Blog

State intervention in startup VC

Jonathan Gold

01 Jul 2014

It can be fun to criticise venture fund managers, the investment industry and even more so the Government or European Institutions. Sometimes I think it’s worth defending them and this is one such time.

A recent article in the Economist on-line, 17th May entitled “Innovation by fiat” actually stated:

Nearly 40% of all the funds pumped into European VC last year came from state-backed sources, up from just 14% in 2007”.

I’m sure that’s right and I would have guessed as much. They go on to quote the European Investment Fund as investing 600m Euro into European VC funds alone last year. The article goes on to say how poor the returns are for the European VC industry as an asset class over the last 10 years. Quick aside I must find the article I saw a few weeks ago that explains that in terms of the legacy from the Dotcom bubble of 2000 but that’s another story.

The statistics from the Economist article went on to say that all this might be repelling private capital and that nobody publishes the returns on such funds. Well I recall a UK Public Accounts Committee report that looked into the matter almost 10 years ago. Also if anyone looks hard enough figures can be found as the performance of public financed VC funds isn’t a secret.

Well before I rant on too long let me focus on a few issues with some answers to the article, which of course you can read yourself from the link. I should add my views are my own but taken from almost 20 years in and out of Government and private capital for early stage and economic development in the UK…  Then you can make you own mind up:

  • EU and EU State Funds are used to help create early stage VC funds where the level of risk is not attractive to private capital
  • The Funds are predominantly but not exclusively targets to help economic regeneration in deprived regions
  • The output of the Funds are not just based on a financial return but wealth and economic regeneration, see above
  • All funds I have been involved with (more than 6 now) have been required to secure private investors alongside the investment to a greater or lesser extent
  • The Funds are targeted at the sub £1m or so level and only aimed at small businesses and startups
  • Private investors benefit from investing in the successes from these funds as the larger funding rounds leave out the public funds (see above)
  • The use of VC style investment instead of grants (as grants used to dominate) forces startups and small business to become much more commercial in approach
  • The majority of public leverage Funds are managed by private VC firms who manage them in a fully commercial manner not as soft cash.

…there will always be debate about the rights and wrongs of public money used to invest in private business but I happen to think it works. What do you think?


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