Government Sponsored Venture Capital: Blessing Or Curse?

Abstract

Young companies with growth opportunities face serious problems when it comes to financing. The private venture capital (vc) market fails to provide sufficient funding for this segment. First, we present the main characteristics of start-up companies and market failures that can lead to government intervention. These failures include asymmetric information embodied in the business plan; high transaction costs of the investment process from the investment decision to the exit; and positive externalities in the economy, as the government prefers other goals than profit realization. Government participation is categorized as direct or indirect intervention. We present international studies showing that indirect government intervention can have both beneficial and negative effects on the vc market. Finally, the Hungarian government's participation and intervention are evaluated on the domestic vc market.

Empirical examination of relationship between venture capital financing and profitability of portfolio companies in Uganda

“…Furthermore, Puri and Zarutskie (2012), Kelly and Hankook (2013) and Paglia and Harjoto (2014) showed that VC financing positively influences the VC-funded companies' profitability growth. Jaki et al (2017) asserted that profitability growth changes progressively in the early stage of 3 to 5 years, and subsequently a decline is recognised when the VCs plan to exit. However, Harris et al, (2014) reported unsatisfactory results in terms of returns on invested capital.…”

The impact of state intervention on the Hungarian venture capital market

“…Both direct and indirect forms of intervention can be distinguished. (Avots, Strenga & Paalzow, 2013, Lerner, 2012J aki & Moln ar, 2017):…”

“…Companies in the seed and start-up stage do not realise revenues, they are still working on their idea, creating the prototype of the product or making the service available for their customers. In this stage they have a negative net cash flow and bear a high risk (J aki, Moln ar, & Walter, 2017). When evaluating the performance of portfolio companies it should be considered that their net cash flow is necessarily negative after the VC investment since they start spending cash on the development of their product or marketing.…”