Considering a Government Program to Support Your Startup? Here's What You Need to Know First.
Be aware of any expectations -- you may not want to give up your independence and autonomy for funding.
Governments offer a wide variety of support and funding for entrepreneurs starting or growing their businesses. There is reason to question how effective these programs are to create economic growth and jobs. But what does government funding mean for the individual entrepreneur?
Whether it is seed money to get started or funds to scale up the promising startup, funding and fundraising is a common issue for entrepreneurs. After all, the concepts of venture capital, or VC for short, and angel investing are based on the typical lack of investment capital to support the riskier phases of entrepreneurship. Bootstrapping is to many entrepreneurs a necessity rather than a strategy: they have to make do with very little — not by choice.
Naturally, governments have sought to help alleviate this burden. They started by offering a wide variety of support to help entrepreneurs get off the ground or grow. From SBA loans and grants to incubators and accelerators, governments at all levels spend a substantial amount of money and effort to try to support entrepreneurs. Their rationale is political. The goal is to boost economic growth and to thereby help create jobs.
But what do the money and effort accomplish? There is no doubt that the government's funding and support is being used. And that as a result there is more of the activity that is being funded and supported. But the real question is: are these programs successful? The answer to this question is not obvious.
Josh Lerner of Harvard University argues in Boulevard of Broken Dreams that the track record is rather dismal. Despite all of the government's programs and all the money invested, we still do not quite understand how to boost entrepreneurship, help entrepreneurs succeed or create for economic growth. As a result, these public programs look nice but have little actual effect.
To others, the argument is different, if not the very opposite. Mariana Mazzucato, a professor at University College London, sees government as all but a precursor of entrepreneurship. As she argues in her highly acclaimed book The Entrepreneurial State, government support is critical to drive economic growth. Were it not for government investment in innovation, there would be little or no growth.
So which is it — is government support to entrepreneurs a waste or necessity? In a recently published book, 32 internationally-renowned scholars on entrepreneurship, innovation and policy address the effectiveness of these programs. Specifically, Questioning the Entrepreneurial State analyzes and scrutinizes Mazzucato's thesis both empirically and theoretically. The combined contribution of the 17 chapters suggest that her conclusion is premature and misleading. Government funding is a blunt tool that is fraught with politicking, bureaucracy and unintended consequences. It is also an ineffective means for the ends sought. There is, to put it differently, little bang for the buck.
But this tells us little about how and whether entrepreneurs can use these programs productively. Even ineffective political funding, which may not be a good idea from the taxpayers' perspective, can be put to good use by an entrepreneur in search of funding to create or scale up their business.
Related: The Myth of Government Grants
The question for the individual entrepreneur is not whether the money could be put to good use, but is it worth considering a government program for support in your startup? Here are four things to consider:
Your job as an entrepreneur is to figure out how to best provide consumers with value. Wherever and whenever you make consumers better off, there is value in your startup. But it is easy to lose track of this when trying to figure out how to make ends meet and putting out everyday fires. One apparent solution to the money-in problem is to tweak the business idea or value proposition to fit the funding call of a support program. My advice is: don't. If you do not stay true to creating value, your business cannot be successful. Instead, it can become dependent on that type of funding.
There can be too much of a good thing. Having more funding than necessary or being protected from the brutal reality of the market can cause lethargy and inefficiency. It also means you make suboptimal decisions, perhaps thinking that you can afford to take on extra cost. It's the very opposite of bootstrapping, but it is equally a problem. You become less diligent in cutting costs and making the most out of the expenses that are necessary. This can severely affect the profitability or even survivability of your business. Make sure you do not fall victim to the false sense of security offered by incubators, accelerators or funding programs.
Economists remind us that there ain't no such thing as a free lunch (TANSTAAFL). This is true also with government support. Make sure you understand the expectations and requirements before applying. The application process itself may be burdensome and time-consuming. Government funding can also require public insight and influence into the business beyond what you are comfortable with. It may also be that support comes with extensive reporting requirements and bureaucracies that you would not otherwise choose. Remember, entrepreneurs choose their costs. Choose them wisely.
All external funding comes with strings. This is true also of public sector support. Make sure you are aware of the program's, government authority's or agency's expectations before you apply for and accept support. You may not want to give up your independence and autonomy for funding.
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