Benchmarking government support for venture capital: United States
Table of contents
The US VC market is the largest in the world, which is partly due to the stronger involvement of institutional investors in the VC asset class in the United States than in Europe. Relatively old data show that institutional investors accounted for around 60% of the annual VC fundraising between 1990 and 1997 in the United States, while in Europe the same figure is between 15% and 34% (Nielsen, 2008[1]).
VC investments in the United States have experienced stable growth in the last 15 years. During the 2008/09 Great Financial Crisis, investment levels dropped sharply from 0.25% to 0.18% as a share of GDP. However, the following years saw an immediate recovery, with investment levels rebounding to 0.28% in 2011 and averaging 0.25% until 2014. Since 2014, VC investments have steadily grown from USD 56 billion (0.32% of GDP) to USD 126 billion (0.6% of GDP) in 2020. In 2021, VC investments reached a record high, with USD 254 billion (1.12% of GDP), nearly double the amount of 2020, driven by all-time low interest rates. Year 2022, following higher inflation and higher interest rates, showed a 25% contraction in VC investments, which fell to USD 190 billion (still above pre-pandemic levels).
Late-stage investments make up the largest share of the VC market in the United States, comprising on average 53% of total VC investments in the 2011-2020 period, while seed investments are the smallest segment. Over the 2011-2020 period, seed investments have also grown more slowly than early-stage and late-stage investments. Late-stage investments, in particular, experienced notable growth in 2017-2018 and 2020-2021, doubling total investment volumes in both periods, although this exponential growth come to a halt in 2022.
A study looking at the risk-reward profile of US VC funds in the 1984-2015 period, find that those funds had on average a 20% annual return (Morgan Stanley, 2020[2]). Similarly, PitchBook, over the period 2009-2024, finds annualised returns of 25% for US VC fund investments in the seed stage, 19% for series A investments, and between 13-14% for follow-on investments (series B and above) (PitchBook, 2024[3]).
Note: Figures include the investment activity (in investee companies domiciled in the United States) of professional venture capital firms with or without a US office, Small Business Investment Companies (SBICs), corporate VC, institutions, investment banks and similar entities whose primary activity is financial investing. Angel, incubator and similar investments that are part of a VC round are included if they involve cash for equity and not buyout or services in kind. Data are primarily obtained from a quarterly survey of venture capital practitioners conducted by PitchBook. Information is augmented by other research techniques including other public and private sources. All data are subject to verification with the venture capital firms and/or the investee companies. The statistics presented correspond to the aggregation of investment data according to the location of the portfolio companies, regardless of the location of the private equity firms. For Panel B, seed financing is between USD 1 million and USD 10 million, early stage corresponds to Series A and B, and later stage corresponds to Series C and D.
Source: Panel A and B (OECD, 2023[4]); (NVCA-Pitchbook, 2023[5])
The US VC market and VC industry have developed independently without strong government participation, although public investments in R&D, including through well-known programmes such as the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR)0F1, have indirectly supported the VC industry through a steady supply of innovative businesses and investment opportunities. A recent report by the OECD shows that government VC investors are involved in no more than 3% of all VC deals in the United States, whereas the share is 11% across Europe (Berger, Dechezleprêtre and Fadic, 2024[6]).
Existing federal government-backed VC programmes are, therefore, small-scale in the United States, at least relative to the size of the country, are often part of broader programmes that also include debt finance components, and typically pursue second-level objectives beyond VC development, such as regional development and social inclusion.
Two main VC-related federal programmes are the Small Business Investment Company (SBIC) programme and the State Small Business Credit Initiative (SSBCI). Both are multi-faceted programmes that offer different types of financing (loans, guarantees, venture-capital, semi-equity instruments, etc.). The VC programmes launched within the SBIC and the SSBCI have mostly followed a fund-of-fund approach although, especially in the context of the SSBCI which is highly decentralised and implemented at state level, some states have also experimented with direct investment VC programmes.
The Small Business Investment Company (SBIC) programme is managed by the federal Small Business Administration (SBA). SBICs are privately-owned and -managed investment funds that are licensed and regulated by the SBA to provide both equity and debt financing to small businesses.
An SBIC must have an experienced team of private equity managers, who have secured a minimum commitment of USD 5 million from private investors, although the SBA, as licensing authority, can require the fund to have secured USD 20 million or more of commitments by limited partners (LPs). One single LP cannot account for more than 70% of the private funding committed in an SBIC. SBIC funds are typically allowed to receive up to 2:1 public-private leverage. The SBA commitment comes in the form of loans to an SBIC, with the loan funding that comes from the sale of 10-year maturity SBA-guaranteed debentures (i.e. unsecured bonds) to private investors. Hence, SBIC funds are often also called “debenture funds”.
While no style or type of investment is preferred in the context of the SBIC programme, strategies with investment time horizons above 10 years, such as early-stage biotech, are often not a good fit for the programme, due to the maturity of the SBA-guaranteed loan.
SBICs can only invest in “small businesses”, which are defined as companies with net worth less than USD 19.5 million and average after-tax income of less than USD 6.5 million over the previous two years. Recipient companies must also be U.S. businesses, that is, at least 51% of employees and assets must be located in the United States.
SBICs are also eligible to use “low/moderate income” (LMI) debentures, which are deferred interest debentures that are issued at a discount and require no interest payments or SBA annual charge for the first five years. The use of LMI debentures is restricted to LMI-qualified investments. Qualified investments are small businesses in which 50% or more of the employees or tangible assets are in a LMI Zone (as defined by applicable government agencies) or 35% of the full-time employees of the small business have primary residences in an LMI Zone.
As of 2023, 24% of total financing reported by all SBICs had an equity nature (USD 2 billion), 11% consisted of debt with equity features (USD 0.8 billion), and 65% of straight debt (USD 5.2 billion). Total financing by all SBICs was USD 8 billion in 2023. In the same year, the SBIC programme was financing 1 208 companies, 25% of which were underserved businesses, mostly falling under the definition of LMI-qualified investment. The SBIC programme has, therefore, also a strong regional development dimension, showing that a large proportion of SBIC investments is not in the most developed states of the nation.
In 2023, the total SBA capital at risk in the programme was nearly USD 19 billion, while the total private capital invested was USD 24 billion. Based on estimates by the SBA, the programme created or sustained on average 120 000 jobs over the period 2019-20231F2.
A recent evaluation of the SBIC programme utilises the results of a survey of SBICs, along with data from Morgan Stanley Capital International (MSCI), to perform an analysis of SBIC performance (Brown et al., n.d.[7]). Overall, the authors find that, based on the survey results, that SBIC funds outperform comparable non-SBIC peers by an average of around 4% (median of 2.6%) in terms of internal rate of return (IRR) and an average of about 0.7x (median of 0.3x) in terms of multiple on invested capital (MOIC). The authors also examine SBICs in the MSCI database, where data is available for a smaller sample but should be free of selection bias from self-reporting. The MSCI sample also shows outperformance of SBICs relative to comparable non-SBIC peers, but the magnitude is smaller. In a regression analysis the authors finally find that larger funds tend to generate higher IRR and MOIC when controlling for other factors such as vintage year and strategy.
A second relevant US federal programme is the State Small Business Credit Initiative (SSBCI)2F3. The programme initially operated between 2010 and 2017 and was relaunched in 2021, with USD 10 billion in funding. The programme, led by the US Treasury, has a decentralised approach that supports state-level business financing programmes. While supported programmes are not only focused on equity finance, about 70 state-level VC programmes are backed by the SSBCI.
In 2021, the SSBCI had already allocated most of the available funding to states (USD 8.3 billion). Of this funding, based on (partial) information provided by the states to the Treasury, at least USD 2 billion had been allocated to VC investment programmes3F4, which included mostly indirect investment programmes in VC funds and a few direct investment programmes in local start-ups and SMEs. However, for the 35 states for which there was information, state governments had allocated on average almost exactly 50% of the budget into equity programmes (49.4%), projecting a more realistic total VC commitment of the programme in the range of USD 4-5 billion. This average conceals important inter-state differences. Some states, such as North Dakota, New Mexico, Louisiana, and Kansas allocated more than 80% of the SSBCI funding into VC programmes, whereas others allocated 20% or less (North Carolina, Massachusetts, Florida, and Alaska).
Eligibility requirements for state-level VC programmes include a crowding-in effect, where private investment must be greater than the amount of the SSBCI funds invested. Furthermore, all SSBCI programmes in the 2010-2017 period required that at least 20% of private capital be at risk in all transactions. Funding to states is distributed in several tranches, with USD 1.5 billion being earmarked for the purpose of supporting businesses owned by Socially and Economically Disadvantaged Individuals (SEDI)4F5.
Recipient VC funds can use SSBCI contributions to partially cover both advisory services and administrative costs of the funds. Administrative costs for VC funds are capped at 5% of total SSBCI contributions for the first tranche, and 3% for the second and third tranche. VC funds can use SSBCI contributions to cover services (financial management, operational guidance, IT consulting, transaction consulting, etc.) for their portfolio companies so long as the federal funds spent do not exceed 1.71% of the annual average of total federal funding.
State-level SSBCI VC programmes followed four different models: private funds, state-sponsored entities, co-investment models and state agencies.
Private funds are given SSBCI funds to invest alongside private capital. Investment decisions are taken by the GP of the private VC fund, who receive a fee and carried interest from the government for its investment activity.
State-sponsored entities are those contracted by the state to serve as intermediaries to manage investments. In this case, Investment principal and gains return to the intermediary to be re-invested.
Co-investment models have a defined formula and set of criteria, automatically matching any eligible private investments. Here, eligible investors or funds identify qualifying investments for state participation on a formulaic basis.
State agencies can also take direct control, sourcing deals and conducting due diligence themselves. In this case, state agencies directly engage in transactions, with support from an investment committee, and receive returns based on the investment contract.
The SSBCI VC programmes have been managed as state assets expected to generate financial returns in addition to stimulating private sector investments. None of the VC programmes granted capital to small businesses or their investors, although several VC programmes provided various financial incentives to participating investors in the form of above-market carried interest or non-standard risk mitigation, such as accepting an adverse liquidation preference (Schmisseur, 2016[8]).
The effectiveness of the SSBCI programme was measured each year by the Treasury in the initial 2010-2017 run of the program (US Treasury, 2017[9]). Results were also disaggregated by the type of support provided, allowing for an analysis of the impact of the VC component of the programme. From 2011 to 2016, the total value of new financing provided to small businesses by SSBCI-backed VC funds was USD 4.17 billion, a leveraging effect of 12.76 times the initial public funding. SSBCI-backed VC funds primarily targeted early-stage enterprises, with nearly half (45%) of their funding going to early-stage investments. Seed stage investments made up the second highest share of investments (27%), while pre-seed and growth stage made up a minor portion (13% and 11% respectively).
Beneficiary enterprises reported that they had created nearly 14 000 jobs within two years of receiving SSBCI support, and that nearly 11 000 jobs at risk of loss had been retained. Furthermore, 36% of SSBCI-backed VC investments were in low-middle income communities, pointing out that the SSBCI programme, like the SBIC, has sought to support access to finance in less developed states and regions.
Another evaluation of the first run of the programme shows that more than two-thirds of states allocated SSBCI funding to VC programmes (more specifically, 48 VC programmes in total) (Schmisseur, 2016[8]). The USD 448 million allocated to VC programmes accounted for nearly one-third of total SSBCI funding. As of end-2105, states had made over 1 300 VC investments using USD 278 million, corresponding to 69% of total SSBCI VC funding. The investments leveraged nearly USD 1.7 billion in co-investment and more than USD 3 billion inclusive of subsequent private financing, for a total leverage ratio of 11:1. These programmes also supported the creation of almost 11 200 new jobs as projected by businesses at the time of investment.
The same evaluation also finds that states with lower per capita rates of venture capital investment were more likely to allocate SSBCI funding to VC programmes. States that received just 20% of U.S. venture capital investments in 2014 represented 84% of the USD 448 million of SSBCI VC allocation, suggesting that the programme was used to boost the local entrepreneurial and VC ecosystems of lagging or peripheral states.
References
[6] Berger, M., A. Dechezleprêtre and M. Fadic (2024), “What is the role of Government Venture Capital for innovation-driven entrepreneurship?”, OECD Science, Technology and Industry Working Papers, OECD, Paris.
[7] Brown, G. et al. (n.d.), “The Performance of Small Business Investment Companies”, Institute for Private Capital.
[2] Morgan Stanley (2020), “Counterpoint Global Insights, Public to Private Equity in the United States: A Long-Term Look”, https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdf.
[1] Nielsen, K. (2008), “Institutional Investors and Private Equity*”, Review of Finance, Vol. 12/1, pp. 185-219, https://doi.org/10.1093/rof/rfm009.
[5] NVCA-Pitchbook (2023), “Q3 2023 Pitchbook NVCA Venture Monitor”, https://nvca.org/wp-content/uploads/2023/10/Q3_2023_PitchBook-NVCA_Venture_Monitor.pdf.
[4] OECD (2023), OECD Data Explorer Venture Capital Investments, https://data-explorer.oecd.org/vis?tm=venture%20capital&pg=0&snb=11&vw=tb&df[ds]=dsDisseminateFinalDMZ&df[id]=DSD_VC%40DF_VC_INV&df[ag]=OECD.SDD.TPS&df[vs]=1.0&dq=ZAF%2BUSA%2BGBR%2BCHE%2BSWE%2BESP%2BSVN%2BSVK%2BPRT%2BPOL%2BNOR%2BNZL%2BNLD%2BLTU%2BLUX%2BLV.
[3] PitchBook (2024), PitchBook Analyst Note: VC Returns by Series: Part IV.
[8] Schmisseur, C. (2016), Program Evaluation of the State Small Business Credit Initiative, Yale School of Management.
[9] US Treasury (2017), “SSBCI Summary of States Annual Report 2017”, https://home.treasury.gov/policy-issues/small-business-programs/state-small-business-credit-initiative-ssbci/ssbci-program-reports.
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The full paper is available in English: OECD (2025), Benchmarking government support for Venture Capital: A comparative analysis, OECD SME and Entrepreneurship Papers, OECD Publishing, Paris, https://doi.org/10.1787/81e53985-en
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← 1. The SBIR programme a U.S. government funding program, coordinated by the Small Business Administration, intended to help certain small businesses conduct R&D. Funding takes the form of contracts or grants. The recipient projects must have the potential for commercialization and must meet specific U.S. government R&D needs. Funds are obtained by allocating a certain percentage of the total extramural (R&D) budgets of the 11 federal agencies with extramural research budgets in excess of USD 100 million. Approximately USD 2.5 billion is awarded through this programme each year. STTR is a parallel programme to SBIR with the added requirement that small businesses partner with colleges/universities, R&D centres or qualified non-profit research institutions.
← 2. SBA estimates jobs created or sustained using "The 1999 Arizona Venture Capital Impact Study" (confirmed by the DRI-WEFA study of 2001) indicating that 1 job is created for every USD 36 000 of SBIC Program investment (adjusted for inflation).
← 3. Further information at: https://home.treasury.gov/system/files/136/SSBCI-FAQs.pdf and https://home.treasury.gov/policy-issues/small-business-programs/state-small-business-credit-initiative-ssbci/ssbci-program-reports.
← 4. However, the split between debt and equity programmes is missing for some large states, such as California, introducing a bias in the current total.
← 5. SEDI include women, racial minorities, people with limited English proficiency, disabled people, and individuals living in disadvantaged locations.