Against Government-Subsidized VC
| Peter Klein |
Government-subsidized venture capital underperforms private venture capital, according to a new analysis of Canadian data. Firms backed by subsidized VC are less profitable, less innovative, and less attractive to later-stage investors than firms backed by private VC. Poor governance and a negative signalling effect, and not adverse selection, appear to be the drivers. This is from a new NBER paper by James Brander, Edward Egan, and Thomas Hellman, “Government Sponsored Versus Private Venture Capital: Canadian Evidence.” Abstract:
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.