Will Governments Ever Get Startups?

Posted on September 6, 2011. Filed under: Advice, Companies, Funding, Government, Startup | Tags: , , , |

In two words: Not likely. I could end the post there but this is a blog, not Twitter.

Now there two reasons for this post right now:

  • Flickr image courtsey of johnsnape

    My employment on a government entrepreneurship programme finished on August 31, so only now can I blog about my experience: My contract of employment effectively disabled me from blogging about it in depth and honestly. I could have taken the risk of “mouthing off” but that would have helped neither me, my colleagues or more importantly clients. So I copped out of saying what I think online although I did take the risk of using Twitter where the only civil servant types you will find engaging on there are similar mavericks and forward thinkers.

  • Steve Blank, an extremely influential entrepreneurial thinker and teacher, made this post on September 1st: Why Governments Don’t Get Startups.
Steve has made some interesting points, detailed below, but I think he has missed some other crucial ones, as follows:
  • Government programmes are policy driven and furthermore policies change every five years, or more often
  • Few civil servants, or people in quangos running government programmes, have ever run a business, let alone a scalable startup
  • Governments think locally, regionally and nationally. A scalable startup has too think globally and at some stage connect sell globally.
  • Governments make little effort to speak with businesses about their real challenges: Sure, politicians visit businesses in their local area but that’s almost invariably a PR exercise for both parties. So there is a disconnect between policy makers and those who deliver the interpreted policies and interact directly with businesses
  • Government bodies and programmes tend to attract individuals and organisations that fit several of the following characteristics:
    1. They are risk averse
    2. They are very keen on procedures
    3. They have political aspirations
    4. They like talking more than doing
    5. They are experts in doing funding bids and spending money on overheads
Why should I have an opinion on this? Well for the last 4 years I have been working in three different government funded business growth and startup roles:
  • As a business development manager in a University (mentoring, pre-seed funding programmes, commercialisation, spin-outs). A large part of this role was working with ten other universities
  • As a Portfolio Manager in a scalable startup programme funded by a UK regional development agency
  • As a Portfolio Director in a business innovation and growth programme funded by the same UK regional development agency (for the South East of England)
Before that I sold a software company, in wihich I was a co-founder, to a NASDAQ listed company.  This was very much a scalable (albeit bootstrapped) startup. More details are, of course, on my LinkedIn profile.

So in total I’ve spent 22 years in business (small and large) and 4 years in the public sector or a private contractor that was publicly funded. Also as of 1st September 2011, I’m focussed on my new startup, StackBlaze whilst continuing to help a few other select startups.

So what about Steve Blank’s post? He concludes that:

Unless the people who actually make policy understand the difference between the types of startups and the ecosystem necessary to support their growth, the chance that any government policies will have a substantive effect on innovation, jobs or the gross domestic product is low.

Flickr image courtsey of northdevonfarmerHowever my experience is that the people making policy did understand something of the difference between different types of businesses and even startups. The primary problem is actually in the execution of their programmes. Indeed it seems to me there has been to much government money spent on analysis and policy making, which is all well and good for consultants, but little use to the rest of us.

But I do agree that there is a lack of understanding of how to develop an ecosystem. I’m talking here about the UK, of course. Don’t get me started on Europe! It’s no joke that the vast millions spent on cross-country innovation networking got coined as “Euro-jollies”.

Steve talks about the (only) success of the Israeli incubator programme and there is an emerging trend for incubators here and elsewhere. A UK government funded incubator may well come about. But I shudder to think about how much hands will be tied for the managers of that through inappropriate reporting requirements, audits, changes in policy and any other top down suffocation.

Steve states six lessons that need to be learnt:
  1. Each of these six very different startups requires very different ecosystems, unique educational tools, economic incentives (tax breaks, paperwork/regulation reduction, incentives), incubators and risk capital.
  2. Regions building a cluster around scalable startups fail to understand that a government agency simply giving money to entrepreneurs who want it is an exercise in failure. It is not a “jobs program” for the local populace. Any attempt to make it so dooms it to failure.
  3. A scalable startup ecosystem is the ultimate capitalist exercise. It is not an exercise in “fairness” or patronage. While it’s a meritocracy, it takes equal parts of risk, greed, vision and obscene financial returns. And those can only thrive in a regional or national culture that supports an equal mix of all those.
  4. Building a scalable startup innovation cluster requires an ecosystem of private not government-run incubators and venture capital firms, outward-facing universities, and a rigorous startup selection process.
  5. Any government that starts publicly financing entrepreneurship better have a plan to get out of it by building a private VC industry. If they’re still publicly funding startups after five to ten years they’ve failed.

Im my view the regional  programmes, that I have worked with recently, had taken on the lessons of 1, 2, 3 above but not 4 and 5. Will the UK learn these two lessons next time? I doubt it. In fact the signs are that lessons 1, 2 and 3 will end up having to be relearned. This might be funny, if it were not so serious.

Having said all this I don’t think the main problem with government is them knowing and learning these lessons: The main element in success lies in the execution of any programmes that are set-up. Sadly, I’m not optimistic.

When a start-up executes badly it goes to the deadpool. Those startups that execute well flourish. When the government executes badly we get another one in five years. When the civil service, and many others dependent upon them execute badly, too many just hang around for the next programme to work on or a nice pension plan. I am sorry of you feel this is rather insensitive at this time of cutbacks and please don’t think that the majority of these folks don’t have good intentions.

Plus don’t get me wrong, I loved my recent jobs:  When I was working with the entrepreneurs, that is. It’s been a honour, a privilege and great experience working with so many fantastic entrepreneurs. But you can see why I’m happy to be back, properly, in start-up land!

What is your experience of government business startup support? Do you think these programmes spend money effectively? Should government leave it to the private sector? And, if not, what types and stages of companies should they support?
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19 Responses to “Will Governments Ever Get Startups?”

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Colin ,

Excellent points and we both know the good and bad parts of what happens when intervention takes place. A few more thoughts:

Most government programmes focus on jobs/GVA within the business being supported and rarely measure the added employment/financial benefits within the wider system A lot of modern innovation/business doesn’t just take place within self-sufficient business units and may involve lots of distributed talent, all of which contributes and may benefit in some way. How does this get captured or measured?

How can government better encourage start-ups – is it through additional support or would a more benign tax/employment regime be of greater help and have greater impact (or is it a subtle mix of both elements)?

Lots of Government programmes focus on inputs and outputs. Would it not make more sense to focus on the outcomes, with an eye on the allocated budgets, in the belief that if you do the right things then the necessary metrics fall out of those activities, if they are the right things to do? You know I’m fond of quotes and there is one attributed to Einstein which describes this pretty well:
“Not everything that can be counted counts, and not everything that counts can be counted.”

Good luck with the new stuff.
Chris

Thanks, Chris for the some thought provoking questions. And thanks, indeed, for your “tolerance” of my maverick tendencies in the last 20 months. You have made a very good point about distributed talent: The more high growth the company the more likely there is to be use of overseas talent. So GVA does not capture anything really but, oh wait, what a surprise, things that they can definitely tax!

Colin. I think that you were the exception. I work with owner managed and entrepreneurial businesses and with the exception of you and a few others, these publicly funded initiates with great titles were largely irrelevant to the businesses. Most start ups want cash or grants because they cant get funds until they get revenue, the typical catch 22. The banks have stopped lending to all but the most sound businesses leaving a big gap where start ups and businesses struggling in the recession are fighting to survive.
I think one reason government fails to support new businesses, in addition to the valid points that you make, is a lack of responsibility and accountability for those in the public sector who are responsible for such ‘initiatives’. The bureaucracy alas will always reform and look after itself, at our expense.

Good luck now that you are out of it.

Maurice O’Shea

Cheers. Very well put. Let’s hope for less bureaucracy then.

A very interesting post Colin. I think that your prognosis of the problem when it comes to synergy between government and the world of startups is very accurate, and it’s not something that’s easy to remedy because of what is essentially a clash of culture. Part of the problem for me, linking into your first point about policy changing, is that government does not tend to go into these sort of things properly, nor for the long haul – everything is a gimmick when it comes to government policy, and nothing is ever a permanent plan. For instance, the state is really interested in its whole “Tech City” initiative at the moment, but who knows how long that will last – six months? A year? Two years? Probably no more than that. There is a reluctance to fully invest in anything and put in the required time, effort and commitment. The “Tech City” initiative to be particularly seems like something which exists only to create the appearance of action and to get some good press: after all, it looks good if the government is apparently supporting small, tech startups

My quotes were stripped from my original posting so I will resubmit.

I used to work for the US federal government and although I loved the job I found the lack of entrepeneural spirit of the place a bit demoralizing. I worked with many bright people that worked hard, but in the end a big driving force in government is not not make an embarrassing mistake. In some ways the public gets what they deserve here as they don’t tolerate honest mistakes well.

“They are risk averse”
Along those lines when I worked for the US government they had me take the Meyers Briggs test. The woman issuing the test had given the test to about 1000 government workers and she said I was the first ENTJ (self-driven, motivating, energetic, assertive, confident, and competitive). Statistically she should have had 20 to 50 of this type in such a large population. By far the dominant type was risk averse, rules following accountant types. Certainly not those with an entrepreneurial mindset.

“Should government leave it to the private sector?”
No. As imperfect as the system is the government can also help industries and technologies along that are of long term benefit, but not short term enough to turn a quick profit. Certainly many technologies wouldn’t have been possible without government involvement such as the internet, gps and more.

The government should set up an ecosystem that fosters innovation. Ideas include grants, and networking opportunities. Getting innovators together in larger groups to foster communication would be a good example. It could for example have a greater presence and sponsorship of meetups. Good things happen when innovators are provided places to get together. They could provide guest speakers. The government could even outsource some of this. Through universities the government could sponsor events too. This would bring together students, academia and business. Some of this is already done, however one of the areas of improvement would be to find a way to help people find out more about these opportunities.

This isn’t my domain of expertise, but just because the government isn’t doing a great job at this doesn’t mean you throw out the baby with the bath water.

Yep, PR is what it is almost all about.

I used to work for the US federal government and although I loved the job I found the lack of entrepeneural spirit of the place a bit demoralizing. I worked with many bright people that worked hard, but in the end a big driving force in government is not not make an embarrassing mistake. In some ways the public gets what they deserve here as they don’t tolerate honest mistakes well.

<>
Along those lines when I worked for the US government they had me take the Meyers Briggs test. The woman issuing the test had given the test to about 1000 government workers and she said I was the first ENTJ (self-driven, motivating, energetic, assertive, confident, and competitive). Statistically she should have had 20 to 50 of this type in such a large population. By far the dominant type was risk averse, rules following accountant types. Certainly not those with an entrepreneurial mindset.

<>
No. As imperfect as the system is the government can also help industries and technologies along that are of long term benefit, but not short term enough to turn a quick profit. Certainly many technologies wouldn’t have been possible without government involvement such as the internet, gps and more.

The government should set up an ecosystem that fosters innovation. Ideas include grants, and networking opportunities. Getting innovators together in larger groups to foster communication would be a good example. It could for example have a greater presence and sponsorship of meetups. Good things happen when innovators are provided places to get together. They could provide guest speakers. The government could even outsource some of this. Through universities the government could sponsor events too. This would bring together students, academia and business. Some of this is already done, however one of the areas of improvement would be to find a way to help people find out more about these opportunities.

This isn’t my domain of expertise, but just because the government isn’t doing a great job at this doesn’t mean you throw out the baby with the bath water.

Interesting stats for the Myers-Briggs tests: I wonder if anybody has done this for a batch of entrepreneurs?

Governments do try to set-up ecosystems, but they tend spend the money poorly (on overheads) and too small a percentage reaches the businesses that need it to grow. The Technology Strategy Board here in the UK has taken an even bigger role in the things you mention.

Yes it would. I would also like to see a more formal study done of government workers. Or maybe it has been done and I just haven’t seen it?

“Plus don’t get me wrong, I loved my recent jobs: When I was working with the entrepreneurs, that is. It’s been a honour, a privilege and great experience working with so many fantastic entrepreneurs.”
The point of the post is does government have a hope of helping entrepreneurs and innovators. Do you think you personally were able to have a positive impact?

Well, I hope so, but that’s for others to judge. I can report that our team came top of the two client satisfaction surveys that were done (at great expense!).

Then I would say there is hope. Maybe they should consult with you and have an independent ‘board of directors’ help them develop a program!

Should government leave it to the private sector? And, if not, what types and stages of companies should they support?

There is no clinical yes or no answer to this question, rather a case of horses for courses. I have now been involved in funding three start ups through various phases of funding, working with public and private sector, in different countries and during different economic cycles. The biggest factor is the economic cycle that you are in when funding.

The private sector is driven by fear and greed. During boom times they are only to willing to back start ups and enterprise at various stages of development, however during recessionary periods, the private sector tends to only back established companies that are ‘de-risked’. The bigger problem in the UK is the simple lack of VC funding. Yes early stage VCs does exist in the UK, but when compared to the US or Hong Kong, they are like hens teeth.

During recessionary periods Government have a role to play in supporting and developing grass root entrepreneurial enterprise, which in turns seeds jobs, generates taxation etc. However Government have a broader role to play rather than simply funding; they need to focus on creating an environment that is conducive to the creation of start ups and growth of companies and by this I mean focusing educational funding on key skills (sorry a degree in American Studies doesn’t count), providing tax breaks for entrepreneurs who invest their money in start ups (don’t worry the Government will fleece those same start ups on National Insurance and the people employed will pay tax on their earnings, so the Government get their pound of flesh either way).

Therefore, the Government should not leave it to the private sector and both should co-exist.

———-

What is your experience of government business start up support? Do you think these programmes spend money effectively?

Mixed. Paperwork, lots of paperwork. Mostly inexperienced people trying too hard to guess if your business plan will work. That being said, you guys in the innovation centre where excellent and Ireland was good to work with. Northern Ireland was appalling. The public sector has a greater level of accountability and this presents problems, however just look at the amount paid out to people on unemployment benefits simply by ticking a few boxes and periodic interviews. This is actually a decent framework for funding start ups. Early stage funding should be a ‘shotgun’ approach with a small amount of seed capital given to a large number of companies that full-fill a basic vetting criteria. The seed funding should be adequate to do a proof of concept and if the start up can provide evidence of product demand the VCs should do the rest. During recessionary periods additional second round Government funding should be made available and the vetting should be put in the hands of experienced business people.

———

As ever a thought envoking post Colin.

All the best
Dary

Dary,

Great comments and thanks for sharing you experience from both sides of the Irish Sea.

You said: “Therefore, the Government should not leave it to the private sector and both should co-exist.” I agree with this. You have made some good cases where public sector support makes sense and I would classify these as cases where there is market failure. Indeed that’s a major reason that the Enterprise Hub network was more successful, IMHO, because it was trying to address market failure: Indeed I only got involved because it made sense. When they changed this service into a larger, wide ranging service, trying to address areas without market failure it’s no surprise that the focus and cohesiveness of the ecosystem broke down; which validates Steve Blanks point about the need for different types of ecosystems.

I also agree with your point: “Early stage funding should be a ‘shotgun’ approach with a small amount of seed capital given to a large number of companies that full-fill a basic vetting criteria.” In a sense this is what the Commercialisation Fund tried to do, better than many other schemes, and whilst it has some success, it was always too procedural. On the whole I am positive about the Commercialisation Fund but with one big negative: The very best of the companies that I encouraged to apply invariably got rejected. High risk, very high potential growth seemed to fail their criteria! So unfortunately, for this and other reasons, I can’t see a government programme with a basic vetting criteria being a success: Unless, of course, they want me to run one for them ;) All I would need to do is crowd source votes from peer entrepreneurs and apply a bit of what I’ve learnt………Oh well, we can dream……..or do this after our exits, hey?

Colin

There are a lot of interesting discussions taking place on LinkedIn Groups, like Future Trends. For example, a discussion on innovation cycles at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=57633924&gid=145854

In the west, lack of liquidity and investment strategies that are at best myopic hamper the private sector. The above suggests that expectations of startup support from the public sector will also be extremely limited.

At best, those few viable startups created by highly risk averse governmental initiatives will then fail in the infertile soil called the private sector…

Many Angels and VCs remain active, but are they now providing a viable “third way” or they still stuck in the middle?

An interesting read Colin. I whole heartedly agree with most of it – I’m unsure whether a silicon valley style business environment is utopia. I’m keen to test some of my PHP apps on your StackBlaze startup.

best,
Andy
http://www.andrewgill.com

[...] Original post by Colin Hayhurst via colinhayhurst [...]

Hi Colin

Thank you for the post.

We don’t develop an entrepreneurial mindset in schools in the UK and our society does not support an entrepreneurial mindset. Since the government is a representation of society (or at least it should be), they should not be involved beyond setting the necessary frameworks that can drive/support start-ups until this changes. The government want the entrepreneurialism fruit but for all the reasons you mention they are not the ones to sow. In a truly entrepreneurial society everybody would see themselves as both a potential angel and a potential entrepreneur (as they are in reality very similar, if things are working well) and our legislative and tax systems would support this in a simple to understand way. US society is of course broadly closer to this ‘model’, but so is India and in my experience even China. Perhaps we need to look at how we organized ourselves before the industrial revolution.

Keep in touch Colin and good luck with your new endeavours.

Regards
Martin Melconian


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    I help entrepreneurs and small high growth potential companies in Sussex, Surrey, London & sometimes further afield. Flexible to your needs but typically help in raising investment finance and mentoring. Previously I was co-founder, CTO then CEO of a software company which we sold to a NASDAQ listed company

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