Government policy towards entrepreneurial finance: Innovation investment funds

https://doi.org/10.1016/j.jbusvent.2005.12.002Get rights and content

Abstract

This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982–2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government–private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show – in both a statistically and economically significant way – that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.

Section snippets

Executive summary

This paper analyses the Australian Innovation Investment Fund (IIF) program and venture capital in Australia in a number of dimensions. First, in order to highlight the unique aspects of the IIF, I first compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. With reference to prior research on governmental venture capital programs, I argue the IIF program in Australia has a number of distinct structural features that are

Background and context

VCs are often viewed as the primary source of capital for inventive high-tech start-up companies (Gompers and Lerner, 1999, Gompers and Lerner, 2001a, Gompers and Lerner, 2001b). As small high-tech firms are reported to contribute disproportionately to innovation and economic growth (Cosh and Hughes, 2003), policy makers around the world have become increasingly concerned about the success of their high-tech sectors, and the availability of venture capital. It is further widely believed that

Government policy towards venture capital in Australia, and the institutional details of the Australian IIF program

The focus of the analyses in the remainder of this paper is on the Australian Innovation Investment Fund (IIF) Program.6 The IIF program is one of eight related programs in Australia; other initiatives include the Renewable Energy Equity Fund (REEF) Program, the Pre-Seed Fund (PSF) Program, the Pooled Development Funds (PDF) Program, the Venture Capital Limited Partnerships

Evaluation criteria for the Australian IIF program

This section outlines and describes the criteria upon which the IIFs are evaluated in this paper. The data used and empirical analyses are described and presented in the subsequent sections.

Data and summary statistics

This paper makes use of data provided by the Australian Venture Capital Association (AVCAL) and the Thompson Financial Venture Economics Database [“the AVCAL data”]. The data comprises 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms. In this section, I provide a graphical and descriptive analysis of the venture capital industry in Australia. The next section (Section 7) provides rigorous statistical and econometric analyses of the

Econometric regression analyses

The econometric regression analyses in this section formally test the 7 different evaluation criteria that were enumerated above in Section 5. The focus of the analysis is on the effect of the indicator variables for fund types (IIFs, funds in organizations that are affiliated with an IIF, and non-IIFs). Control variables are provided for other factors pertaining to differences over time (e.g., to capture trends in the degree of learning and skills over time, etc., as well tax incentives

Limitations and future research

The data analyzed in this study involve three primary limitations. First, AVCAL's coverage of the Australian venture capital and private equity industry is not 100%. The extent of coverage for all venture capital and private equity investments in the AVCAL data is unknown. Nevertheless, the data are the most comprehensive for the Australian venture capital and private equity industry. In regards to the coverage for IIFs, it is known (Department of Industry, Tourism and Resources, 2004) that the

Conclusions

This paper began with an overview of venture capital programs in the US, Israel, Canada and the UK. As shown, particularly with reference to the poor performance results with Canadian and UK governmental funds, designing an effective governmental venture capital program is not an easy task. The Australian IIF program structure has useful features that match private and public partnerships that resemble the Israeli and US programs.

Based on an analysis of 280 fund investments in 845

Acknowledgements

I owe special thanks to the Department of Industry, Tourism and Resources of the Corporate Strategy Branch of the Government of Australia for helpful comments and inspiring and sponsoring this research, and to the Australian Venture Capital Association for their helpful support.

References (79)

  • C. Keuschnigg et al.

    Start-ups, venture capitalists and the capital gains tax

    Journal of Public Economics

    (2004)
  • A. Lockett et al.

    The syndication of venture capital investments

    Omega: The International Journal of Management Science

    (2001)
  • S. Manigart et al.

    The determinants of the required returns in venture capital investments: a five-country study

    Journal of Business Venturing

    (2002)
  • C. Mayer et al.

    Sources of funds and investment activities of venture capital funds: evidence from Germany, Israel. Japan and the UK

    Journal of Corporate Finance

    (2005)
  • W. Neus et al.

    Exit Timing of Venture Capitalists in the Course of an Initial Public Offering

    Journal of Financial Intermediation

    (2005)
  • H. Sapienza

    When do venture capitalists add value?

    Journal of Business Venturing

    (1992)
  • H. Sapienza et al.

    Venture capital governance and value-added in four countries

    Journal of Business Venturing

    (1996)
  • D.A. Shepherd et al.

    VCs' decision processes: evidence suggesting more experience may not always be better

    Journal of Business Venturing

    (2003)
  • A.L. Zacharakis et al.

    The nature of information and venture capitalists' overconfidence

    Journal of Business Venturing

    (2001)
  • A.L. Zacharakis et al.

    A non-additive decision-aid for venture capitalists' investment decisions

    European Journal of Operational Research

    (2005)
  • Armour, J., Cumming, D.J., in press. The legislative road to Silicon Valley, Oxford Economic...
  • Berger et al.

    The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle

    Journal of Banking and Finance

    (1998)
  • A.N. Berger et al.

    Small business credit availability and relationship lending: the importance of bank organizational structure

    Economic Journal

    (2002)
  • D. Bergmann et al.

    Venture capital financing, moral hazard, and learning

    Journal of Banking and Finance

    (1998)
  • J.A. Brander et al.

    Venture capital syndication: improved venture selection versus the value-added hypothesis

    Journal of Economics and Management Strategy

    (2002)
  • A. Brav et al.

    Myth or reality? The long-run underperformance of initial public offerings: evidence from venture and nonventure capital-backed companies

    Journal of Finance

    (1997)
  • R.E. Carpenter et al.

    Capital market imperfections, high-tech investment, and new equity investment

    Economic Journal

    (2002)
  • C. Casamatta

    Financing and advising: optimal financial contracts with venture capitalists

    Journal of Finance

    (2003)
  • C. Casamatta et al.

    Learning and Syndication in Venture Capital Investments

    (2003)
  • A. Cosh et al.

    Enterprise Challenged

    (2003)
  • R. Cressy

    Funding gaps: a symposium

    Economic Journal

    (2002)
  • D.J. Cumming

    The structure, governance and performance of U.K. venture capital trusts

    Journal of Corporate Law Studies

    (2003)
  • Cumming, D.J., in press. The determinants of venture capital portfolio size: empirical evidence. Journal of...
  • Cumming, D.J., Johan, S.A., 2005. Managing relationships through contracts: evidence from the venture capital industry....
  • D.J. Cumming et al.

    Mutual Funds That Invest in Private Equity? An Analysis of Labour Sponsored Investment Funds

    (2004)
  • Cumming, D.J., MacIntosh, J.G., in press. Crowding out private equity: Canadian evidence. Journal of Business...
  • D.J. Cumming et al.

    Private Equity Returns and Disclosure Around the World

    (2004)
  • R. Davidson et al.

    Estimation and Inference in Econometrics

    (1993)
  • Department of Industry, Tourism and Resources, 2004. AusIndustry Venture Capital Programs, September 21, 2004...
  • Cited by (221)

    View all citing articles on Scopus
    View full text