Abstract: 1/3 of venture capital (VC) investment in Europe comes from the government. We study government-backed VC investment intermediated via private VC funds that focus on different stages of the firm life cycle. We link data on the portfolio of VC investments of the largest European government agency engaged in such form of industrial policy, showing large increases in the volume of VC funding per firm. Reduced-form regressions show government-linked financing via private VCs has stronger effects when focused on young firms. Despite being much less effective when targeting older firms, we find government-linked VC funds are biased towards later-stage investments in so-called "scale-ups". We develop a structural model of firm life cycle dynamics in which government spending funds entrepreneurs via pri- vate VCs. Counterfactuals show the targeting across VC stages that maximizes ag- gregate productivity depends on the degree of financial market imperfections. The model rationalizes the policy focus on mature firms in highly frictional markets. However, in a calibration with relatively mild financial frictions, reallocating a con- stant budget towards early-stages produces aggregate effects of the same magnitude as a more costly “Big Push" that increases the amount of spending.
Abstract: Venture capital (VC) networks facilitate reverse knowledge spillovers from U.S. investments in foreign startups back to the United States. Using the first U.S. VC deal in a foreign company as a quasi-exogenous shock in a difference-in-differences design, I show that investees’ pre-existing patents become 18% more likely to be cited by U.S. entities, with no corresponding change in citations from other countries. Spillovers are concentrated among US startups most closely connected to the investing VC through its network of prior syndication ties, while geographically proximate firms show no such effects. A similar design applied to domestic coast-to-coast VC deals confirms that the network channel is especially salient in cross-border settings. These knowledge flows translate into real outcomes: patent output rises by 10% overall and 22% in investee-related technologies; high-quality innovation increases by 10% overall and 34% in related technologies. Closely connected firms are also more likely to achieve successful exits through IPO or acquisition. The findings indicate that VCs transmit startup knowledge across borders through their syndication networks, enhancing innovation and performance beyond their direct portfolios.
Discussant: Ye Zhang, Stockholm School of Economics
