Public grants beneficiaries and venture capital‑backed firms: a tale of two funding strategies

Although firm characteristics play a crucial role in predicting future performance, public agencies often overlook these factors in their funding decisions, unlike Venture Capital investors. This oversight may have implications for the pay-offs from publicly allocated funds and the achievement of policy objectives. To explore the role of firm characteris- tics in receiving public grants and Venture Capital funding, we compare the characteristics of beneficiaries of the SME Instrument—one of the most innovative funding instruments for innovative companies in Europe—with those of VC-backed firms. Our findings reveal different funding strategies: Venture Capitalists tend to fund younger and more innova- tive firms, while SME Instrument grants lean towards smaller and older companies. These trends persist even when considering factors such as bank indebtedness and profitability. Additionally, firms that are more profitable are more likely to secure public grants than VC-backed counterparts are. The difference in funding strategies may be related to the varying levels of risk tolerance of public agencies and Venture Capitalists, with the pub- lic agency potentially being more risk-averse than its private counterparts are. Our study underscores the potential need to refine the selection criteria of the public funding program to align it with the expected role of public funding in de-risking uncertain ventures in their early development phase.