New research published in Small Business Economics demonstrates the significant impact of public venture capital investment on startup firm employment and sales growth. The findings also demonstrate that public venture funds can successfully draw significant additional private investment and debt funding, and do not act as a capital replacement. Further, the research suggests that accompanying startup ecosystem resources are contributors to firm success.
The author, Roger Svensson of The Research Institute of Industrial Economics in Sweden, examines the growth of more than 430 companies that received investment from Almi, a public venture fund in Sweden. The fund pools resources from the EU, national, and regional governments and co-invests in seed and startup companies alongside private investors. While there may be some differences between Sweden and the U.S. markets, Sweden is an advanced innovation-centered economy, and the fund structure and strategy appear similar to many U.S. TBED investment approaches. The model examined is interesting from a U.S. TBED perspective because, as a national fund, it allows comparison across cities and regions under a uniform set of program parameters.
The analysis was conducted using a robust dataset that allows for identifying multiple business development metrics and controls for companies with similar attributes that have and have not received investment from the fund. The findings indicate that employment growth for firms receiving government VC investment is 39-62% higher than that of the control group and that employment growth begins almost immediately after investment. Sales take longer to develop, but are 45-60% higher for companies that receive investment. Companies receive between 57 and 84% more private debt and 52 and 86% more private equity investment after initial public-private co-investment than comparable companies. These results demonstrate the accelerative and amplification effects of the public-private co-investment model on multiple important business metrics.
The fund evaluated is selective, funding approximately 5% of applicants, yet it has mandates to invest geographically. The data indicate that the positive effects of government venture capital are significantly higher in metropolitan areas. The author states that the difference between regions may be linked to geographic earmarks with “use-it-or-return-it” requirements (similar in concept to SSBCI funding in the U.S.) that could incentivize selecting companies in lower population areas that would not be funded in more competitive markets. The paper also suggests that the differences in outcomes in different-sized communities are linked to the additional ecosystem resources available in larger communities. The combined factors may reduce investment quality in less populous regions in exchange for wider resource availability. While this finding could be discouraging for TBED organizations working to support development in rural areas and smaller cities, it does validate the strategy of developing a comprehensive set of ecosystem resources. It also points to the importance of program design and rigorous screening of TBED outcomes.
While there are many different approaches to public investment, the strategy examined achieves success by investing at the earliest stages and requiring private sector co-investment. The fund operates a selective application process, and the author suggests that review and vetting from public investors can generate positive signals for private markets.
The author highlights that program design is an important factor in determining outcomes and that allowing additional funding in areas with high-growth potential may boost overall outcomes. The author also concludes that investments in additional ecosystem resources in areas without established startup resources may be required to support the effectiveness of public investments.
The author concludes that government investments “can alleviate financial constraints and stimulate firm growth when properly embedded in a supporting instructional and regional context” (p.25). From a TBED perspective, these results are important because they demonstrate that the additional capital accessed by companies is significant and that there are positive, meaningful small-business hiring and sales outcomes. The overarching message is that TBED strategies are impactful, and that incorporating capital, business support resources, and networks are all important components that drive business growth and success.
Applying these findings to a state, regional, or local environment appears to be straightforward. While individual program parameters may alter outcomes, this paper offers strong evidence that significant business benefits can result from public investment in early-stage companies. Looking at the analysis as a whole, the Venture Development Organization (VDO) model that incorporates both access to capital and innovation-based business support resources captures many of the key components of success under one roof. There is, of course, no one-size-fits-all approach that can guarantee success. However, the research supports that a comprehensive and complementary set of public and private resources can successfully stimulate business growth.
If you have similar examples of successful public and public-private investments driving positive business outcomes, we invite you to contact us to share your experiences. We also invite you to join our TBED Community of Practice to discuss the impacts of programs with peers and learn about new and emerging practices that advance support for promising technology businesses.
This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.