Government and venture capital
Stumbled across some interesting research on government support of startup businesses. First, this new piece on the Vox site:
We are all for policy support for entrepreneurs. But, we believe it must be channelled correctly. An approach that seeks to pick winners ex ante is likely to fail. We base this assessment in part on the very poor performance of policy interventions of this type (Lerner 2009). Our view is also based on the underlying firm dynamics that are observed in the data and discussed above. We instead believe policymakers should focus more consistently on the many small businesses and entrepreneurs that make large and small improvements to the economy. The best support policymakers can provide is to encourage competition among local banks and financiers. Governments should forget about picking winners and focus on picking the right system.
Me: Right, capital access is important. But then I took a look at that Lerner report (Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It) by Josh Lerner at Harvard. Here is an interesting bit of a Q&A he did with the NYTimes Freakonomics blog (anything in bold is mine):
Q. Are government interventions to boost entrepreneurship always successful? Why do these programs fail?
A. Sadly, for every successful effort such as those in Israel and Singapore, there are numerous unsuccessful ones.
First, they can simply get it wrong: allocating funds and support in an inept or, even worse, a counterproductive manner. Decisions that seem plausible within the halls of a legislative body or a government bureaucracy can be wildly at odds with what entrepreneurs and their backers really need. When Australia legalized the venture capital limited partnership structure earlier this decade, for instance, legislators worried that foreign funds or firms might exploit the favorable tax treatment these entities enjoyed. So they required that each company backed by a venture partnership have at least half its assets in Australia. The venture funds found that this restriction handicapped the companies in their portfolio. The entrepreneurs could not expand their software development activities in India or their manufacturing operations in China without putting the venture funds’ tax status in danger, even as they competed against American ventures that made heavy use of “off-shoring.”
Q. You write about “The Neglected Art of Setting the Table” i.e. establishing a favorable environment for entrepreneurs. Tell us about the ideal place setting.
A. Often, in their eagerness to get to the “fun stuff” of handing out money, public leaders neglect the importance of setting the table, or creating a favorable environment. Such efforts to create the right climate for entrepreneurship are likely to have several dimensions. Ensuring that creative ideas can move easily from universities and government laboratories is critically important. However, many entrepreneurs come not from academia, but rather from corporate positions, and studies have documented that, for these individuals, the attractiveness of entrepreneurial activity is very sensitive to tax policy (particularly low capital gains tax rates). Also important is ensuring that the law allows firms to enter into the needed contracts — for instance, with a potential financier or a source of technology — and that these contracts can be enforced.