It is an important time to think about the role that government can play in venture capital markets. We recently talked about how declining technology valuations from rising interest rates are pushing start-ups into survival mode and to hoard cash. In the face of tightening funding markets, it raises the question: should governments be stepping in to do more than they have previously done to make up for the coming ‘winter’ in private venture capital?
In Australia the Federal and State governments already invest in venture capital to meet their economic development goals. CSIRO helped finance Main Sequence Ventures, the largest deep tech fund in Australia. The government also contributed to Brandon Biocatalyst (formerly Medical Research Commercialisation Fund) managed by Brandon Capital. There is a South Australian Government venture capital fund. LaunchVic in Victoria recently acted as cornerstone investor to a fund of funds, (V-Ignite). The NSW government has medical device and physical sciences funds.
Should government-sponsored venture capital step more into the breach as private capital pulls back? Is more investment in venture capital good, regardless of whether it is government or private?
Research results accord with market experience; that private money and public money are different. Government funding is more focused on deep tech, such as healthcare and climate tech, whereas private capital emphasises software automating business processes and finance. The private sector would say that government cannot create the hyper incentives of a venture capital partnership structure (where fund managers take 20 per cent of the capital gain) to align interests and incentives. It would also point to the lower typical returns of government investors, and the risk of crowding out private sector investment.
Recent research gives some ‘harder’ evidence, based on venture capital activities in the European Union. The key insights were that, if the investment policies are structured appropriately, government-sponsored venture capital has mild ‘crowd-in’ effects (attracting private capital rather than crowding it out) and it is able to target innovative firms.
So public and private dollars are not entirely interchangeable; there is a role for both. The jury might still be out on whether, in a crisis, venture capital is an effective space to be putting government money designed at supporting economic activity. But long term, it might help us solve some of the big issues for humanity, as our population ages, and our climate warms.