can also find the paper here:
strategy.sauder.ubc.ca/hellmann/pdfs/Brander%20Egan%20Hellmann%20-%20NBER%20Final%20Version.pdf
June 9th, 2008 at 4:22 pm
Oops. Sorry. Here is the link:
http://strategy.sauder.ubc.ca/hellmann/pdfs/Brander%20Egan%20Hellmann%20-%20NBER%20Final%20Version.pdf
June 20th, 2008 at 1:12 am
And just STICK TO A FEW UNIVERSAL, OPEN- SOURCE, PUBLIC- DOMAIN SYSTEM which is updated every couple months or so.