Pre-seed government venture capital funds

This paper analyses a Pre-seed Fund (PSF) government venture capital (VC) program for the purpose of improving our understanding about effective public policy towards entrepreneurial finance. The PSF program is a public-private partnership started in 2002 for the purpose of fostering more investment in nascent high-tech entrepreneurial firms in Australia. Data from Venture Economics indicate PSFs are the primary provider of seed stage VC in Australia, but PSFs are not more likely to invest in high-tech firms than other types of VC funds. PSFs have smaller portfolios (number of investees) per manager than other types of VC funds, and are more likely to invest in firms resident in the same state, but do not stage and syndicate more frequently than other types of VC funds. Overall, therefore, the structure of the program has given rise to mixed performance in terms of finance and governance provided to nascent high-tech entrepreneurial firms. As well, there is also suggestive evidence that the PSF program diminishes the incentives for Innovation Investment Funds (a previously existing Australian government VC fund program) to invest in seed stage ventures, and hence competing government initiatives appear to be crowding out one another. Further evidence suggests that among the four PSFs in existence, one PSF has outperformed the other PSFs in regards to the investee firm patents and financial statement performance, even though this fund has invested less money and charged lower management fees than its counterparts. Hence, a further implication is that the impact of government-sponsored VC funds depends not only on the design of the program but also on the selection of the VC managers carrying out the investments. © Springer Science+Business Media, LLC 2008.