Governments and VC: Can Anyone Get This Right?

There are obvious reasons why nations, states, cities and even communities work hard to attract venture capital ecosystems, affixing the word "Silicon" to whatever natural landmark is nearby.

Silicon Beach. Silicon Wadi. Silicon Gulch.

Historically, most of the growth in the United States economy post World War II can be traced back to the growth of the venture capital ecosystem and all that came from it. It's a big reason that California, just this one state, is a top-five global economic powerhouse with a $4 trillion GDP, rivaling Japan and the United Kingdom.

And yet, there are case studies upon case studies of governments making things worse for local venture capital ecosystems, not better. Decile Group was originally spun out of Founder Institute, which has chapters in more than 100 countries. So we've seen this go wrong a lot.

It's hard to address every nation and their unique circumstances in one article. In the future we'll dive into specific case studies on when this works and when it doesn't, and the unforeseen consequences of well-meaning ideas.

But there are some general rules. There are things that never work. There are things that are essential to any ecosystem becoming successful. And some important things to do first.

Here is the starting point for building a thriving ecosystem where governments help startups and VCs instead of hurting them.

One caveat: Most of these examples are gleaned from American-based, Western-leaning examples of success.

Fix regulations that get in VCs' way. Remove barriers to raising money, investing in the best companies, and doing what's right for those companies. If you want the best VCs and the best LPs to invest in them, returns have to be above political or national motivations. This is the single most important thing to internalize or capital will just flow elsewhere.

Invest broadly in funds without restrictions or compromises. Invest where there is already capital so you are additive, not the entire ecosystem. The goal is to enable a flywheel, then have the government intervention fade away over time and let the success of private industry take over.

Keep investments at the fund level, never the company level. Any investment decisions should be made through an independent, investment-motivated committee, not one with political interests.

Sector or geography requirements for funds. Any requirements or quotas around sectors or geographies may seem like a near-term win, but you will choke a fund's ability to invest in the best companies. The Power Law already makes it hard to find the best companies in the industry. If you make it harder, you won't get the best talent or the most money, and those firms will die.

Onerous rules around who can invest. Whether it restricts pension funds, high net worth individuals, or foreign investors, these rules limit capital flow and stunt ecosystem growth.

Direct startup investments. Governments should never be in the business of investing in startups directly. A great use of government funding is at the scaling-up layer. Many nascent ecosystems have strong angel or seed funds, but money to scale is scarce. Governments can be valuable LPs for venture firms looking to scale what is already discovered and working.

Often, it's not the first step.

There are core ecosystem pieces that are needed for there to be anything meaningful to fund: research labs, universities, the ability for tech to transfer out of those places, immigration policies that allow the flow of talent, public infrastructure, laws that allow rapid company formation, and the ability to fail without onerous personal consequences.

It's a waste of money to start investing in funds before an ecosystem is ready for it.

This is not a time to get creative. Venture capital is a bespoke industry and a unique asset class. Unintended consequences almost always result when governments try to get involved with it. Instead, look at what's been done before.

The OECD's work on government VC shows mixed public-private models (fund-of-funds and co-investment) outperform pure state funds. Successful examples like Yozma-style schemes that kickstarted Israel's ecosystem, Nordic and UK vehicles, and EU scale-up programmes target specific gaps, have professional governance, and include sunset paths to full privatization.

Successful VC ecosystems like the United States should not be copied and pasted directly into contexts where they do not apply. Silicon Valley emerged at a unique time and place. It can't be replicated without Stanford University, Fred Terman, and a time machine.

But governments should look at the laws and regulations in the United States that allow for capital flows, tax incentives around long-term investments, and the ability to fail, and be as startup-friendly if not more so.

It is also critical for governments to learn from leaders within their own borders. Often, voices have been sounding out the need for venture capital reform locally for decades before governments take action. Governments must engage these leaders and design solutions that solve the specific problems ecosystem leaders are facing.

Diagnose the gaps. Begin with dialogue. Engage local ecosystem leaders, startups, and investors to determine where the bottlenecks lie.

Fix the basics first. Focus on tax and LP rules, high-efficiency and low-cost company and fund structures, exits, and talent mobility.

Create the underlying infrastructure. The best VC rules in the world won't matter if there is no underlying ecosystem. Invest in research, innovation programs, education, and reliable public infrastructure. Avoid flashy investments in coworking spaces. Build the building blocks instead.

Focus on scale. Fill funding gaps within the ecosystem that block successful companies from scaling through fund-of-funds and co-investment.

Create a favorable environment for exits. Simplify and modernize listing rules for growth companies. Liberalize foreign investment rules. Remove barriers to listing abroad or doing cross-border share exchanges without punitive tax or legal hurdles. Successful cross-border exits or foreign exits of homegrown solutions grow your ecosystem too.