Public sector contributions to the venture capital market – How are portfolio companies affected by the investments?
In autumn 2016, Damvad Analytics conducted an impact assessment of co-investment funds that implemented financing contributions within the framework of the eight structural funds programmes, in order to improve the regional supply of venture capital in Sweden. The study had a quantitative approach and focused on the impact for companies that had received the investments. Along with a parallel qualitative evaluation of the activities of the funds, the report formed the basis for the final reporting by Tillväxtanalys of the impact on the funds.
The quantitative impact assessment of the venture capital funds described above was based on databases with relatively short temporal horizons due to a short time between investments and the availability of the latest financial statements. Therefore, in this report a follow-up of the previous study has been conducted using a larger database and a longer temporal horizon, for the purpose of identifying longer term impacts on the portfolio companies. The portfolio companies received initial investments during the period from 2009 – June 2015. In this report, we use financial statements of the companies that extend until 2016.
The funds have undertaken investments together with private co-financiers. These co-financiers often originate from the same region as the respective funds or other regions within Sweden. Only a small proportion of private co-financiers originate from other countries. The funds and their co-financiers have primarily invested in micro-enterprises in growth phases. The most common sector among the portfolio companies is IT/Telecommunications, in which approximately one-third of the companies are active. Every fifth company is active in industry/transportation. However, the investment pattern differs between funds, where portfolio companies in the IT sector are relatively common in funds in metropolitan regions, while trading companies are over-represented in funds in more sparsely populated areas.
In this report, impacts that arise as a result of the capital investment are estimated using a quasi-experimental method in which a control group for the portfolio companies is identified on the basis of the matching method coarsened exact matching (CEM). We then compare the development of the company groups over time and identify whether the difference between the groups is statistically significant. We follow the trends for turnover, number of employees and productivity (value added per employee).
We find a distinct positive impact on the number of employees in the portfolio companies. Companies that received capital investments grow faster than the control group and the difference is statistically significant throughout the entire period studied. However, the size of the confidence interval increases over time and five years after the initial investment, significance is only reached at a level of ten percent.
There are no statistically significant differences obtained between the groups for turnover. However, there are indications of a more positive trend among the portfolio companies.
In terms of the level of productivity, the development is initially negative for the portfolio companies. In year one and two following the investment, there are statistically significant differences between the groups with a negative trend for the portfolio companies. Three years and beyond, there are no statistically significant differences between the groups. However, there are indications of higher productivity in the portfolio companies from year three and onwards. In conclusion, the results indicate that the capital investments have meant an increase in the capacity of the companies in terms of the number of employees in both the short and long term, while a long-term impact on productivity levels cannot be supported. It can be noted that to a large extent the estimated coefficients are affected by the development of individual companies.
Overall, the development of the portfolio companies is in line with their own assessments of the effects of the investments. The portfolio companies describe that the investment primarily created opportunities for more rapid expansion. The companies themselves also assess that the future impact on company profitability will be greater than that seen so far.
One conclusion from the results is that the funds contribute to”create jobs”. However, the results should be regarded in the light of where in the country and for which companies the effects occur. The greatest impact is achieved for companies in metropolitan regions and companies in expansion phases. One interpretation of this is that potential portfolio companies with expectations of increased growth is larger in metropolitan regions, and that investment strategies in other parts of the country have appeared to be different. An example of this is that the funds in which the impact is the clearest for the number of employees - Almi Invest Sthlm, Almi Invest Västsverige (West Sweden) and Sydsvensk Entreprenörskapfonden I (Southern Sweden Entrepreneurship Fund I) - are also the funds that have invested the most in IT companies. The results are in line with international research that often indicates primary effects in the form of recruitment, where the greatest impact occurs for high-tech companies and companies in areas with established venture capital environments.