The effect of business accelerators on regional venture capital funding in the UK

Over the past two decades, numerous local governments in different countries have established accelerators to support start-ups and stimulate local economic transformation. However, the literature contains limited evidence regarding the impact of these programmes on the availability and supply of seed and early-stage venture capital (VC) within their regions. From a theoretical perspective, accelerators have been argued to positively influence regional VC markets by supporting local entrepreneurs and reducing investors' search costs. Drawing on agency theory as the principal theoretical framework, we argue that this relationship may no longer hold under certain conditions. Specifically, when public bodies invest in multiple competing accelerators, these organisations may become less effective at signalling venture quality to investors, thereby generating adverse selection dynamics akin to a 'market for lemons' that may negatively affect regional VC markets. We refer to this phenomenon as the 'proliferation paradox' and argue that it operates within the UK venture capital market, resulting in only limited effects of accelerators on regional VC flows. This paper examines this proposition by analysing the impact of business accelerators on regional VC funding across UK Local Enterprise Partnerships (LEPs) between 1998 and 2016. To address concerns regarding reverse causality, multiple methodological approaches are employed. The findings suggest that accelerators exert only a limited, and in some cases negligible, effect on regional VC investment, particularly in large territorial units such as LEPs. In addition, the results support the view that regional characteristics moderate the relationship between accelerators and VC investment.