Beware of Strange Bed-fellows: Partnerships Between the State and Venture Capitalists in Managing Government Guiding Funds

Yifan Wei (University of Manitoba)

Nan Jia (University of Southern California)

Milo Wang (University of Alberta)

Abstract: Can the state leverage the expertise of venture investors while promoting high-value entrepreneurship? We provide evidence that the less extractive power a local government has, the more likely it is to achieve its goal by leveraging the expertise of higher-quality venture capital (VC) and private equity (PE) firms. The concerns about state extraction produce a larger deterrent effect on those potential VC/PE partners that have greater outside market opportunities, hence reducing the quality of the pool of candidate partners available to the state. We examine our hypotheses in the context of Government Guiding Funds (GGF) in China which aim to use public funds as seed money to increase investment in entrepreneurship in high-tech and emerging industries, and to hire VC/PE firms to manage the funds.