VC Investors Increase Growth, Productivity, as Well as Investment and Innovation Performance

VC investors in Europe positively affect firms’ growth, productivity, investment and innovations. VC investors also helped their portfolio firms to outperform during the financial crisis. These findings come from the VICO project carried out on behalf of the EU by the ZEW and nine further European universities and research institutes. The VICO project devoted considerable attention to disentangling the "selection" and "treatment" effects of VC investors on the investee firm. The treatment effect refers to the improvement in the performance of the portfolio firm caused by the VC investment, while selection refers to the VC investors being able to choose high quality firms with su­perior future prospects. The findings generally supported the view that VC investors had a considerable positive treatment effect on firms’ growth, productivity, as well as invest­ment and innovation performance. VC investors helped their portfolio firms to outper­form firms not backed by venture capital even during the financial crisis in 2008–2009.

However, the extent of the treatment effect was contingent on the characteristics of the investor and to some extent also of investee firms. The project demon­strated that experienced VC investors have disproportionally positive effects on employ­ment generation and asset accumulation within the economy. Furthermore, the project showed that independent VC firms exerted an unequivocally positive impact, greater than that documented in previous studies, on the productivity and sales growth of Euro­pean high-tech entrepreneurial ventures. This effect was largely attributable to the treat­ment effect.

With regard to the impacts of the (direct) investments by governmental VCs, when we distinguished between firms backed in the early stages of their life (firms aged five years or less) and relatively more mature firms (aged more than five years), governmental VCs appeared to have a positive impact on the growth of the early stage firms, while the im­pact was negligible for the more mature ones.

Both independent and governmental VCs were helpful in alleviating the financial con­straints of the portfolio firms. VCs tended to select firms which were active in patent­ing and in turn VC-backed companies outperformed otherwise similar non-VC-backed companies in terms of innovation output. Most interestingly, syndicates led by inde­pendent VCs but including also governmental VCs exhibit the greatest positive impact on firms’ innovation.

The VICO project suggests several policy recommendations, first, emphasizing a sys­temic view and targeting framework conditions for the emergence of the VC industry. Furthermore, it notes that a failure to recognize the need for coordinated policies is an important determinant of the modest success of previous policy initiatives in Europe. At the macro level, the project recommends, for example, shaping the educational system and European culture in favour of an entrepreneur­ial risk-taking and innovation prone attitude or the creation of a VC-friendly tax and regulatory environment (e.g., elimination of double taxation and registration problems).

There were also several micro-level measures recommended, such as provision of selected subsidies on a competitive basis to entrepreneurial firms to improve the pool of entrepreneurial ventures with high-level human capital and high aspirations; promotion of support services (like business incubator services) by experienced ac­tors; or measures favouring the entry of VC firms managed by experienced managers through public funds of funds.

Numerous studies were carried out within the scope of the VICO project.  A summary of the most important findings can be found at Vico Project's web presence.

The VICO Project

The VICO project, funded from the EU Seventh Framework Programme, studied the impact of VC financing on the innovation rate, employment creation, growth, and competitiveness of high-tech entrepreneurial ventures in Europe and the role VC investors play in helping entrepreneurial firms bridge their resource and compe­tence gaps. The project created a unique, large-scale longitudinal dataset on European high-tech companies and VC investments. This dataset provided the back­bone for several studies within the project. The project also drew on survey, interview and documentary data. One of the major objectives of the project was to investigate the impact of the heterogeneity of VC investors on the performance of the portfolio firms. This heterogeneity is an important peculiarity of the VC landscape in Europe.

For further information please contact

Prof. Dr. Tereza Tykvová, Phone +49 621/1235-147, E-mail tykvova@zew.de