Public bodies must do better for startups

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| The European | 6 April 2021

Gregoire Croidieu of emlyon business school outlines why only 20% of businesses on government schemes grow, and how this can be improved

Governments across Europe have implemented various policies to help innovative ventures launch and grow, this is because they value a thriving innovation sector and these businesses are expected to drive economic growth. By definition, innovative ventures are not only expected to generate an above-average performance in terms of growth and job creation, but also to introduce new technologies and business practices, all of which are essential for an economy’s global competitiveness.

Once established, such ventures are expected to exhibit higher survival chances, grow faster, and generate positive knowledge spillover into the local economy – they are examples of positive entrepreneurship because of their positive contributions to society. However, despite their advantages, innovative ventures are difficult to establish, growth is a rare event and most entrepreneurial ventures die young and small, particularly when they innovate. One way governments are trying to change this is through sponsorship of ‘venture advisory’ programmes.

Although the wording might vary a lot from one country to another, providing advice, training, and mentorship has been a key approach to supporting innovative entrepreneurship for years throughout the world. Given their anticipated contributions to overall economic growth, policymakers eagerly direct aid to these ventures by providing financial resources such as loans, R&D subsidies, contracts through agencies, or government-run venture capitalist funds. La French Tech or the Italian Start-Up Act are fairly recent European examples of this approach. They both provide this type of support and often go beyond with financial tools and specialised, targeted programmes.

The Start-up Act in Italy has provided a variety of labour and financial policy incentives to facilitate intellectual property protection. Through these policy interventions (also referred to as “input-related” policies), governments provide strategic support aimed at narrowing the knowledge and resource gaps entrepreneurs face as they launch and run their businesses, and to trigger an increase in performance outputs, such as sales and job creation.

Falling short

Given the investment of public resources for supporting entrepreneurial growth my colleagues and I at emylon business school decided to look into whether government entrepreneurship programmes truly benefit innovative ventures. While prior research has found that these schemes have some benefits for growth outcomes I, and a number of co-authors, found that only 20% of businesses on government entrepreneurship schemes actually reach their first growth milestones. This is a very worrying finding, given that 80% of businesses that governments actively fund through schemes are not successful in growing at all.

There are several reasons for this, the first is that in most cases government support programmes lack sufficient resources and they often misallocate resources away from clients who need them the most. The second is that policymakers eventually resort to a “picking winners” approach based on past performance indicators. Using past-performance indicators to pick winners is a double-edge sword for innovative firms, as some established ones perform really well, whereas others (often emerging) have not shown any performance for years and tend to be excluded from support.

As they are not considered “winners” based on the past performance criteria, innovative ventures are not prioritised for receiving support and, as a result, cannot benefit from the programme and grow.

One key finding that our research also revealed is that innovative ventures are not better than non-innovative ventures at benefiting from the advice they receive – so, on top of not being targeted, they are not better at learning.

With this in mind, for innovative ventures to achieve more growth milestones they must want to learn, which is why it is important for the programme to have the right selection process in place. Programme managers can’t know in advance if a firm is willing to learn from the programme and grow – the aim of such policy is to introduce procedures to detect if the business owners are willing to listen to advice and use it to grow.

There are many ways to do this, but in our research, we find that dedicating advisor time to interview all of the firms up for selection is key. This may appear a waste of time and public resources, but in fact, is an effective way to detect the firms with the highest potential from the programme.

State-sponsored programmes to support economic development through entrepreneurs and innovators are increasing throughout the world. Yet, it is a difficult task, because business growth is difficult to achieve. And because they cost public money, we ought to assess the effectiveness of these programmes and improve their designs.

Our research shows that by better targeting the firms whose growth will benefit the economy, and identifying the firms who will get the most benefit from these programmes, is one way to get value from this public effort.

Further information

www.em-lyon.com/en

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