Theory of Government Venture Capital

Abstract

Government-sponsored venture capitalists (GVCs) play an important role in most successful venture capital (VC) markets. This paper offers the first theory on GVCs. We investigate the role of government in VC markets, where private venture capitalists (PVCs) dominate. We find that PVCs offer better incentives, while GVCs address risks better; PVCs are more efficient in financing superior ventures, while GVCs are more efficient in financing inferior ventures; and there are ventures that are socially no-viable if financed by PVCs but are socially viable if financed by GVCs.

Keywords: Government Venture Capital, Private Venture Capital, Staged Financing, Equity Sharing, Incentive, Risk

JEL Classification: G24, G28