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Venture capital has become an important engine of economic growth in the United States over the last decades. For instance, Gompers and Lerner (2001a: 83) state: “No matter how we look at the numbers, venture capital activity clearly serves as an important source for economic development, wealth and job creation, and innovation.” Gilson (2002: 2) likewise asserts:

Every work that sets out to evaluate the design and impact of government policy in the economic realm has to answer one fundamental question first, namely whether a case can be made for government intervention at all. The aim of this chapter is therefore to explain what exactly can justify government intervention in the venture capital market.

The modern venture capital industry came into being in 1946, when MIT president Karl Compton, Harvard Business School professor Georges F. Doriot, and local business leaders from the Boston area founded American Research & Development (ARD). ARD’s goal was to help commercialize technology developed during the Second World War, and what made ARD “modern” was the fact that in addition to simply providing capital to startups, assisting its portfolio firms with management assistance was also part of the plan from the very beginning.

The financing of entrepreneurial activity in Germany has a long tradition, and at least reaches back to medieval times, when vast trading empires, such as those associated with the Hanse and Fugger, blossomed in regions that are now part of Germany. The advent of modern venture capital firms is a much more recent phenomenon in Germany, though. Only by the mid-1960s the first Kapitalbeteiligungsgesellschaften (KBGs - equity stock companies), which can loosely be regarded as the German counterpart to the U.S.’ SBICs, were founded. Finally, nearly another two decades later, in 1983, the first independent, U.S.-style venture capital firms came into being in Germany.

This chapter sets out to provide a valid quantitative comparison of the venture capital activity in the U.S. and Germany. So far, to my knowledge no such comparison exists. The goal of this comparison is to make clear where the German venture capital market stands relative to its counterpart in the U.S. Against this backdrop, it becomes possible to evaluate public policy for venture capital, which is the ultimate goal of the lengthy data analysis presented so far.

The literature on venture capital has identified three main reasons for why IPOs could play an important role in the venture capital cycle. These are:

The question whether supply or demand is holding back the growth of the venture capital market is not new. However, for Germany it has not been contemplated seriously in the literature so far. In terms of the design of an effective public policy aimed at fostering venture capital activity, this is most unfortunate. After all, if we do not even know where the bottleneck lies, how can we design policies to help widen it, other than by relying on pure luck? Even more troubling, it appears that public policy for venture capital has been seriously and systematically misguided in the past. As was laid out in chapter 4.4, all governmental initiatives have so far by and large met with little, if any, success. It is little comfort, then, that similar schemes have not yielded the envisioned positive results on the other side of the Atlantic, either: “In the United States, programs like the Department of Commerce’s Advanced Technology Program (ATP) have disbursed over $1 billion to small high-technology businesses over the past ten years, with few tangible results.”

This book set out to describe and evaluate public policy for venture capital in the U.S. and Germany. While it certainly has not answered all questions along the way, at least one insight should by now be firmly ingrained in the minds of this discussion’s readers. Not supply of, but demand for venture capital is the crucial ingredient that American and German policy makers have to add to their equations if they want to see their domestic venture capital markets flourish and thereby ultimately have the two countries’ economies themselves prosper.