The Government Whispering to Entrepreneurs: Public Venture Capital, Policy Shifts and Firm Productivity

Abstract

Research Summary: Grounding on the literature on resource dependence, board political capital, and principal–principal conflicts, I conceptualize governmental minority shareholding as a governance strategy through which ventures access information about future policy shifts and better calibrate their decisions before policy implementation. I test these arguments on multicountry firm-level longitudinal data about European venture capital (VC)-backed and comparable non-VC-backed companies. By means of a difference-in-differences methodology and exploiting the staggered announcement of tax reforms across countries, I show that public VC-backed companies after a tax reform announcement show higher productivity than non-VC-backed ventures, and this effect lasts 4 years. After decomposing productivity, the post-announcement effect of public VC backing is mainly due to both an output effect (sales value increase) and an enhanced efficiency in the labor factor. Managerial Summary: Ventures facing market uncertainty may benefit from having a governmental minority shareholder on board. Governmental minority shareholders bring political capital in the form of information about future business-related policy changes, as well as connections to debt capital providers. Plus, their minority status makes conflicts with the entrepreneur (and other shareholders) less likely. In this way, after a policy reform announcement, entrepreneurs backed by governmental minority shareholders (such as public venture capitalists) can better predict market changes and react more quickly than comparable non-backed firms to those changes. In sum, governmental minority shareholding represents an effective governance strategy for ventures to reduce their uncertainty and access information and resources that would be out of reach for both the ventures and all other types of shareholders.