U.S. Government Investing in VC to Counter China
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Can the U.S. government succeed as a VC?
In the past 11 months, the U.S. has taken a bold step in response to the growing economic and technological challenge from China. Washington has now designated several industries, including semiconductors and rare earths, as critical to national security and began investing directly in them.
The next step is even more striking – the U.S. government is beginning to function as a venture capitalist. Its new investment in Pat Gelsinger’s tech venture xLight and earlier investment in ReElement Technologies mark a shift toward direct, equity-based bets on emerging ventures.. This follows other major investments in larger companies such as MP Materials and Intel.
Here are 6 strategic questions that will determine whether the U.S. can succeed as a VC.
#1. What is the goal?
It is difficult to serve two goals – and do it well.
Silicon Valley VCs have a single goal: generate outsized financial returns. Even with this singular goal, leading VCs estimate that only about 15 funds capture about 95% – 97% of all VC profits (https://www.forbes.com/sites/dileeprao/2025/10/15/vc-entrepreneurs-vs-unicorn-entrepreneurs-8-key-differences/). That’s because there are very few home runs to pay for the many failures.
Add a second goal, including national security, domestic supply chains, or job creation (as in many government VC programs), and the challenge intensifies:
- Few investments may satisfy both goals, so the choice dwindles.
- There are very few home runs from the smaller universe to offset the inevitable failures.
#2. At what stage should the U.S. invest?
Top VCs usually invest after a venture demonstrates potential, i.e., after Aha! There are 5 forms of venture Aha (https://www.forbes.com/sites/dileeprao/2018/07/23/how-vcs-identify-successful-ventures-five-kinds-of-entrepreneurial-aha/):
In Silicon Valley, angels often help ventures reach Aha. How will the ventures targeted by the U.S. government get to Aha? Or will the U.S. government invest before Aha when the view is murkier and the risks higher?
#3. Will the U.S. have the right to change CEOs – and exercise it?
VCs prefer to invest in proven entrepreneurs and executives. The U.S. is now investing in Pat Gelsinger’s venture. Does he fit the profile of a unicorn-entrepreneur or a successful, high-growth CEO? If not, is the government taking on founder risk it may not be able to manage?
Also, VCs typically reserve the right to change CEOs if needed (https://www.forbes.com/sites/dileeprao/2023/03/14/the-1-secret-of-billion-dollar-entrepreneurs-94-took-off-without-vc/). Will the U.S. retain this right? And use it?
#4. What returns should the U.S. target?
Early-stage VCs can seek annual returns as high as 80% – 100% in each deal to justify the considerable risk and secure high portfolio returns after paying for the failures. But public-oriented VCs often target lower returns — one reason few public-oriented VCs do well. The successes may not earn enough to pay for the failures.
Should the U.S. behave like an early-stage VC and seek triple-digit returns – but that might mean not investing in some national-security ventures? Or adopt a more modest target consistent with public-purpose investing? If the latter, it may not get the home runs to pay for the failures – and the fund could earn negative returns. Is that acceptable?
#5. Will the best entrepreneurs seek funding from the U.S. government?
High-potential entrepreneurs typically pursue capital from top-tier VCs – if they seek VC at all. Will they turn to the U.S. government unless the terms are unusually favorable?
The eagerness with which some companies have accepted federal investments suggests these deals may be highly beneficial to the companies – but is it good for taxpayers?
#6. Is this a good strategy for the U.S. and can other governments profit from VC?
The key question is this: what will count as success?
Governments have long struggled to design effective public–private investment programs. China appears to have found a mix that delivers economic gains for the country, though in a different system of public accountability.
Democracies, and especially ones where the governments and government policy can change, must develop models where the incentives and guardrails match national goals, especially when profits are privatized, but losses are not.
MY TAKE: How far will this U.S. government VC experiment go?
Washington’s move into direct investing could become a long-term tool of national strategy, but only if these programs can avoid the structural deficiencies that have derailed past efforts – and create the one necessary ingredient to develop the foundational infrastructure to make these programs work.
From my work advising local, regional, and federal agencies on VC-driven economic development, I’ve seen that government investment programs often attract early-stage or relatively inexperienced founders. With targeted training of the skills behind unicorn-entrepreneurs, however, many can grow into capable leaders who build strong, scalable ventures.
