VC Exit Wounds, Local Economy Booms: Government‐Guided Funds in China

Government venture capital (GVC) finances start‐ups with public objectives, distinguished from private venture capital (PVC) whose pursuit lies solely in financial returns. In this paper, we use China's government‐guided funds (GGFs) as the empirical setting to investigate the distinctive implications of GVCs on both VC exits and the local economy. Our findings reveal that GGF ownership significantly reduces the likelihood of successful VC exits at the deal level, although the magnitude of this effect depends on VC characteristics. On the other hand, we document that GGFs deliver positive economic and social outcomes at the city level, with the impact most pronounced in eastern, large, and well‐connected cities. Taken together, our results sketch a complete picture of GVC's essence: sacrificing VC exit efficiency for a broader political vision—the promise of local economic prosperity. Our study contributes to the literature by integrating micro‐level loss with positive regional spillovers, offering novel insights into the role of government in entrepreneurial finance.