Venture Capital and Intangible Capital

Résumé

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 private VCs. Counterfactuals show the targeting across VC stages that maximizes aggregate 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 constant budget towards early-stages produces aggregate effects of the same magnitude as a more costly “Big Push" that increases the amount of spending.

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