Working Paper: NBER ID: w14029
Authors: James A. Brander; Edward Egan; Thomas F. Hellmann
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.
Keywords: venture capital; government intervention; innovation; entrepreneurship; Canada
JEL Codes: G24; H00; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government-sponsored venture capital (GVC) funding (O36) | likelihood of successful exits (IPOs and acquisitions) (G24) |
| Government-sponsored venture capital (GVC) funding (O36) | innovation (patents) (O31) |
| Private venture capitalists (PVCs) selecting higher quality projects (O22) | likelihood of successful exits (IPOs and acquisitions) (G24) |
| GVCs providing less effective support (F12) | likelihood of successful exits (IPOs and acquisitions) (G24) |
| GVCs crowding out private investment (F64) | likelihood of successful exits (IPOs and acquisitions) (G24) |
| GVC funding (O16) | performance measures (exit values) (L25) |
| GVC funding (O16) | innovation (patents) (O31) |