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Governments offer a wide variety of support and funding to entrepreneurs starting or expanding their business. There is reason to question the effectiveness of these programs in creating economic growth and jobs. But what does public funding mean for the individual entrepreneur?
Be it seed money to get started or funds to grow the promising startup, financing and fundraising is a common problem for entrepreneurs. After all, the concepts of venture capital, or VC for short, and angel investing rely on the typical lack of investment capital to support the riskiest phases of entrepreneurship. Getting started is for many entrepreneurs a necessity rather than a strategy: they have to make do with very little, and not by choice.
Naturally, governments have sought to help ease this burden. They started by offering a wide variety of supports to help entrepreneurs start or grow. From SBA loans and grants to incubators and accelerators, governments at all levels are spending a tremendous amount of money and effort trying to support entrepreneurs. Their logic is political. The objective is to stimulate economic growth and thus contribute to job creation.
But what do money and effort accomplish? There is no doubt that government funding and support is used. And as a result, more of the activity is 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 the results are rather dismal. Despite all the government programs and all the money invested, there is still little understanding of how to stimulate entrepreneurship, help entrepreneurs succeed, or create for economic growth. As a result, these public programs look good but have little real effect.
For others, the argument is different, if not quite the opposite. Mariana Mazzucato, a professor at University College London, sees government as anything but a precursor to entrepreneurship. As she argues in her highly acclaimed book The entrepreneurial state, government support is essential to stimulate economic growth. Without government investments in innovation, there would be little or no growth.
So what is it? Is government support for entrepreneurs a waste or a necessity? In a recently published book, 32 internationally renowned academics on entrepreneurship, innovation and policy discuss the effectiveness of these programs. Specifically, Questioning the entrepreneurial state analyzes and examines Mazzucato’s thesis both empirically and theoretically. The combined contribution of all 17 chapters suggests that his conclusion is premature and misleading. Government funding is a blunt tool that comes up against politics, bureaucracy and unintended consequences. It is also an ineffective means for the ends sought. There is, to put it differently, a small quality-price ratio.
But that doesn’t tell us much about how and if entrepreneurs can use these programs productively. Even inefficient political funding, which may not be a good idea from a taxpayer perspective, can be put to good use by an entrepreneur seeking funding to start or grow 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 to support their startup? Here are four things to consider:
Your job as an entrepreneur is to find the best way to deliver value to consumers. Where and when you make things better for consumers, your startup has value. But it’s easy to lose sight of that when trying to figure out how to make ends meet and put out the daily fires. An apparent solution to the money problem is to modify the business idea or value proposition to meet the call for funding from a support program. My advice is: don’t. If you don’t stay true to value creation, your business cannot succeed. Instead, he may become dependent on this type of funding.
There can be too much of a good thing. Having more funding than necessary or being shielded from the brutal reality of the market can cause lethargy and inefficiency. It also means you’re making suboptimal decisions, perhaps thinking you can afford the extra costs. It’s the complete opposite of bootstrap, but it’s also a problem. You become less diligent about cutting costs and getting the most out of necessary expenses. This can seriously affect the profitability or even the survivability of your business. Make sure you don’t fall victim to the false sense of security offered by incubators, accelerators or funding programs.
Related: Accepting a Helping Hand: How to Fund Your Business with…
Economists remind us that there is no free lunch (TANSTAAFL). This is also true with government support. Make sure you fully understand the expectations and requirements before applying. The application process itself can be tedious and time-consuming. Government funding may also require public insight and influence on the business beyond what you are comfortable with. Support may also come with extensive reporting requirements and bureaucracies that you would not otherwise choose. Remember that contractors choose their costs. Choose them wisely.
All external funding comes with strings attached. This also applies to public sector support. Make sure you know the expectations of the program, government authority or agency before requesting and accepting support. You may not want to give up your independence and autonomy for funding.
Related: What you need to know about government grants for small businesses…