Governments around the world are increasingly shifting economic development expenditures to the support of early-stage businesses. In the United States, state governments have also expanded their development agencies’ mandates from primarily serving as tourism-support operations to now working as engines of small business development. This Article challenges the conventional wisdom driving the creation of state venture capital programs and argues that the structure of state venture capital is deeply flawed. Rather than remedy inequities between states and within states—for instance, in the urban/rural divide that is a feature of most states’ political economies—state venture capital is more likely to perpetuate and even exacerbate inequality. Furthermore, it introduces the potential for waste and corruption that jeopardize governmental legitimacy. From a legal perspective, state venture capital makes use of existing private financing and its accompanying legal infrastructure to channel financing and fill funding gaps, particularly for marginalized entrepreneurs. However, by co-opting private entity forms, it often impairs the administrative mechanisms designed to safeguard public funds. State venture capital also faces daunting market headwinds that make it difficult for venture financing to thrive outside of Silicon Valley and a few other venture capital hubs. Despite these challenges, state venture capital can be structured to give it better odds of success. This Article proposes reforms that can help governments create economic environments in which entrepreneurship is more likely to thrive, governance mechanisms that can foster accountability, and investment selection and contract design features that make it more likely that state venture capital programs will succeed.

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