When Leverage Must Be Targeted: Regions, Sectors, and Investor Diversity
Fund-of-funds can widen the supply of venture capital, but scale alone does not determine who receives it. This chapter examines the harder design problem: how government VC can use intermediaries to reach regions, founders, and technologies that private markets systematically overlook. The key judgment is whether public criteria, manager selection, portfolio requirements, and reporting alter allocation without destroying the private expertise and investment discipline that make intermediation useful.
Why private VC concentrates
Venture capital clusters because its information is social as well as financial. Investors want to meet founders, compare opportunities with people they trust, recruit specialised employees, and find co-investors who can support later rounds. A successful local ecosystem makes each of those tasks easier. It also creates a record of companies, exits, and managers that lowers the cost of evaluating the next opportunity. Capital therefore follows networks that capital has already helped build.
The same pattern produces a geographic feedback loop. Investors prefer places with a history of entrepreneurship and nearby portfolio companies; founders in those places can meet investors more easily and are more likely to find follow-on finance. The OECD reports that more than 80% of VC investment at the European Union level is concentrated in 20 cities. In the United Kingdom, investors had an office within one hour of the invested company in 61% of equity deals, with another 21% within two hours. Distance is not the only cause of concentration, but these figures show why a promising company outside an established cluster can face a network problem as well as a capital problem.
Sector preferences reinforce geography. Private funds seek businesses with large potential markets, scalable models, and a plausible route to returns within the fund's time horizon. Those preferences can be economically rational for investors while leaving technologies with longer development cycles underserved. A government VC programme may therefore be sector-neutral when it follows private investment, or increasingly targeted when it wants to fill a gap in areas with positive externalities or strategic importance.
Demographic concentration has a similar structure. Investors and fund managers are not evenly distributed across society, and women entrepreneurs remain underrepresented in sectors that receive the most VC. The OECD reports that women entrepreneurs are about 63% less likely than men to secure VC funding and receive about 2% of total venture-capital investment globally. These figures describe unequal access, not the quality of individual ventures. They also imply that simply increasing the size of a general fund may not change the screening process that produces the imbalance.
The policy problem is thus not “private investors are irrational.” Investors respond to risk, information, expected returns, and the networks through which they find and monitor companies. The problem is that those responses can collectively underprovide capital to places, founders, and sectors whose value is not fully captured by the usual investment signals. Targeted government VC is an attempt to change the inputs to that system—who invests, which managers are eligible, which portfolios are built, and how long the capital can remain available.
How an indirect programme targets what it does not select directly
A fund-of-funds does not usually choose every start-up itself.