A matter of market failure? Understanding why provincial governments in the Netherlands establish governmental venture capital funds.

Abstract

Increasingly, governments intervene in the venture capital market through the establishment of governmental venture capital funds (GVC funds). Government intervention through GVC funds is often legitimised by perceived funding gaps. However, the rationale of these GVC funds in actually addressing these gaps, is controversial. In line with this controversy, this study researches why provincial governments in the Netherlands establish GVC funds. Based on a literature study combining insights from venture capital and policy diffusion literature, five theoretical motives for intervening as such are identified. These motives are tested through an analysis of venture capital investment data and in interviews with experts and practitioners. The study concludes that a combination of regional market failure motives, policy diffusion mechanisms and wealth differences, explain why provinces in the Netherlands establish GVC funds.