Why governments support venture capital

By January 15, 2013Venture Capital

The Canadian government announcement yesterday of a $400m plan to strengthen the Canadian venture capital industry is the latest in a long series of similar announcements and initiatives from governments around the world that put government cash into VC funds alongside private money to make it more attractive for private investors. The Canadian government is investing directly in funds, some other governments have followed that model whilst others achieve the same result via manipulation of the tax code. The VCT and ECF schemes here in the UK, the FCPI scheme in France, and the EIF supporting the whole of Europe are other good examples.

Stephen Harper, Prime Minister of Canada, helpfully set out his government’s reasons for making this move:

  • the local venture capital industry is not firing on all cylinders, especially since the credit crunch of 2008
  • local startups with high potential are being starved of funds
  • talented entrepreneurs are going to the US to build their companies
  • adequate risk capital [for startups] is vital of the economic future [i.e. for jobs and growth]

These reasons apply equally in the UK, France and just about every startup hub I know outside the Valley and they are provide important boosts to the local startup ecosystems. Without them raising money would be harder than it is now, and it is already too hard. There are, of course, always risks when governments intervene in markets and there will doubtless be examples of funds that have supported which really shouldn’t have been, but just about all the funds that I know which have received government support, including ours, are working hard and with some success to build a local venture capital industry which can exist without state support.