Academic Angle. How to design a public venture capital programme

In the earlier parts of this series, we noted some typical features of funding early-stage enterprises and why and how governments might create a policy environment that encourages the starting up of enterprises. In this part, I will provide some broad suggestions for the Government to start an effective scheme for funding start-ups.

Many of the ideas in this part draw upon an interesting book by Joshua Lerner, Boulevard of Broken Dreams – Why Public Efforts to Boost Entrepreneurship and Venture Capital have failed and what to do about it .

It also draws on an emerging body of academic work in this area.

Gestation time VC industries take a long time to develop and so they require a consistently supportive policy stance, irrespective of changes in the administrative or political leadership. Without realising this essential nature, governments either change policy or even drop the programme when they find that they cannot see results in the short term.

Optimal size VC funds sponsored by the government have to be of the right size. Funds that are too small are hardly sufficient to make an impact. Further, early-stage investing requires a considerable degree of effort in terms of sourcing, evaluating and managing investments, involving a high fixed cost. The economics of fund management thus dictate larger investment per enterprise as well as investment vehicles of a minimum size.

At the same time too large a fund will crowd out private players. When private funds are driven away in this manner, the absence of competition from private investors lowers the bar in terms of overall investment performance standards.

Market orientation The state is necessarily motivated by a developmental agenda in its role as a provider of capital. However, for the programme to succeed the funded enterprises have to be financially viable. One way to ensure such viability would be to partner with private venture funds. This can be achieved through a variety of mechanisms such as investing in private funds or co-investing with private funds or replicating the investment management organisation and structure of a private venture fund.

Global design Increasingly, enterprises are being global, challenging the previously held wisdom that firms should achieve success in their home market before addressing international markets. Similarly investment activities are becoming more and more international.

International investors bring the value of their global experience to their investee enterprises. In the light of these considerations, it would be useful for governments to design a programme that makes it easy for foreign investors to do business with the country.

Spatial distribution One misguided developmental initiative is in creating programmes for developing entrepreneurship in geographical areas where the conditions are not congenial for start-ups to flourish.

The message here is not that public policy should be impervious to the need for the geographical distribution of entrepreneurship as a goal entirely. Instead programmes should consider what is likely to work for a region and customise it accordingly as opposed to be driven by faddist impulses.

Incentives Finally, it is important to create a set of incentives that ensures that the economic motives of the investment manager are aligned with the return objectives and developmental goals of the state.

Monitoring mechanism Monitoring and evaluation need to be built into the design of the programme. The design also has to provide for a mechanism for the Government and its partners to exit the programme either when the programme has fulfilled its objectives or to pull the plug if it fails to meet its objectives.

Clearly not all of these are relevant to every initiative of every government. Nor is there a guarantee that merely checking suggestions from these lessons of experience will guarantee the success of an initiative.

However, at the minimum they do provide a guidepost to avoid the mistakes that many other governments made.

The writer is Chairperson, NS Raghavan Centre for Entrepreneurial Learning at IIM Bangalore. Views expressed are his own.