How Government Helps and Harms Entrepreneurs
The local NPR station ran a great story by America Abroad Media (@America_Abroad) about how government helps and harms entrepreneurs (available on iTunes). Interest in job creation and the growth in the number of incubators makes this a timely topic.
Can government aid business formation? The short answer is that the block and tackling issue of business climate beats sexy initiatives, investments, and incubators.
Incubators. Leading incubator frenzy is NYC with more than 100 incubators, accelerators, and co-working spaces. Other cities are getting into the business of business formation; three announcements of the last few weeks include:
- City of Fort Worth launches new business incubator: IDEA Works FW is a partnership between the city and a local foundation
- Westminster announces downtown business incubator: this small town 30 miles northwest of Baltimore is trying to attract downtown businesses.
- Richmond's city-backed business incubator rebranded as RVA Works after launching a collaboration with VCU.
Thirty years ago there were a couple dozen incubators, now there are a couple thousand; there's even an association. A dated survey suggests about one-third of business incubation programs are sponsored by economic development organizations, one fifth by cities or counties, another fifth by higher education. There are a couple flavors:
- Co-working space: Companies pay to be there; some becoming more resource heavy; some offer learning experiences (e.g., General Assembly, 1776).
- Incubators: Offer more resources that co-working space, often run by nonprofits focused on a sector or a city; companies usually get in free but they may pay rent (e.g., 4.0 Schools).
- Accelerators: Companies are selected and reside for a defined period of time; they receive some funding and services in return for an equity stake (e.g.,ImagineK12 in Mountain View, LearnLaunch in Boston, and TechStars in 7 cities).
It's clear that some incubators work and some don't. Robert Litan, Bloomberg Government's Director of Research, thinks good successful incubators grow organically where it make sense (i.e., incubators fighting trends will struggle and require subsidy). Some college incubators are among the most successful. Well run incubators hold tough admissions standards, and manage for results, others don't. Bottom line: it's hard to start a successful business, most will fail--that includes incubators.
Investment. Does it make sense for governments to make direct investments in startups? I don't see evidence of that being done successfully at scale. I see a lot of NSF and SBIR funded projects (especially game-based learning) that may have sounded good on paper but are not commercially viable--they gain few users, they don't result in scaled organizational capacity, and they don't advance the field. Weak results from direct investment are primarily function of poorly written grant criteria and reviewers with little or no venture investing experience.
Foundations are also getting into the direct investment business and falling prey to some of the same problems. For example, a program officer falls in love with a literacy deal and sells the idea of an investment without the benefit of seeing the other dozen deals just like it and an attorney with no venture experience signs off on the paper work. In a recent paper, Boosting Impact, Matt Greenfield and I recommended that foundations should invest in venture funds as a better alternative. Public-private investment partnerships would also make more sense for state and federal agencies as opposed to direct investment.
"Government should stick to basic R&D," according to LItan and "at the commercial end, the market should be funding new companies."
Climate. What really matters is low taxes, quick permits, and lightweight compliance according to Stephen Adams, President of the American Institute for Economic Research. He's skeptical of public investment in incubators and enterprise zone. He thinks incubators have become popular because they are sexier than talking about tax policy.
New business formation was about 600,000 annually but dropped to 400,000 during the Great Recession, according to Robert Litan. It's only recovered to about 420,000 starts begging the question what can government do?
Litan says the percentage of college educated people is a key economic development stat, so governments should try to improve education (i.e., music to EdLeaders' ears!).
David Kautter, American University, said it's the "culture of try, fail, try again" that made America the world's business engine. Kautter said the opportunity to declare bankruptcy rather than going to prison is an example of a legal framework that underpins a culture of risktaking.
Frederic Meunier is part of the "Doing Business" team at the World Bank. He noted that it's a lot easier to start a new business in Singapore than in the U.S--which places fourth on this list.
New York is advertising tax free zones --a great start but (as a former NY employer I know) it's still tough to get licenses and dealing with payroll tax and workers comp are a nightmare. Fixing this stuff, according to Adams, isn't sexy but it can be the most cost effective path to job creation.
Conclusions. As a student of innovation ecosystems and a champion of small and medium sized businesses as engines of economic development, I appreciate the incubator and investment intent of local and state governments but most are not successful. If a city is going to get into the business formation space, they should do it with capable partners and treat it like a business (not a charity).
The most important thing that local, state, and federal governments can do to promote business formation is to promote education and a pro-business climate: rational taxes, easy licensing, and efficient workers comp systems.
Our summer learning project is an investigation of how and where innovations in learning occur. We're updating the Smart Cities posts cataloging innovations in America's great cities and outlining the key ingredients to learning ecosystems--and you're welcome to weigh in.