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MoreLIP: Why it Makes No Sense to Compare Private and State-Sponsored VC Performance

08/09/2009 — George Lipper, Development Capital Networks

The publication of yet another research study (this by the British Venture Capital Association) suggesting that state-sponsored venture funding fails to perform as well private venture funds makes me just that much more anxious to obtain and read Josh Lerner's forthcoming book Boulevard of Broken Dreams, soon to be published by Princeton University Press.

Both a Financial Times story evaluating the BVCA findings and a next day critical response by Richard Harrison of Queen’s University Management School point out once again that it’s a fool’s errand to compare the performance of a private equity fund with a strictly financial return objective with that of a state-sponsored fund that likely represents far more complex objectives.

About three years ago, the National Association of Seed and Venture Funds published a guide to state sponsored programs -- finding more than 150 such funds spread across 44 responding states -- only to discover a mix of objectives and performance so disparate as to defy realistic comparison. The organization promised to follow up with a more in-depth study. But funding for such a project was put on hold when it was learned that Dr. Lerner's project, with support from the E Marion Kauffman Foundation, was already in underway.

Many of us -- particularly in the fly-over states -- have been searching for years to ascertain what works and what doesn’t in the creation and execution of state funds to help spur innovation and high tech job creation.

The NASVF study, published in spring 2006, reported $5.8 billion among the 44 states had a generalized goal of new job creation and economic growth as their priority. Their self-reported aggregated performance was 1) 42% excellent to above average, 2) 47% average and only 3) 12% below average -- a Lake Wobegon of state venture capital programs.

At the risk of sounding like a shill for Amazon, my order is in -- even though the book’s cover foretells the story: “Why public efforts to boost entrepreneurship and venture capital have failed – and what to do about it."