Government fund-of-funds programs aim to increase the availability of venture capital (VC) funds to early-stage companies by using private VC firms as a channel to allocate public funds (Wilson & Silva, 2013). To achieve this goal, policy makers have the ability to use profit distribution and compensation structures that improve the expected returns in market failure areas in order to attract private sector investors and professional managers to participate in early-stage funds (Jääskeläinen et al., 2007). However, these enhanced compensation mechanisms may create adverse incentives for VC firms that manage overlapping non-government sponsored VC funds. Instead of increasing the overall risk exposure of the combined funds, the altered compensation mechanism could incentivize VC firms to shift the risky investments, which they would make even in the absence of the hybrid VC fund, to the hybrid VC fund. As a result, the VC investor could improve his risk-return profile at the expense of the government fund-of-funds investor. In this study, we aim to contribute to the literature on government fund-of-funds programs (Buzzacchi et al., 2013 & 2015; Brander et al.; 2015; Munari & Toschi, 2015; Colombo et al., 2016) by focusing on the risk shifting behavior of different types of VC firms that manage hybrid VC funds and overlapping non-government sponsored VC funds.