Government capital is not just 'silly money'

Japan Times

18-05-2025

Silicon Valley-minded venture capitalists (VCs) around the world tend to blindly criticize government capital for innovation as 'silly money.'
For sure, there has been a global trend to replicate concepts from Silicon Valley with regards to the 'power law' of venture capital, 'move fast, break things' disruption, avoidance of government and the 'fake it until you make it' confidence, among others.
Nothing could be more wrong — especially when Silicon Valley is fundamentally a sui generis culture and ecosystem.
Unlike Silicon Valley's predominantly private-sector-driven ecosystem, many Asian societies exhibit greater risk aversion, necessitating proactive government involvement to stimulate entrepreneurial activity.
Historically, government funding and industrial policy have played a pivotal role in fostering innovation and supporting startups across Asia, starting with Japan, followed by other countries like South Korea, Singapore and Taiwan, among others. And we must not forget that, even in the establishment of the Silicon Valley ecosystem, the U.S. government and military played a big role in the postwar years and the military even laid the foundation for the invention of the internet and the semiconductor chip.
In particular, the commercialization of cutting-edge fundamental research at universities carries high risks and very long gestation periods that could be unpalatable to private-sector players. Further, deep-tech and life-science research from universities are often of strategic interest to governments, particularly from the angles of national security and economic development, which typical investors may not be attracted to.
Indeed, government-backed VCs, including public university VCs are more inclined to invest in early-stage companies, particularly those emerging from academic or research institutions. On the other hand, independent VCs tend to focus on later-stage investments where the risk is lower and the potential for returns is clearer.
This approach often leads to underinvestment in nascent technologies and startups that require more time and support to mature. A study by Iqbal Muhammad and Stephanie Serve analyzing 3,817 firms across nine Asian developing countries from 1991 to 2017 found that government-backed startups were more likely to receive early-stage financing compared to those backed by independent VC firms.
And while government-backed VCs may have a lower likelihood of successful exits compared with independent VCs, which tend to follow more rigorous due diligence processes and market-driven strategies, government-backed startups perform better in the expansion and later stages thanks to early investments aimed at unlocking exponential innovation.
As examples across Asia, Singapore's government actively supports startups through initiatives like the Startup SG Equity program. Last year, an additional $338 million was allocated to this program, increasing the investment cap per startup from $6 million to $9 million. Taiwan's government has invested approximately $211.6 million over five years to support local equipment and materials suppliers in building research and development capabilities.
Meanwhile, mainland China exemplifies a robust government-led approach to innovation. In 2022, tax rebates for corporate R&D reached 1.3 trillion Chinese yuan (approximately $180 billion), marking a 28.8% annual growth rate since 2018. Additionally, in 2025, China launched a 1 trillion yuan ($138 billion) government-backed venture fund targeting emerging technologies like quantum computing and artificial intelligence.
With this context, a key platform to commercialize fundamental research — especially from universities and research institutions — are government-backed university VCs and incubation programs. In the early stage deep-tech space, incubators turn basic research into commercializable ideas and found companies, while university VCs would invest when startups at the seed stage are ready to create products based on their intellectual property and beyond.
In 2022, the Japanese government launched the University Fund of Japan, a ¥10 trillion ($68.5 billion) endowment aimed at revitalizing the nation's research capabilities and fostering innovation. This initiative addresses concerns over declining research performance and aims to position Japanese universities as global leaders in scientific research.
Profits from the investments are distributed to selected universities, with a maximum annual allocation of ¥300 billion ($2 billion). The duration is suitably long for early stage deep-tech investments — the support is structured to continue for up to 25 years, providing long-term financial stability to recipient institutions. Universities are chosen based on their strategies for research excellence and organizational reform. Tohoku University was the first institution selected under this program.
Public university VCs like Kyoto-iCAP (Kyoto University Innovation Capital), where the author works, are also designed to take high risks to commercialize fundamental university research through government funding alongside private-sector limited partners. Its funds, with a capital size of more than $220 million, have a duration of 12 to 15 years to reflect the high risks and long gestation periods. Indeed, according to Global University Venturing, Japan has one of the most advanced university VC ecosystems in Asia — 85% of its top universities have an investment vehicle to support its startups.
Other notable Japanese university VCs are University of Tokyo Edge Capital Partners (UTEC) — which leads the pack with an approximate capital size of $594 million, University of Tokyo Innovation Platform, Osaka University Venture Capital and Tohoku University Venture Partners.
More than 40% of European institutions and more than half of Australian campuses have funds too. In contrast, only about a third of U.S. universities maintain such investment vehicles, which goes back to the U.S. and Silicon Valley having a unique private-sector-dominated ecosystem that is backed by a highly entrepreneurial and risk-taking culture. Some of the successful exits that have emerged from the university VC ecosystem are Kyoto iCAP-funded Cuorips and Chordia Therapeutics, UTEC-funded PeptiDream and Spiber, National University of Singapore-incubated and Temasek-backed VC fund Vertex-funded PatSnap and Oxford Science Enterprises-backed Oxford Nanopore Technologies and Immunocore.
Going forward, especially when deep-tech fields like semiconductors, materials, clean energy, AI and life sciences become more strategically important for Asian societies, further funding from governments and universities are crucial. This can eventually scale the early stage of a deep-tech startup ecosystem and encourage risk-sharing that could attract more private-sector players.
Raymond Woo is the Singapore Office Representative of Kyoto-iCAP (Kyoto University Innovation Capital), Kyoto University's venture capital firm.