Public support of entrepreneurship seems to be all the rage in policy circles, and yet in 2011 only about 8 percent of American businesses were new, compared to 15 percent 1970. Inspired by this frustrating truth, the Kauffman Foundation has produced a report called ‘Guidelines for Local and State Governments to Promote Entrepreneurship‘ based on lessons learned from the foundation’s entrepreneurship support programs. Here are a few of their most interesting findings:
State and Local Governments Should Stop Supporting Two Bad Ideas – Public Venture Funds and Incubation Centers
Public venture funds have a poor track record. Operating any venture fund is risky and challenging, let alone one funded by taxpayer dollars. Most venture funds fail and the ones that do not tend to generate smaller rates of return than the standard rate for the public stock market. This, coupled with the lacking expertise of public sector employees in the realm of venture capitalism, makes public venture funds an especially questionable use of public funds.
Public incubation centers also are weak performers. Public business incubators, an increasingly popular concept, are established to meet entrepreneurs’ need for capital. They rarely succeed at doing so: unless a startup requires expensive equipment, an physical incubator does not help them, but it may keep alive businesses that would not otherwise survive.
Local Governments Should Increase Support for High-Performing Programs – Network Building and Support Targeted by Stage
Fostering connections and learning among entrepreneurs leverages local strengths. The Kauffman Foundation’s main recommendation is to concentrate on the people behind businesses, who learn by doing an interacting with each other. Entrepreneurs like to learn from others in the same business environment, but they often find it hard to make the connections. This is where a local government can help: through events and other platforms, they can bring entrepreneurs together.
Organizing business communities around different stages of entrepreneurship offers more relevant support. Public programs should direct businesses to the forums that would meet their needs best. While meeting others in the same developmental stage (nascent ventures, startups, or scaleups) can facilitate technical learning and innovation, meeting with businessmen further ahead may help entrepreneurs find mentors, investors, or inspiration.
In General, Bottom-Up Approaches Work Better Than Top-Down Strategies
It is no coincidence that both of the bad ideas described above are top-down strategies, conceived in the minds of policymakers and imposed on the industries that should theoretically benefit from these newly created institutions. It is also interesting to note that the recommended ideas are also both bottom-up approaches. As it has also been demonstrated in other studies, the power of entrepreneurship lies within the connections among businesses: inspiration, mentoring, angel investment, serial entrepreneurship, and employee spin-offs. To harness these connections, successful support strategies should concentrate on bringing businesses together.
Contributed by Lili Torok.