Do Governments Make Good Venture Capital Investors?

Venture capital

The European Commission’s decision to make direct equity investments in start-ups and SMEs has sparked a fierce debate. The Commission seeks to fuel a COVID bounce, increase Europe’s unicorn count and grow its venture capital market to compete with the US and China.

New Source of Venture Capital in Europe

The EC has been an early-stage investor in 159 deep tech Start-ups through the EIC Accelerator Pilot since late 2019 and will now be a direct investor for the first time through the new European Innovation Council (EIC) Fund.

Start-ups and SMEs will share €178m in the initial round of funding in the form of €500k to €15m tickets for 10 to 25% equity stakes. The EIC also provides grants, mentoring, and acceleration services.

Europe needs new sources of venture capital but the commission’s move to “bridge the funding gap for highly innovative companies” has sparked criticism.

Is Government Funding Good for your Startup?

Founders have made damning claims about the accelerator pilot while investors and analysts question the priorities, capabilities, and commitment of the EIC as a direct investor. They warn that companies will continue to die as the government abandons their investments.

More private company liquidity is good, but do Start-ups and SMEs want public sector investors in their capital tables? Here are some of the best arguments for and against.

Do Governments Make Good Start-up Investors?

Connections – governments can facilitate high levels of collaboration between academia, business, and specialists to drive innovation.

Seed Capital – governments can take risks with early-stage funding that private investors cannot, especially in deep tech where the potential for societal payoff is large.

Proof of Concept – all Start-ups need market traction. Governments can utilize deep tech and enable its early adoption in an ESG compliant manner.

Growth Acceleration – governments can co-invest with private equity investors to accelerate growth from series A onwards.  

Do Governments Make Bad Start-up Investors?

Learning Curve – direct investing requires processes, technology and experience that governments often do not possess.

Bureaucracy – investing taxpayer money requires good corporate governance, balancing due diligence and reporting with time spent on active value creation.

Risk Appetite – the failure rate in venture capital is high. Can shareholders agree if one investor is focused on loss mitigation and another on profit maximization?

Start-ups need help – VC and private equity funds infuse portfolio companies with expertise, contacts, and services to fuel growth. Governments lack these operational platforms.  

Aligning Founders and Investors

The accelerator pilot was always meant to be a learning experience and the EIC and member states France and Estonia have already incorporated takeaways into new funding initiatives. The lesson is clear:

Investors and founders must align through good corporate governance to promote sustainability and overcome challenges.  

Why Does Corporate Governance Matter?

Corporate governance is often defined as a series of admin exercises in company management, reporting, pay, and internal controls. This limited view is fatal to young companies.

Good corporate governance is a demonstrated commitment to actions that support the long-term sustainability of a business supported by transparent, high-quality disclosures.

Investors want to reduce losses, simplify portfolio management, and maximize returns without sacrificing high ethical standards. Good governance is proven to sustain profitability, helping companies to build strong investor relations, raise funding and boost valuations.

How We Help

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