Study: Weaker performance for publicly backed VC

Venture capital companies that are supported by public funding tend to underperform companies backed by the private sector, according to a recent study.

Venture capital performance may have more to do with the investor holding the purse strings than the company receiving the investment, according to a recent study by the VICO Project, a collaboration of European academics.

The study found that publicly backed venture capital companies typically underperform when compared to those supported by independent venture firms. The study examined the performance and output of 759 European high-tech companies between 1994 and 2004.

Each of the companies had received financial backing from at least one of four types of venture capital investors: independent firms that follow a US limited partnership model; capital affiliated with a non-financial corporation; bank-controlled venture capital and public sector venture capital, which includes investments from governments and universities. Researchers took into account age, size, industry of operations, stage of development, distance between firm and advisor, syndication, duration and exit mode when considering each venture capital firm and investment.

“The project showed that independent VC investors exerted an unequivocally positive impact on the productivity and growth of European high-tech entrepreneurial ventures, especially when the investment was made in the seed stage,” according to the study.

“Public sector VC on average did not have a sta¬tistically significant impact on the growth of high-tech entrepreneurial ventures (except for the employment measure). However … the impact of governmental VC appeared to be posi¬tive for the early stage firms, while negligible for the more mature ones.”

The results of the study are not particularly surprising viewed in the context of the public sector’s role in the European venture capital market, which is to fill the financing gap left by independent firms and other investor types. This creates a selection bias in the quality of the public sector’s respective investments, and makes it difficult to recruit personnel who can move companies beyond their development stage.

Furthermore, public sector venture capital tends to focus on seed investments in local companies, leading them to hold their investments for longer periods of time. Private venture firms – particularly those marketing a fund — tend to seek faster exits from high-performing assets to impress new investors.

A representative from VICO could not be reached for comment.

Although public sector venture capital seems to lead to diminished performance for high-tech companies, the study also found that venture funding from a mix of domestic and international sources and a variety of investor types typically leads to better company performance. In terms of innovation within portfolio companies, optimal venture funding includes a combination of public and private sources led by a private venture investor, according to the study. 

The VICO Project, funded by the 7th Framework Programme of the European Commission, assesses the impact of venture capital and private equity financing on the economic performance of innovative entrepreneurial ventures in Europe. The project measures this impact through companies’ innovation rates, employment creation, growth, and competitiveness and the role which investors play in helping these firms bridge their resource and competence gaps, according to its website.