Government VCs and the venture ecosystem

John Bakie
12 October 2010

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Governments have been involved in funding small businesses for many years now, and government-backed VCs are a common sight in many European countries. While in the past, they might have been seen as just another source of funding for many start-up companies, they now form a vital part of the venture ecosystem.

Regional, state-backed venture funds, such Finance Wales, High-Tech Gründerfonds and the One North East Fund, have become increasingly commonplace over the past decade. As governments sought to do more for small businesses during the boom years following the dot.com crash, the funds they supported have grown, and become an accepted part of Europe's venture community.

The investment houses are usually set up as independent companies, with a fund structured very much like a traditional closed ended venture vehicle. However, the bulk, if not all of their capital comes from central or regional governments, to promote small businesses in their respective geographies. In the UK, the funds have been widely used in less wealthy areas of the country, such as Wales, Scotland and the North East, to bolster economic activity.

They were once much like any other corporate or institutional VC and, for entrepreneurs, would simply represent another form of funding they could tap in order to raise capital. However, with growing talk of a funding gap at the bottom end of the market, these funds have come to fulfil a major role in the development of early-stage companies.

One venture capitalist recently told unquote" that many VCs are no longer actively looking at funding series-A rounds, as government-backed funds now dominated this area. Several attendants of this year's seed camp also felt VCs were simply not looking at providing capital for companies in the earliest stages of development.

It is difficult to determine whether this is an example of government initiatives having a detrimental impact on privately run funds, or if it is filling a void left behind by them. Traditional VCs may have felt competing government money at the bottom of the market was pushing up the price of investments too high, and moved upwards. However, with the global downturn and consequent problems raising funds, it may be that VCs simply did not want to take the risks associated with very early-stage companies.

In reality a mixture of both might be responsible for the current state of affairs. However, with heavily indebted governments now trying to cut back on spending, their VCs may find their funding squeezed in much the same way as private venture funds have been for some time now. It remains to be seen whether institutional funds will step in and back series-A rounds on a regular basis again.