Abstract

Nowadays most countries understand the importance of a well functioning venture capital (V/C) industry for employment creation, innovation and economic growth. Recently, Germany launched a variety of programs to channel financial resources, particularly at early stage, to technology ventures through private V/C funds.

Research has shown that when V/C institutions, investors (either governmental or private) and fund managers hold different interests, important consequences can (and do) result. Different incentive structures written into contracts between them affect managers´ investment behavior (Gilson, 2003). When government makes co-investments alongside private investors, political goals might clash with strategies of return maximization on investments. Governments, as a general rule, seek social return (Jääskeläinen, et al, 2004).

This research starts from the premise of a possible conflict of interests between private investors and government as an investor in V/C portfolios (Becker & Hellman, 2005; Zacharakis, 2004; Leleux & Surlemont, 2003). It tests the hypothesis: (1) public sector finance influences the generation of V/C funds and the fund’s venture investment and exit timing; (2) private V/C funds with public sector financing experience will launch additional privately-invested funds and (3) public sector financing for the V/C industry provokes a crowding-out effect on investments in private V/C funds.

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