The Effectiveness of Public Venture Capital in Supporting the Investments of European Young High-Tech Companies

Abstract

This work studies the extent to which the investments of young high-tech companies in Europe are supported by public venture capital (PVC) financing. We estimate an investment equation derived from a sales accelerator model, and benchmark PVC to the most well-known category of venture capital: independent venture capital (IVC). To take into account unobserved firm heterogeneity and the endogenous nature of VC financing, we resort to a system generalized method of moments (SYS-GMM) including external instruments for PVC and IVC variables. The sample includes a panel of 1,312 young high-tech manufacturing companies from six European countries. Our results confirm that European young high-tech companies are financially constrained and that IVC is effective both in increasing firm's investments and in alleviating their dependence on current cash flows. The impact of PVC is, instead, very limited. PVC-backed firms increase their investments right after a financing round, but no effect is observed in the long term. Moreover the investments of PVC-backed firms are still affected by their current cash flows.

Keywords: Investments, financial constraints, venture capital, public venture capital

JEL Classification: G32, D92, G23