The Effects of Incentive Structures on the Performance of Publicly Funded Venture Capital Funds

Abstract

A majority of developed countries have realized the importance of functioning venture capital markets for job creation, innovation, and economic growth. Accordingly, governments have taken measures to support the development and efficient functioning of national venture capital markets. As a policy response, particularly in the more problematic early-stage investment area, many countries have set up government financed support programs to channel risk capital to new ventures through private VC funds. The choice of the incentive structure for a publicly co-financed and privately managed venture capital fund is crucial for the success of a program. However, there is very little robust research determining the actual effects of different structures on fund performance. A comparison of government VC structures has been hindered by both the variety of utilized structures and the plurality of domestic environments. In this study, we examine the effects of different incentive structures on the performance of publicly co-financed venture capital programs under changing market conditions by comparing these structures in a simulation model.