Let me ask you a question:

If you were the Governor of Ohio, how much money would you spend on Venture Capital?

Think about this - as a leader, you want to bring happiness and economic prosperity to your constituents. One major driver of this prosperity will be increased number of jobs. And to get these increased number of jobs, you will likely need more companies along with more innovation, which will help drive up the wages.

So Venture Capital becomes a great lever to pull. Perhaps you start a Government owned Venture Capital firm, solely focused on driving investments to local businesses in the area.

If that's the case - and we see the massive success in Silicon Valley and other financial centers, why don't other governments try to replicate this success?

Why don't every government funnel millions, if not billions, into Venture Capital firms?

In this essay, we will help answer these three questions:

• Why is VC such a force multiplier: Recognize how this can materially change
• What is the benefit by adding VC: Where does adding VC help...
• How much is too much: ...and where does it end.

Why is VC such a force multiplier

To first answer this, you need to understand what the different levers and tools you can drive for innovation. As a leader, you can choose to focus your spending on driving up investments, such as infrastructure. While that does add jobs, it often are jobs that can be temporary in nature, and/or could be less desirable.

On the other hand, you can attempt to boost consumer spending through a number of initiatives (i.e cutting taxes, etc.). While that may help boost the local economy, it may lead to a lack of production in the area.

However, over the past two decades, we have been seeing that there are few areas of true and outstanding economic and productivity as investments in the informational and internet economy. And no lever is a bigger driver of this type of innovation as VC.

Unlike other investment vehicles, VC is particularly suited for the massive risk that is required to help harbour these kind of early stage investments. In addition, a significant VC pool will help drive compounding effects in the area through incubation along with reputational benefits (i.e if I know that land X has opportunity, I will take my idea here).

Therefore, with this known, the question then becomes: Why doesn't every government prioritize VC as an economic strategy?

How does government driven VC help drive benefits?

To address this, we need to first start by deciding on a set of measurement criteria.

In this case, the best way to calculate the success of a VC is by the % of it's investments that results in an exit. In other words, the role of a VC is to pick winners, and we judge VCs on what their batting rate is.

From this then, the next step becomes looking at VC investments driven by governments and see how they perform?

The good news? At low levels of investment, we see marginal benefits to the local ecosystem with every additional dollar added. In other words, at low levels of VC investment in a market, the government driven VC investments help drive incremental pay and innovation.

There's a number of reasons for this. VC firms are usually cyclic, so government funds can help prop up the industry during a cyclic downturn. In addition, they can also help in sustaining or kickstarting an immature VC climate.

How much is too much?

However, there is a limit to how much we can add

As the total amount of investment gets added increases, we see lower and lower marginal benefit in terms of the % of exit rate for the firms for every $ added. And at a certain point, we actually see a negative impact on the VC success.

There aren't very clear reasons why, but there are a number of hypothesis that can help explain this

First, we know that if the level of government invest vast exceeds the private sector, it can overwhelm the local VC climate, and can actually stifle their innovation.

Or - it could be a case where government driven regulation as a result of investment result in lower levels of efficiency relative to private sector as the investments get inflated.

All of this to say, should any government look to increase their spending in VC to drive their innovation, they should know to do so knowing that there is always a ceiling.

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