When comparing the results of each nation on the three key performance factors – patent creation, follow-on financing and exits – there is no notable correlation. The key finding is that companies supported by government venturing tend to outperform those backed by private venturing on all three
Patent creation: Companies supported by government venturing perform better – except in the UK, Australia and China, where the effect is reversed.
Follow-on financing: Companies supported by government venturing perform better – except in Germany, India and China, where the effect is reversed.
Exits – IPO and trade sale: Companies supported by government venturing perform better – except in Canada, Japan, Germany, where the effect is reversed.
It is unclear whether Germany, which scores twice on negative effects, in exits and follow-on financing, but tops the list on patent creation, tends to invest in much riskier high-tech startups, where private venturers may shy away for that reason, although patent filings are not necessarily a measure of success for companies.
In contrast, Australia tops both successful exits and follow-on financing, but has a highly negative coefficient in patent creation. This could lead to a conclusion that government venturers in some countries, such as Germany, take on riskier technology ventures with higher failure rates, and government operatives are not necessarily less experienced compared with private venturers or their counterparts in other nations. China is another extreme case, where government venturing scores negatively against private venturing in patent creation and follow-on financing, but tends to outperform private venturing slightly on exits. It is a fact that China had many government-owned funds that supported many companies from 2000-10, especially services businesses, which tend to be lower-risk deals and thus have a better probability of a successful exit. The Chinese government, however, has recently changed its approach and provides more grants to tech startups, and has also invested more in leading venture capital firms, in order to create more technology companies with solid hands-on support for successful growth and notable exit.
In summary, moderate government venturing seems to be a meaningful way to support new technology companies.
Government policies and programmes as technology startup catalysts: Nations with a small business angel base and a lack of sufficient early-stage VC funds with a critical size could be supplemented with government hybrid funds. However, this requires a strong dealflow of high-potential by technology sector and build the technical and commercial knowledge required to identify, support and promote the rapid growth of world-class, new technology based young firms. Policy should be systematic, focusing on improving the flow of multiple funding rounds to high-potential young firms as they grow, thereby providing a funding escalator from formation to IPO or trade sale (M&A).
How much government support and involvement is ideal? The challenge for government is to develop policies that work, but avoid the temptation to try to effect change via too much direct intervention and transactional activities. Balance it with encouraging sustainable, growth-oriented and innovative firms, not simply fostering more startups. Starting a new business is the easy part – successfully growing it is the challenge. The key is to grow firms with strong root systems that can sustain their own growth as much as possible before seeking additional funding. A growth oriented approach is more relational in leadership of these growth firms. It seeks to understand their networks and how to foster the expansion of such networks at the local, national and international level.
Nations with government venturing focusing on IP creation tend to have fewer exits: Higher-income countries, measured by per capita GDP, tend to have less government venturing activity but stronger exit performance. Higher-growth countries also tend to have less government venturing activity but weaker exit performance. Exit performance appears correlated with measures of financial depth, such as bank credit and the size of the stock such as Research in Motion in Canada, can generate enough benefits to more than pay for the full cost of a nation’s government venturing programme for many years. However, such exits (more than $250m) are rare, and only 0.28% of all enterprises exceed this threshold. In other words, the performance is measured by number of company exits and not by the cumulative exit values generated in each nation.
A positive coefficient in these and the following graphs means that in this country government venturing outperforms private venture comparative performance of government venturing initiatives across countries.
Boris Battistini is a senior research fellow at the Swiss Federal Institute of Technology (ETH Zürich) and an associate at Metellus, a venture capital firm based in Zürich, London and San Diego. Email: boris.battistini@metellus.ch
Martin Haemmig is an adjunct professor at CeTIM at UniBW Munich and Leiden University. Email: martinhaemmig@cetim.org
Reuse of any graph or table for any purpose only with the permission of Martin Haemmig.