Abstract
Research has focused on the fundraising dynamics of venture capital (VC) funds (Balboa and Martí, 2007; Barber and Yasuda, 2017; Chakraborty and Ewens, 2017; Crain, 2018; Walske and Zacharakis, 2009; Zarutskie, 2010). In this study, we examine the role of government LPs in VC follow-on fundraising. This question is important since, around the globe, governments have invested in privately managed VC funds with the objective of supporting national VC industries (e.g., Avnimelech and Teubal, 2006; Cumming, 2007; Jääskeläinen et al., 2007; Tyebjee and Bruno, 1984). On the one hand, government LPs may be able to certify VC firms towards private LPs. On the other hand, the allocation of public funds may suffer from the adverse selection of less skilled VC firms (Akerlof, 1970) or be distorted by political interests (Stigler, 1971). We use the context of the European VC industry to answer the following research questions: (a) Which type of VC firm secures commitments from government LPs?, (b) Are VC firms able to exercise regulatory capture?, and (c) Can we observe signs of the European VC industry becoming self-sufficient, i.e., be able to function without government LPs?