Abstract: While encouraging state-owned enterprises (SOE) to participate in venture capital is one of the important supporting tools for the central government to implement its SOE reform, innovation-driven development and other relevant national strategies, theoretical researches have paid little attention to this, and the existing literature focuses only on the impact of SOEs' venture capital on their own innovation. In this paper, we study whether SOE venture capital can nurture start-ups' innovation and the underlying mechanism. Based on a sample of venture capital backed start-ups from 2009 to 2016, we find that SOE venture capital can promote start-ups' innovation effectively, and the results hold when using heterogeneous timing DID as identification strategy. The mechanism tests show that SOEs' tolerance for failure as well as their ability to provide more technological expertise and more government resources for start-ups are the main reasons why they can nurture innovation. Our study reveals the important role of SOE in fostering innovation and provides a certain guidance for the implementation of SOE reforms and strategy of innovation-driven development.

Key words: state-owned enterprises, venture capital, direct investment, start-ups, firm innovation