NextBillion - A WDI Publication

A new class of venture capitalist is emerging, but they aren’t Wall Street financiers or Silicon Valley tech bros. They are public institutions like the European Innovation Council (EIC), Innovate UK and Germany’s High-Tech Gründerfonds (HTGF), bodies historically designed to serve the public by funding high-risk research. While once celebrated for their unconditional grants to startups and SMEs aimed at increasing their research and development capacities, these agencies are now shifting their approach, taking equity stakes, appointing venture capitalists to leadership roles and focusing on de-risking deals for the benefit of private capital, celebrating this as an innovative “blended finance” model.

Yet in practice, this shift risks hollowing out the public mission of these agencies. The world does not need public bodies prioritising the interests of private funds and adapting themselves to the demands of venture capital (VC). It needs institutions that do what private capital cannot or will not: supporting innovation for the public good, not just for profitable exits.

The Quiet Transformation in Public Innovation

Historically, these institutions operated on a grant-first, mission-driven model, serving as a crucial foundation for high-risk, long-term research and development. This approach has yielded foundational technologies that have shaped the modern world, including the Internet, GPS, semiconductors and advanced prosthetics.

Today, however, a new methodology is taking hold. In recent years, public bodies such as the EIC and Innovate UK have begun to adopt the logic of the VC playbook. This shift is most clearly embodied in the EIC Accelerator, a program that combines a non-dilutive grant with an investment component in the form of equity. This approach, while justified by a desire to “crowd in” private capital and support rapid scaling, risks compromising the core public mission of fostering innovation that serves the collective, not just the commercial interest.

The core tension at the heart of this discussion lies in the inherent conflict between two distinct motivations. The public sector’s objective is to maximise societal benefit, address critical market failures and fund projects for the collective good, even if they lack a clear and immediate commercial pathway. In contrast, the private VC model is a financial instrument designed to maximise investor returns, driven by a high-risk, high-reward portfolio strategy focused on identifying “unicorns” that can generate disproportionate gains.

The Public Sector’s New Role in Funding Innovation: The Case of the EIC Accelerator

The EIC provides a clear case study of this paradigm shift. Its predecessors, the Horizon 2020 SME Instrument and the Future Emerging Technologies programs, were based on a pure grant model. These instruments focused on providing non-dilutive funding to fill the gap for early-stage, high-risk research and innovation. This model was a traditional grantor-grantee relationship focused on fostering R&D with a clear emphasis on “excellence, implementation and impact.”

However, starting in 2021, the EIC Accelerator introduced a new “blended finance” model, which combines a grant component of up to €2.5 million with an investment component in the form of equity financing ranging from €0.5 million to €10 million. This move could transform the relationship from a pure grantor-grantee dynamic to a shareholder-investee one. The rationale is that by providing patient capital and taking on risk, the public sector can make these ventures more appealing for private investment and help them scale faster.

The Quasi-Public Precedent: High-Tech Gründerfonds

The EIC’s adoption of this blended finance model is not a completely novel idea, but rather the institutionalisation of a pre-existing quasi-public model. High-Tech Gründerfonds, a German public-private partnership, was founded in 2005 to specifically address the funding gap for the country’s early-stage technology startups. HTGF was designed to provide seed financing and prepare companies for a subsequent round of VC funding.

This model provides a valuable reference point, as HTGF’s explicit mission is to act as a bridge to private capital from the very beginning. Its standardised investment approach, which typically involves an initial investment of €800,000 for a 15% equity stake, streamlines the process — but also solidifies a venture-like financial model. The EIC’s move to a blended finance model is, therefore, not a dramatic departure from the past but an expansion of a public-private model that had already been pioneered at a national level.

The Public’s Share and Equity Stakes

The high-risk nature of startups is a well-known challenge. The most frequent cause of failure for both general and deep tech startups is the lack of a market need, or “product-market fit.” A central conflict arises from the VC model’s pressure for quick exits and rapid scaling: It is fundamentally at odds with the long, unpredictable and capital-intensive development cycles of deep tech, where success may take years.

The VC playbook, when applied to deep tech, can force companies to commercialise prematurely, before they have found a clear market need. Public agencies, by adopting this model, risk pushing these firms down a path that is known to lead to failure, rather than using their patient capital to support the long validation cycles deep tech requires.

Mission Drift and The Market Distortion Trap

The adoption of a venture-like model can also lead to a phenomenon known as “mission drift,” where an organisation’s resources and activities are diverted from its formal goals to ensure its financial survival or accommodate institutional pressures. By adopting the investor playbook, public innovation agencies can subtly or overtly shift their funding priorities. They may begin to favour “safer,” more commercially viable and less risky projects that are more likely to secure follow-on private funding and achieve a profitable exit. This, in turn, risks distorting the market by crowding out truly high-risk, public-good projects that private capital would never touch, creating an undue subsidy to the private sector and introducing new risks for the public sector, which may find itself avoiding investments that address urgent (but less profitable) public needs. This creates a powerful selection bias: The public agency’s criteria, which should be based on the public good, become influenced by what private investors will find attractive.

For a private VC, a project is a “failure” if it doesn’t return cash to investors — something that happens with roughly 75% of venture-backed companies. For the public sector, a project is a “success” if it advances the public good, regardless of its commercial outcome. For instance, the development of the Internet and GPS were considered a success long before a financial return was possible at businesses based on these technologies. By adopting a financial return metric as a measure of success, the EIC and other agencies are subtly redefining success in a way that risks deprioritising foundational R&D that may not be commercially viable but is societally essential. The funding is no longer primarily about the public good but about the “bankability” of a project — a dynamic that favours projects with a clear path to a profitable exit.

What this means for inventors

This reorientation also threatens to reshape the role of inventors. Researchers who have dedicated their careers to science may now find themselves under pressure to master investor pitches, negotiate term sheets and plan for exits. Universities, already criticised for demanding large equity stakes in spin-out companies based on faculty or student research, are sometimes joined by public agencies taking their own shares. Instead of acting as a supportive partner, these agencies’ and universities’ innovation centres begin to resemble any other investor, competing for ownership rather than enabling discovery.

The lesson is not that blended finance is inherently flawed — private capital can play a role in scaling technologies. But public institutions must retain their distinctive purpose. If they merely mimic private funds, they squander the very advantage that justifies their existence. Taxpayers who fund these agencies do not need another investor in the market. They need institutions that champion innovation that’s too uncertain, too slow or too unprofitable for private capital to invest in — but that’s nonetheless essential for society.

These public institutions should prioritise the needs of inventors and researchers, not capital holders. This will require courage from policymakers to resist the temptation to copy the venture playbook, and instead to reassert the unique value of public funding: enabling invention for the benefit of all.

Emre Eren Korkmaz is a researcher at the University of Oxford and founder-director of OCTD, a research and consultancy company with a focus on data scarcity and impact measurement.

Photo credit: peshkov