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ABSTRACT

This paper examines the link between publicly backed venture capital funds and business innovation in the UK venture capital market. In examining this relationship, the research empirically analyses the characteristics of 4113 investment deals made to 2359 UK based companies. We use patents as a proxy for innovation and find that obtaining investment solely from publicly backed VC funds, reduces the probability of the recipient company to apply for a patent compared with those companies that receive investments from private VC funds. In contrast, the probability of a company to have a patent or have applied for one does not vary significantly between companies that receive investments from both the public and the private sector and those companies that receive investments solely from private VC funds. The results have implications for both policy makers and practitioners and stress the importance of coinvestments between publicly backed and private venture capital funds to promote innovation.

5. Conclusions

This paper examines the impact of publicly backed venture capital funds in business innovation. In absence of other data (e.g. patent citations or proprietary company-level data on new product innovations/prototype development), we use patent applications as a proxy for innovation. We find that the statistically significant and negative coefficient observed between GVC backed investments and the firm's potential to innovate remains strong, even after controlling for a variety of factors associated with sectoral structures or investments characteristics: differences between regions, industry focus, investments size or investments stage. This suggests that this relationship is the result of some unmeasured investment characteristics or the environment in which funds operate. Such an unmeasured investment characteristic could be the chosen investment strategy of the GVCs funds. GVCs funds could have as part of their objectives to fill the gap associated with private funds giving priority to ventures engaged in patenting and tending to discount or even ignore ventures without patent activity. In this case public backed funds intentions might be in part to explicitly fill a gap that exists because private funds require (or give strong preference) to ventures engaged in patenting and ignore or underfund firms that have yet to patent or apply for a patent. Under this scenario, we would expect that GVCs funds would tend to be more interested in “pre or non-patenting” firms than private firms and would tend to pull out of investments when patent applications are made, leaving those investments to the private venture capital funds. In this case, the empirical results of this research may be an outcome of the ex-ante policy choices made by publicly backed fund managers (e.g. to invest in very early stage companies which are neglected by private funds). However, our analysis also shows that when selecting companies for a first round investment, patents are equally important (or unimportant) to both GVCs and PVCs.