Venture Capital Response to Government-Funded Basic Science

Abstract

Science-based R&D can deter venture capitalists due to high technical uncertainty. We study whether mission-oriented public funding—supplying basic science as a public good—fosters VC investment. Our quasi-natural experiment is the BRAIN Initiative (BI), a large-scale government program aimed at mapping the human brain. Using machine learning, we first find large spillover effects of BI in neurotech. Our difference-in-differences analysis shows that BI raised the probability of receiving VC, led to larger funding rounds at higher valuations, and resulted in more successful VC exits for neurotech startups. The mechanisms suggest a reduction in technical uncertainty: (1) an expanded supply of skilled academic labor, (2) increased innovation activity and (3) deeper integration with complementary technologies like AI and big data. Our findings suggest that government-backed science can catalyze private investments in emerging fields.

Keywords: Venture capital, Government Policy, Innovation, Machine Learning, Academic Entrepreneurship