Can Government Help Create Silicon Valleys? Start With the Intermediaries

Suggested solutions to the European innovation gap include a familiar checklist: more risk capital, less market fragmentation, better university-industry links, and more permissive legal tools for venture contracting. Those are real issues. But they may miss a more mechanical lever driving entrepreneurial hub emergence. A Silicon Valley is not just a place with money and talented founders. It is a place where specialized intermediaries keep showing up: investors who know how to screen uncertain projects, syndicate risk, stage capital, certify quality, and connect young companies to managers, lawyers, customers, and exit markets.

This insight leads to a different policy implication. Governments might ask not only whether to subsidize individual startups, but also how to build the intermediary layer that makes startup finance repeatable.

Our preliminary paper studies one historically important example: the U.S. Small Business Investment Company (SBIC) program. Created in the early years of modern venture capital, SBIC does not make the government a direct venture capitalist. Instead, the program provides government-supported leverage to licensed private investment funds, including some venture-capital funds. In its standard form, that support comes through SBA-guaranteed debentures; for a period, the program also used participating securities that were more equity-like and better suited to early-stage investing. The common idea is to expand fund capacity while leaving investment selection, monitoring, and much of the upside with private investors. 

The policy architecture is distinctly indirect: public support flows through private funds, and those funds choose, monitor, and work with portfolio companies. In principle, this structure can make it easier for private intermediaries to take on investments that may otherwise be difficult because the geography or local market is unfamiliar.

That design points to a broader way to evaluate the program. The question is not simply whether SBIC-backed companies outperformed comparable companies. It is whether SBIC-backed activity helped bring investors into new geographies and helped develop new market hubs for the innovation economy. 

To study that possibility, we assembled a historical registry of SBIC licensees from congressional hearing appendices, microfiche directories, archived SBA websites, and current SBA records. We then linked those funds to venture-capital deal data and local economic outcomes. The analysis shifts the unit of evaluation from the funded firm to the local market, using metropolitan areas as a proxy for entrepreneurial ecosystems.

Our preliminary results suggest that government support for intermediaries may help foster innovation hubs. SBIC activity coincides with a rise in local venture activity and establishment entry more broadly. Compared with other local VC activity, SBIC VC activity predicts more startup exits a few years later and more evidence of technology diffusion over a similar horizon. In local-area data, SBIC-treated locations later show more new companies linked to patents and more labor demand tied to skills used in patented technologies. These innovation ecosystem results hold when we exclude the largest established startup geographies, including Silicon Valley. 

Finally, to study a possible investor-level mechanism, we examine VC fund families. When a fund family participates in a local round involving an SBIC investor from a different family, later non-SBIC funds from the same family are more likely to return to that geography. These results are preliminary, but they point to the possibility that intermediary-focused support is followed by broader local startup activity.

One possible lesson is that innovation policy should take the intermediary layer seriously. Public programs are often framed around the supply of capital or the selection of firms. The SBIC experience suggests that program design may also affect whether private investors acquire local information, build relationships, and continue operating in the market after the initial intervention.

For Europe and other regions trying to close innovation gaps, this points to a practical question: which legal and institutional arrangements make it easier for private intermediaries to finance young firms repeatedly in thinner markets? Capital supply remains important, but the durability of the institutions that deploy capital may be just as important as the amount raised.

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Ofer Eldar is a Professor at UC Berkeley School of Law, and an ECGI Research Member.

Adair Morse is the William A. and Betty H. Hasler Chair in New Enterprise Development and Professor of Finance at the Haas School of Business.

Ian Sapollnik is a Ph.D. candidate in economics at MIT.

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This blog is based on a paper presented at the 5th conference on The Law and Finance of Private Equity and Venture Capital, held at Goethe University Frankfurt. The conference was convened by Bocconi University, the DFG LawFin Center at Goethe University Frankfurt, LSE Law School, the Faculty of Law of the University of Oxford, and the Institute for Law & Economics at the University of Pennsylvania, together with ECGI., Visit the event page to explore more conference-related blogs.

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