Across the decades and around the globe, governments have tried various approaches to kick-starting entrepreneurial activity. In his new book, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do about It (Princeton University Press), HBS finance and entrepreneurial management expert Josh Lerner offers a timely look at what works and what doesn’t when it comes to publicly funded stimulus efforts.

Many observers say that job creation is the key to economic recovery in the United States. Can government investments in entrepreneurial ventures succeed in creating jobs?

A number of variables need to come together to make it happen. Even in the private sector, if you look at the start-ups fueled by venture capital in the past decades, there were many failures. But collectively, the companies that did succeed represent a significant fraction of the private-sector jobs in the United States today. The key is to use everything we know about best practices in start-up funding and to avoid what governments often do, which is to throw money at entrepreneurs without creating an environment that is hospitable to entrepreneurship.

You’ve written that government stimulus packages sometimes fail because they are directed by a “herd mentality.” What do you mean by that?

There is a tremendous temptation to fund whatever’s hot. Biotech is one example. Right now, 49 out of 50 states have programs predicated on the argument that their state is uniquely positioned to support biotech ventures, and that obviously can’t be true. The industry’s geography — the establishment of the intellectual and business infrastructure to make biotech ventures thrive — was pretty much set as of 1982. So the states that jumped on the biotech bandwagon in the 1990s or 2000s were too late. You see a lot of the same mistakes happening now in the clean-tech arena, where, again, states are diving in regardless of whether it makes sense for their particular region.

What would be a wiser strategy?

States and countries, for that matter, because this also happens internationally, should look at clusters of entrepreneurial activity that are already taking place and think seriously about the factors that are making those happen. That’s where you’ll get clues about where to make strategic investments for economic growth.

What lessons can those who manage government stimulus efforts learn from the best venture capital firms?

One lesson is that the process of stimulating entrepreneurship is filled with uncertainty. Even in the smartest venture firms, failures are more common than successes. This is a difficult concept for governments to accept. France, for example, has a tendency to set up entrepreneurship initiatives and pull out after a year or eighteen months because the results are slow to materialize. You can’t be that impatient.

Another lesson from top-tier venture groups is the importance of a global perspective when it comes to best practices and competitive strategies. The smart venture firms make global connections. Too often, governments take a parochial point of view.

You just mentioned France as an example of a country with an investment mindset that is too short term. How would a government design a more patient approach?

What you often see is government giving out a large initial outlay of money without first saying, “Let’s be a little cautious and see what happens.” If you think about how venture capitalists fund companies, they usually do it in stages, giving a little money to start, waiting for it to percolate, and maybe doing a midcourse correction. For the public sector to do that, politicians have to accept that they may need to rethink their strategy and that the return on investment won’t conveniently happen in one election cycle.

Your research looks at the various ways that stimulus funds can go astray. Could you give an example?

You tend to see two big classes of problems in terms of money not reaching the intended goals: well-intentioned government policymakers who don’t understand the business arena, and funds that end up in the wrong pockets. In the book, I use examples from Australia to illustrate both problems.

Earlier this decade, the Australian government stipulated that the start-ups it was subsidizing had to give half of all newly created jobs to Australian citizens. That sounded reasonable, but many of the new ventures were software companies that had to compete globally with firms that used inexpensive labor in places like Bangalore. Whatever the desirability of the policy from a political standpoint, the government’s requirement meant that the new companies’ high labor costs undercut their ability to compete.

A second example would be the Australians’ creation of eleven incubator centers to provide financing and advice to information technology start-ups. Much of the money ended up not with the entrepreneurs, but with the people managing the incubators.

You talk about Singapore as doing a good job at “setting the table” for entrepreneurial ventures. What is the secret of that country’s success?

Singapore has been keenly aware of the need to create an environment that’s conducive to entrepreneurship. That has taken a number of forms, from bringing in people who are doing cutting-edge work in fields such as the life sciences, to making Singapore’s business climate attractive to entrepreneurs, to offering training to graduate students and scientists in what the entrepreneurial process is about and how to commercialize a business.

What do you think of the Obama administration’s approach to funding clean-tech innovation and job creation?

The administration deserves credit for understanding that innovation and funding for research are vital to the economy. Obviously there are budget realities to deal with, but they’ve shown a willingness to think in new ways about energy and to consider longer-term strategies such as using immigration to support scientific and technical advances.

But what’s needed with clean tech is a rational, well-defined funding process, with matching funds in areas where market-based activity already exists. The process within the stimulus funding has been absolutely the opposite. It’s been opaque, and since it’s been difficult to figure out what’s going on, clean-tech companies have hired lobbyists to try to access funds. That’s not the best way to ensure that government money is backing the most promising entrepreneurs.

The rules of engagement need to be clear. If you’re dealing with investments that may or may not result in successful ventures, you should have contingency plans, such as what to do if a company’s stock price tanks. When your goal is to distribute $40 billion to businesses working on clean technology, throwing good money after bad is also a major concern. There’s a discipline to the venture process, and I’m not sure that’s been incorporated into the stimulus plan.

Is there anything that surprised you in your research for the book?

The biggest surprise was how little definitive research there has been on a topic that has such widespread economic impact. I hope the book will begin to fill that gap.

— Deborah Blagg


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