Venture capital supports firm growth and so it can be a tool for driving job creation and economic development in cities. But is this beneficial effect tied to the source of the venture fund in question? A recent study by Annalisa Croce, Jose Martí, and Carmelo Reverte investigates this question using a sample of Spanish firms that received initial VC investments from 2005-2013, before and during the 2008 economic crisis.
The findings support the assumption that venture capital investment in general boosts job creation in firms across categories. However, whether private or government VC was better at supporting firm growth depended on how the economy was doing overall.
The sample included 173 enterprises backed by government-owned venture capital firms, 211 enterprises backed by private venture capital firms, and a control group of 888 non-venture-backed enterprises. The study analyzed the difference in employment growth within three years of initial investment between firms whose initial VC investments were completed before the 2008 economic crisis, and those whose initial VC investments were completed during the 5 years of economic crisis that followed.
Firms with government owned VC investments completed before the economic crisis created more jobs on average than private VC investments. However, this pattern reversed after 2008 as the economic crisis hit Spain. Between 2009 and 2013, government support only generated 2.486 to 5.530 jobs on average per firm while private VC support generated on average between 5.732 and 8.184 jobs in investee companies: roughly 50 percent more than government backed VCs.
The researchers suggest that some of this difference may be due to the focus of government VC funds, which tend to invest in strategic, labor-intensive sectors and concentrate their investments more strongly in underdeveloped communities. Private VC managers are likely to be better at screening investees and providing more monitoring services during economic crises, when government VC managers may be under pressure to offset short term effects of the crises by investing in troubled firms to prevent closures.
Contributed by Alicia Weinstein.