Do Development Financial Institutions Create Impact through Venture Capital Investments?

Working paper, joint with Aleksander Andonov and Paul Smeets

Scheduled Presentation(s): SFS Cavalcade NA 2025

Development Finance Institutions (DFIs) manage assets totaling $23 trillion, yet little research has been conducted on their investment activities and impact. We document that DFIs have increasingly invested in venture capital (VC) over the past three decades, participating as limited partners in one out of every six deals. We collect the mandates of DFIs and identify four main objectives they pursue through VC investments: building a VC ecosystem, supporting entrepreneurship and small and medium-sized enterprises, fostering innovation, and promoting sustainable business practices. We empirically test whether DFIs meet these objectives by addressing market failures, including externalities, information frictions, and coordination challenges. Our findings vary between developed and developing economies. In developing economies, DFIs are more likely to target industries with positive externalities, provide capital to underrepresented fund managers, and improve return transparency. However, they are less likely than conventional VC investors to support young funds or early-stage deals, and their investments have no significant impact on firm growth or innovation. In developed economies, we find little evidence that DFIs address market failures and have even more limited impact. Overall, our findings suggest that DFIs have significant room to enhance their impact by better addressing market failures, aligning investments with stated mandates, and embracing higher risk in their portfolios.