Lerner, Josh (ed.), ‘Government Incentives for Entrepreneurship’, Innovation and Public Policy (Chicago, IL, 2022; online edn, Chicago Scholarship Online, 22 Sept. 2022), https://doi.org/10.7208/chicago/9780226805597.003.0008, accessed 21 Dec. 2023.

1. Examples where government incentives didn’t work
   1. US Department of Energy’s Clean Energy Initiative:
      1. Timeframe: 2005-2009, with significant funding post-2009.
      1. Investment: $34 billion spent, exceeding total private venture capital in the field.
      1. Outcome: A decline in cleantech venture investments from 14.9% in 2009 to 1.5% in 2019.
   1. Saudi Government’s Venture Capital Efforts:
      1. Investment: Tens of billions, including a $45 billion commitment to the SoftBank Vision Fund.
      1. Initiatives: Regulatory reforms, establishment of venture funds, and regional hubs.
      1. Outcome: Low venture capital levels; only $50 million raised in 2018, a small fraction of GDP.
   1. China’s Government Guidance Fund Program:
      1. Investment: Over $231 billion in 2015, leading to a claimed $1.8 trillion by 2018.
      1. Outcome: Initial success, followed by a market bubble and a sharp decline in fundraising and global venture capital share.

4. Structural Issues in Government Approaches:

4. Core Argument: The chapter asserts that the disappointing outcomes in government-led entrepreneurship initiatives are not merely due to unfortunate selections or bad luck, but rather stem from fundamental structural issues.
5. Contrasting Examples: The success stories of biotechnology and internet sectors are highlighted, which were primarily driven by smaller companies, showcasing a contrast to the large-scale government initiatives.

5. Venture Capital Mechanisms:

5. Screening Process: Venture capitalists employ a meticulous screening process, more efficient than that of corporate R&D or government grant makers. This involves detailed interviews, financial analysis, and co-investing with other firms for a more robust evaluation.
6. Preferred Stock and Restrictive Covenants: Venture capitalists typically invest in preferred stock, which has priority over common stock during payouts. They also add restrictive covenants to these stocks, allowing them control over various aspects of the business.
7. Staging of Investments: Unlike fixed R&D budgets in large corporations, venture capitalists disburse funds in stages, conditional on the achievement of specific technical or market milestones, allowing them to gather more information and reduce risk.
8. Intensive Oversight: Venture capitalists often engage frequently with their investees, influencing significant improvements in innovation and financial performance.

6. Geographic Concentration of Venture Capital:

6. Observation: The chapter notes the tight geographical clustering of entrepreneurial businesses, with venture-backed businesses being even more concentrated.
7. Data Point: Analysis of Pitchbook data showed that a few urban areas account for a substantial portion of global venture disbursements.

7. Boom-Bust Cycles in Entrepreneurial Markets:

7. Market Dynamics: The venture capital market is characterized by periods of abundant funding and scarcity, leading to fluctuating investment opportunities and valuations.
8. Impact on Returns: Initially, funds in less competitive periods see good returns, attracting more investment and leading to increased competition and inflated transaction pricing, eventually causing market corrections.

8. Mismatch of Government Skill Sets:

8. Skill Gap: Government officials typically lack the specialized skills required for identifying and funding entrepreneurial ventures, which involve managing ambiguity, complexity, and specialization.
9. Government Incompetence and Regulatory Capture: The chapter criticizes the inadequate capability of government officials in managing entrepreneurial ventures and highlights the issue of regulatory capture, where subsidies are often exploited by well-connected entities.

9. Need for Policy Independence:

9. Analogy with Central Banking: Just as monetary policy benefits from independence from political pressures, the chapter suggests that entrepreneurial policy making should also be insulated from day-to-day politics.
10. Challenges with Current Approaches: The chapter criticizes current policy approaches for their lack of market understanding, susceptibility to political influence, and resulting inefficiencies. This is exemplified by the efforts of many US states to create biotech clusters without the requisite infrastructure, leading to wasteful expenditure and ineffective outcomes