This is a guest post by Robyn Klingler Vidra, CIV senior research fellow, see team for more information.
Public policymakers around the world are implementing initiatives to support local venture activity. The over-arching aim for their venture policies is to create a local entrepreneurial cluster, ideally along the lines of the Silicon Valley high-technology cluster. Public strategies for promoting entrepreneurship range from headline grabbing programs, such as Startup Chile, to long-term investments in – and changes to – educational systems, including the British government’s introduction of computer programming into national curriculum. The public venture policy menu consists of instruments across eight categories: (1) regulatory changes and incentives, (2) tax credits, (3) government funding (including funding for R&D, grants, equity investments, etc), (4) infrastructure investments (e.g. Korea’s super high speed broadband), (5) building clusters, networks and institutes (e.g. Taiwan’s Hsinchu Park), (6) attracting talent and investment (see Singapore’s Global Investor Programme and Hong Kong’s InvestHK), (7) extending stock market access for startup, and (8) improving the education and training environment.
There has been a decided shift in favour of governments creating, and even “picking,” startup winners which has underlined this shift. In the United Kingdom, for example, a government initiative called Future Fifty selects the country’s 50 most promising high-growth firms and provides them with “publicly funded schemes and incentives.” Rather than the mantra that governments can’t “pick winners” governments have been increasingly seen – and in some ways expected – to be facilitators of local (high-tech) venture activity. In this way, the expected role of governments around the world is more akin to the Japanese MITI and less like the laissez faire approach historically associated with the United States or Hong Kong. Evidence of this trend is manifest in the venture capital policy area, in which more than 40 countries have deployed public policies specifically aimed at developing local venture capital activity.
Despite the perceived necessity, and apparent ubiquity, of the public promotion of venture, many public policymakers have not effectively supported venture. In fact, many governments have failed to produce the desired results of the venture policies, programs and investments. Recent research suggests that there is a negative relationship between public subsidy and entrepreneurship. In this way, public investments in entrepreneurship have been found to stifle precisely the activities they aim to encourage. Also, VCs including Scott Kuport and Mark Suster have identified trends in the financing of entrepreneurship – such as the structural changes to the VC industry – which suggest that less capital is needed for today’s start-ups given that startups now have less up-front capital expenditure. In effect, in part already due to public efforts, it seems easier (in regulatory terms) and cheaper (in financial terms) than ever to startup. But at the same time, populations expect more government support for entrepreneurs, innovation and early-stage investment activity. What do these trends mean for public policymakers in supporting venture activity?
In light of the disconnect between the expectations for and the outcomes of public venture policies, this post highlights the “do’s and don’ts” of deploying agile, yet impactful, public policies for advancing local entrepreneurship. In doing so, this post provides policymakers with advice – in terms of 3 “do’s” and 3 “don’ts” – on how they can best support local venture activity in today’s context.
1) Build on local competitive advantages: localities should not simply strive to replicate Silicon Valley (as Silicon Valley can’t be copied). Instead, it is essential that policymakers build on local competitive advantages – and address local weaknesses – when designing venture policies. This means designing policies that:
- harness the particular talents of the labor force (e.g. large numbers of graduates in media, biotech or fashion),
- focus on sectors where local firms are already strong (e.g. fintech in London),
- address the opportunities and challenges presented by local geography (e.g. key trade partner, mountain ranges or neighboring countries),
- formulating policies that fit with local risk-taking, fundraising and exit norms
2) Have a long time horizon: many public venture policies require long-term investment and long-term thinking. Investing in changes to primary school education, for example, will likely take at least a decade before bearing entrepreneurial fruit. But, these types of investments today can equip tomorrow’s would-be entrepreneurs with the technical skills that can enable them to develop world-class companies. Maintaining a sufficient risk appetite over the course of the policy’s tenure is essential, particularly when it comes to continuing public funding or conceding public revenue (e.g. tax breaks). For example, a government VC fund should be expected to not produce any financial return-on-investment for at least the first five years.
3) Co-invest with the private sector: Bringing private investors in as co-investors is an important way to test that the companies the government is investing in are, or could be, commercially viable. One of the reasons why Israel’s Yozma Fund has received such acclaim (aside from its accomplishment in catapulting Israel’s VC industry between 1993 and 1998) was its requirement that the VC funds it was investing in were able to raise capital from international private financial institutions. Private investors’ willingness to co-invest acts as a litmus test for whether the investments could secure subsequent funding in private markets – and therefore be self-sustaining.
For “Don’ts”, please see our next week’s post.