Venture capital for innovation: Creating a more effective policy environment

In the context of its 2020 policy agenda, the European Union is consciously striving to create a higher number of sustainable innovative business enterprises in Europe. Achieving this goal, however, depends in part on the EU’s ability to assure that innovative firms have access to suitable sources of financing, including venture capital (VC). Mindful of that, the EU’s 2020 strategy includes an Innovation Union initiative that foresees a number of measures including development of a cross-border venture capital regime and improved cross-border matching of innovative firms with investors.

Unfortunately, little research is available to assist European efforts to optimise the impact of VC financing on the economic performance of enterprises. Moreover, there is insufficient information about how different types of venture capital investors help innovative firms bridge their resource and competence gaps. Having recognised this information deficit, the European Commission funded an international research project called VICO, the main objective of which was to assess the impact of venture capital and private equity (PE) financing on the economic performance of innovative entrepreneurial ventures in Europe.

VICO assessed impact using measures of innovation rates, employment creation, growth and competitiveness. The project also set out to assess the role venture capital/private equity investors play in helping innovative firms bridge their resource and competence gaps.

Overall, the project concluded that the venture capital industry in most of continental Europe remains underdeveloped and should be strengthened, because VC-backed companies outperform comparable non-VC-backed companies both in terms of their investments and in terms of their productivity. Policy makers should devote substantial attention to building and sustaining an effective venture capital market as a way to improve the performance of European business. VICO, however, strongly emphasises the heterogeneity of venture capital sources and investigated what kinds of investment get the best results with specific types of enterprises.

Tapping into the right kind of venture capital financing can be crucial for an innovative company, the VICO consortium found. Indeed, the type of financing accessed can have a direct impact on a firm’s productivity, employment and growth. Consider, for example, the different impacts that public venture capital (PUVC) and private venture capital (PRVC) were found to have on new technology-based firms. PRVC plays an unequivocally positive role in the growth of high-tech start-ups, the research showed. The impact of PUVC, on the other hand, was shown to be only marginal in growth terms, although younger companies seemed to benefit more from public financing than did older companies.

This may be because younger companies have more difficulty finding alternative sources of finance and suggests that if the public sector wants to be meaningfully involved in the venture capital market, it should focus on helping very young enterprises rather than more established enterprises. As for which public bodies administer VC more successfully, VICO finds that government entities tend to be more effective than their university counterparts.

The researchers also noted that the amount and type of experience that venture capital investors have is also important. In general, the project observed that more experienced investors “may have disproportionately positive effects on employment generation and asset accumulation”. In terms of international versus domestic financing sources, the research suggests that a mix of foreign and home-based VC financing seems to be most advantageous.

VICO found that companies with a syndicate of foreign and domestic venture capital investors tend to do better in both the short term and the long term than those who have just foreign or just domestic VC financing. Here, too, the experience of different venture capital investors can be a significant factor. The researchers note that “domestic venture capital managers with international experience stimulate international investment activity". Hence, VICO suggests that if public policy makers wish to stimulate international venture capital investment, they could enable venture capital managers to gain international work experience.

Finally, drawing general lessons from a study assessing the effectiveness of policy schemes in attracting venture capital investors towards innovative entrepreneurial ventures in Finland, the researchers highlight a number of potential pitfalls in policy design. Among VICO’s main cautionary observations are:

  • Pushing through a new policy scheme too quickly does not allow for legislative changes that the achievement of the targets would require.
  • Existing large public venture capital organisations have vested interests in continuing prevailing practices and oppose change even when the practices are counterproductive.
  • If public venture capital funds have return requirements which are similar to those in private funds, they are less likely to provide a remedy to market failures and can crowd out private investors. This point has EU-wide implications for the regulations concerning public funding to enterprises.

VICO - Financing entrepreneurial ventures in Europe: impact on innovation, employment growth and competitiveness (duration: 1/4/2008 – 31/3/2011). FP7 Socio-economic Sciences and Humanities, Activity 1 “Growth, employment and competitiveness in a knowledge society”, Research area 1.2 “Structural changes in the European knowledge economy and society”. Collaborative project (small and medium scale focused research project).


Contact: Fabio Bertoni,; Terttu Luukkonen,