State and local governments are going about it all wrong in trying to foster entrepreneurship, according to a new report from the Kauffman Foundation.
Public venture capital funds and incubators are two of the most popular methods used by government, but there is little evidence that they work, concludes the report, which synthesized more than 80 peer-reviewed studies and articles.
“Cities and states have been devoting a great deal of energy and resources toward the promotion of entrepreneurship, yet entrepreneurship has been sputtering,” said Jason Wiens, policy director at the Kauffman Foundation and the paper’s co-author. “The traditional methods of encouraging entrepreneurship are not producing desired results and should be replaced with methods that are more likely to gain traction.”
The report recommends governments avoid public venture funds because they lack the expertise to run them profitably and pick winner companies. The researchers are equally down on public incubators, stating that there is little evidence of their effectiveness and that they “may only serve to harbor businesses that would not otherwise survive.”
So what’s a city (or state) to do?
The study recommends rebuilding efforts from the ground up and focusing on networking among entrepreneurs, rather than between entrepreneurs and government or entrepreneurs and business leaders. Specifically, the report calls for:
Facilitating catalytic events: Startup Weekend and Kauffman’s 1 Million Cups are examples of events where entrepreneurs can connect, learn from each other and locate resources and partners.
Celebrating successful local entrepreneurs: Find local success stories, recognize them and hold them up as examples. Involve them in fostering the next generation.
Cutting red tape and regulation: Reexamine professional and occupational licensing; simplify tax codes and payment systems; rethink non-compete agreements; and streamline local zoning.
Welcome immigrants: They start businesses at twice the rate of natives.
Set goals and track progress: Find out what – and who – works.
Ecosystems that are committed to public venture funds and incubators can reform them to make them more effective. For venture funds, the report recommends:
• Distributing multiple small investments, instead of one large investment, in order to facilitate connections and learning for entrepreneurs.
• Involve local entrepreneurs in deciding who gets funded.
• Hire managers with strong connections at entrepreneurial support organizations so they can help the entrepreneurs.
• Create an effective board of directors for the fund who can screen applicants and monitor the performance of invested firms and the public fund.
• Establish a reasonable timeframe.
• Define criteria for success and make sure the stakeholders know it.
• Integrate the recipient companies into the local ecosystem.
The report also has some suggestions for improving public incubators. Specifically, it recommends the following reforms:
• Create a catalytic environment that facilitates interactions among peer entrepreneurs.
• Provide startups with referrals to needed support and services.
• Match each entrepreneur with an experienced local entrepreneur mentor with relevant expertise.
• Use mentors to supplement lean staffing.