Government co-financed 'Hybrid' Venture Capital programmes: generalizing developed economy experience and its relevance to emerging nations

Abstract

Policy makers guiding national enterprise and innovation policies have become increasingly concerned at the lack of venture (risk) capital available to new and early stage entrepreneurial ventures. At the end of the first decade of the 21 st Century, the proportion of capital allocated by private, financial institutions to early stage venture capital (VC) has continued to decline to record lows across the advanced Western economies. Similarly, smaller emerging economies (e.g. Poland and the former Soviet satellite countries) have also experienced increased rationing in the supply of private venture capital from either domestic or foreign private investors. Observers rationalise the present trend with reference to the impact of a number of market failures that impede the efficient supply and allocation of risk capital finance. In marked contrast, in the BRIC nations (Brazil, Russia, India, China), foreign investors’ interest is running (perhaps imprudently) at record levels. This sometimes ‘breakneck’ pace of development is occurring in countries where the internal venture capital infrastructure and the wider entrepreneurial and innovation ecosystems commonly remain rudimentary and under-developed. As a public response to a perceived supply-side market failure, several governments have set up equity co-investment programmes to channel equity finance (VC) to capital constrained but high potential, young enterprises. This paper summarises Western experience in public/private (hybrid) VC programmes, notably in the UK, the USA and Australia. It reflects on the lessons learned from independent academic evaluations in order to produce a set of generic guidelines for policy makers. These guidelines are then used to look briefly at the rapidly emerging VC sectors in both China and Poland where national governments have intervened decisively in an attempt to influence the speed and direction of the domestic VC industry’s development. The authors conclude that a ‘policy surge’ that has financed with significant public funds the rapid genesis of a nascent VC industry is in danger of wasting considerable funds if an equivalent focus and effort is not also applied simultaneously to improving key elements of the entrepreneurial and innovation ecosystems. Given potential disparities between research findings and extant policy actions, we implicitly raise the question of whether or not the governments of rapidly developing nations really can learn from developed nations’ experiences.