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Government Sponsored versus Private Venture Capital: Canadian Evidence

In: International Differences in Entrepreneurship

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  • 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.

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This chapter was published in:

  • Josh Lerner & Antoinette Schoar, 2010. "International Differences in Entrepreneurship," NBER Books, National Bureau of Economic Research, Inc, number lern08-2, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8226.

    Handle: RePEc:nbr:nberch:8226

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    1. Kaplan, Steven & Martel, Frederic & Strömberg, Per Johan, 2003. "How Do Legal Differences and Learning Affect Financial Contracts?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4161, C.E.P.R. Discussion Papers.
    2. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 169-197, 02.
    3. Kaplan, Steve & Schoar, Antoinette, 2004. "Private Equity Performance: Returns, Persistence and Capital Flows," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4446-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
    5. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 473-521, October.
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    8. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
    9. Douglas J. Cumming, 2006. "The Determinants of Venture Capital Portfolio Size: Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1083-1126, May.
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    11. Paul A. Gompers & Josh Lerner, 1999. "What Drives Venture Capital Fundraising?," NBER Working Papers 6906, National Bureau of Economic Research, Inc.
    12. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, American Finance Association, vol. 46(3), pages 879-903, July.
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    14. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
    15. Oana Secrieru & Marianne Vigneault, 2004. "Public Venture Capital and Entrepreneurship," Working Papers, Bank of Canada 04-10, Bank of Canada.
    16. Leleux, Benoit & Surlemont, Bernard, 2003. "Public versus private venture capital: seeding or crowding out? A pan-European analysis," Journal of Business Venturing, Elsevier, vol. 18(1), pages 81-104, January.
    17. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    18. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 447-471, October.
    19. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, American Finance Association, vol. 52(5), pages 1791-1821, December.
    20. Baldwin, John R. & Bian, Lin & Dupuy, Richard & Gellatly, Guy, 2000. "Failure Rates for New Canadian Firms: New Perspectives on Entry and Exit," Failure Rates for New Canadian Firms: New Perspectives on Entry and Exit, Statistics Canada, Economic Analysis, Statistics Canada, Economic Analysis, number stcb5e, December.
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    Cited by:
    1. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2011-044, Tilburg University, Tilburg Law and Economic Center.
    2. Bertoni, Fabio & Colombo, Massimo G. & Grilli, Luca, 2011. "Venture capital financing and the growth of high-tech start-ups: Disentangling treatment from selection effects," Research Policy, Elsevier, Elsevier, vol. 40(7), pages 1028-1043, September.
    3. Luukkonen, Terttu & Deschryvere, Matthias & Bertoni, Fabio & Nikulainen, Tuomo, 2011. "Importance of the Non-financial Value Added of Government and Independent Venture Capitalists," Discussion Papers, The Research Institute of the Finnish Economy 1257, The Research Institute of the Finnish Economy.
    4. Cécile Carpentier & Douglas Cumming & Jean-Marc Suret, 2010. "The Valuation Effect of Listing Requirements: An Analysis of Venture Capital-Backed IPOs," CIRANO Working Papers, CIRANO 2010s-01, CIRANO.
    5. Bertoni, Fabio & Tykvová, Tereza, 2012. "Which form of venture capital is most supportive of innovation?," ZEW Discussion Papers 12-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Inci, Eren & Barlo, Mehmet, 2010. "Banks versus venture capital when the venture capitalist values private benefits of control," MPRA Paper 25566, University Library of Munich, Germany.

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