80% Of Government-Backed Start-Ups Fail – Here’s Why
- Government programmes lack sufficient resources
- Policymakers currently use a ‘picking winners’ approach to select businesses to support
- Government should change criteria used to allocate support if they want to boost business growth
It’s no wonder governments around the world value innovation. After all, the businesses and start-ups that can harness such skills are the ones expected to drive economic growth. Innovation can lead to higher productivity, which means that more goods and services are produced, and above-average performance in terms of growth and job creation – in other words, the economy grows.
Not just that, but such companies are also the frontrunners for introducing new technologies and business practises, all of which are essential for boosting an economy’s global competitiveness.
Given their anticipated contributions to overall economic growth, governments and 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 examples of this approach that provide this kind of support, and often goes beyond with financial tools and specialised-targeted programmes.
However, despite their advantages and the wealth of support on offer, innovative ventures and start-ups are difficult to establish. Growth is rare and most entrepreneurial ventures die young.
So, given the level of investment of public resources for supporting entrepreneurial growth, Professor Gregoire Croidieu from emlyon business school and Professor Mickael Buffart from Aalto University School of Business investigated whether innovative businesses ventures actually managed to achieve growth outcomes as a result of government programmes.
And, they found that growth is actually very rare.
Their findings revealed that only 20 percent of start-ups on government entrepreneurship schemes achieve any growth milestones. This is a worrying finding, given that it means 80 percent of businesses that governments actively fund are not successful in growing at all.
Compare this to the private sector, and it makes for grim reading. As an example, start-ups based at Station F in France (the biggest start-up hub in the world) are commonly finding big successes – the most newsworthy of them is recast.ai, a chatbot builder based in Microsoft’s AI incubator within the hub. It was acquired by SAP in January 2018 for an undisclosed amount. This is just one of hundreds more start-ups at Station F that are completing big funding rounds.
The researchers say that there are several reasons for this discrepancy in success rates. The first is that in most cases government support programmes both lack sufficient resources and often misallocate those resources away from clients who need them the most. The second reason is that policymakers eventually resort to a ‘picking winners’ approach based on past performance indicators – meaning that those ventures that have not shown any signs of success thus far will get no support from the government.
For their study, the researchers conducted three sets of analyses on 1,700 businesses, from sectors ranging from technology to manufacturing, from the Small Business Development Centre in Southern California, an institution part-funded by government. They looked into biases, unobserved factors, and used different measures of growth.
The study found that access to venture advisory support from the outset, as well as financial backing, was vital for success.
“The research determined that for innovative ventures to achieve more growth milestones, they need sufficient advisory support,” says Gregoire Croidieu, Associate Professor in Entrepreneurship and Innovation. “This depends first on having the formal criteria used to allocate support, therefore innovation must be included as part of the selection criteria to ensure these ventures receive sufficient support.”
If additional support is targeted explicitly at innovative ventures, they have more opportunities to receive in-depth advice, learn from experts and translate this into productive outcomes, the researchers say. Matching ventures with the correct advisors, and allowing them sufficient time to learn from them is key to translating their knowledge into growth. While this may seem obvious, the researchers say their study emphasises both the need and the importance of this process to actually occur.
Once formalised, the researchers say that this more tailored selection criteria should become objective standards by which to evaluate and select ventures to help. The criteria also safeguard programs against selecting solely on individual preferences driven by program administrators due to their backgrounds, interests or prior experiences.
This research can be applied to other specific sectors, as long as those sectors are explicitly included in any criteria used in the selection process to allocate support, to ensure businesses are recruited correctly and matched with qualified advisors.
Professors Croidieu and Buffart stress that policymakers indeed play a vital role in allocating resources in order to promote innovative entrepreneurship and spur economic growth in their regions. The researchers say that aligning formal selection criteria with a particular objective would improve the number of businesses that will grow as a result of their efforts. With that in mind, they add, as public resources are limited, policymakers will always face trade-offs for how to pick the right winners who will generate growth. With this in mind, having a roadmap such as this can only help.