The Government as Venture Capitalist

Government programs that finance small firms have attracted little empirical attention. This article examines the largest U.S. initiative, the Small Business Innovation Research program. Using a unique database, this article shows that SBIR awardees grew significantly faster than matched firms over a decade and were more likely to attract venture financing. The superior performance of awardees was confined to firms in regions with substantial venture capital activity and was particularly pronounced in high-technology industries. Multiple awards did not increase performance. These results suggest that awards played out an important role in certifying firm quality, but also that distortions of the award process do occur.