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New Book Asks Whether Governments Should be in the Venture Capital Business

Posted by Scott Kirsner  November 9, 2009 07:23 AM

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jlerner.hbs.jpgCan governments spark start-up activity and job creation by getting into the venture capital business? Or do they just waste taxpayer money whenever they try?

Those are the two questions that animate the new book from Harvard Business School prof Josh Lerner, "Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed -- And What to Do About It."

Much of Lerner's book focuses on all the things that can go wrong when governments try to pour taxpayer money into the gas tank of their region's innovation economy.

Governments have built incubators that soaked up money intended for entrepreneurs, given intellectual property licenses to inept start-ups that couldn't take advantage of them, and funded countless friends and family members of rulers and policy-makers. Lerner also discusses In-Q-Tel, the venture capital arm of the Central Intelligence Agency, and the problem of paying government employees anything close to a market salary for making investments in start-ups.

But while the stories of failures are entertaining, what's most useful about "Boulevard" are the examples of governments that have gotten it right: Singapore's dogged efforts to spawn start-ups, a seed investment fund in New Zealand, and Yozma, an Israeli government initiative that brought foreign capital into the country by matching outside money that was invested in Israeli start-ups. Lerner also points out that government funding, in particular federal R&D money and military contracts, helped turn an agriculturally-productive corner of northern California into the place now known as Silicon Valley.

And aside from allocating money, Lerner points out that governments can create a fertile environment for entrepreneurship by doing four things that don't require much capital:

    - Getting the laws right
    - Ensuring access to cutting-edge technologies
    - Creating tax incentives, or removing barriers
    - Training potential entrepreneurs.

Entrepreneurs sometimes debate with one another whether governments can successfully get into the venture capital business, or whether they should leave it to the professionals. Lerner's book is an invaluable contribution to that debate -- a really readable collection of data, anecdotes, and thoughtful arguments.

I e-mailed Lerner late last month to ask whether he has had any conversations recently with policy-makers and state officials here in Massachusetts.

He told me that in advance of the book's publication, he'd gotten lots of requests for galleys from federal agencies like the Commerce Department, the Small Business Administration, and the Council of Economic Advisors.

"But on the state level, the silence has been deafening—no requests or outreach," Lerner wrote. "And based on the account in the Globe about the state’s misadventures with Evergreen Solar, it sounds like they could really use some advice!

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2 comments so far...
  1. The Defense Advance Research Projects Agency (DARPA) has been the successful springboard for very productive initiatives facilitated by government sponsored innovation. Full text search and retrieval, fully indexed databases, and time-shared operating systems grew from DARPA projects in the late 1960s when I was in the Pentagon. Oh yes, and the Internet too.

    Posted by Don McLagan November 10, 09 05:04 AM
  1. I have long had an interest in In-Q-Tel.

    I have followed IQT from near the very beginning (2000, IQT was founded in 1999). The beginning was very very interesting. Between Gilman Louie, the first CEO, the luminaries on the Board (headed by Norm Augustine, Michael Crow and others of the same caliber) and support directly from George Tenent (DCI) and Buzzy Krongard (ExDir), the prospects at first were bright. IQT did find Google Earth (Keyhole) who had great technology and an unbelievably unworkable business plan. IQT followed that with SketchUp too. Spotfire appeared promising for some applications and survives as well (acquired by Tibco).

    What isn't as well known is that some lesser-known investments, notably Traction and Agent Logic (just acquired by Informatica) helped solve the originally perceived problem which was the stranglehold that the "Beltway Bandits" had on IC technology. IQT has counted several successes against that original goal.

    This review alludes to "the problem of paying government employees anything close to a market salary for making investments in start-ups." There was, at one point, some negative publicity that had to do mostly with an investment whose technology failed to test-out, but which was run by some guys who cashed in before the technology could be disproven. Unfortunately IQT employees were "insiders" who owned shares in the company which went public. As insiders, each employee (practically the whole co.) was listed, along with the money they made on the deal.

    This negative publicity led to changes in IQT's profit-sharing. Now, I believe employees no longer own any part of the company's investments.

    Despite that (one-time) windfall, the general feeling w/in IQT was that employees were paid below market rates (this seems to be Prof. Lerner's point). IQT's original solution to the pay problem was to hire fresh MBAs (typically from Stanford) who have, in general, gone on to make much more money outside IQT.

    BTW: IQT employees are not "government employees".

    There were even some amusing side-effects to that publicity, one employee at the time was named "Goss". Porter Goss was then the DCI. Several news outlets publicized the apparently nepotistic connection between the DCI and that employee. What noone who published that angle checked was the race of the IQT employee: he was African-American. (Porter Goss was not).

    Anyway, as with all media stories, there's a discrepency between the "inside" view and the published view.

    Posted by IQT Follower November 10, 09 02:25 PM


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Scott Kirsner was part of the team that launched in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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