Why Governments Don’t Get Startups
steveblank.com
steveblank.com
I'm not sure a society needs more startups and I have no way to know so I wouldn't think to make a policy to help create startups. It seems to me that the presumption that society cannot produce the things it values is very arrogant. The whole point of the price system is to allow society to communicate to entrepreneurs what is valued and what isn't. Let others in society (not in government) communicate to the entrepreneurs what they should be building.
I really hope that methodology and philosophy never becomes the penultimate choice for those that want to start their own business or innovate something.
The government could potentially destroy that balance though, I agree.
Where there is a need, there will be an innovation of some kind. The best ideas come partially from necessity.
If "let's work out of a garage for a while" is the second-to-last choice, what is the last choice, and is it better or worse?
Atleast a garages these days have some panache!
As DanielBMarkham said in the top post, the problem is that governmental offices need to look like they are productively creating value. Getting out of the way doesn't get a bureaucrat a career advance. The government way would be to use tax money to create a startup development program, so that the administrators can point to successful outcomes from it and take credit. Never mind if we'd have more successful startups without a program at all thanks to lower tax overhead. Government cannot create such an outcome because government is composed of individual administrators all with their own self-interest. Government cannot remain idle even when remaining idle is the best solution, because each civil servant needs to be seen as Doing Something.
My state, New Jersey, has as part of its income tax return a moderately complicated form that amounts to a $50 rebate credit against property tax. Wouldn't it have been infinitely simpler to just lower property tax by $50 in the first place? Of course. But the extra paperwork creates visibility that They Are Doing Something About Our Taxes, which perception is far more important to the politicians than actually doing something about taxes.
I'm vaguely reminded of Internet Explorer's "enhanced security" stuff. IE looks more secure by emitting "we protected you!" notices all over the place, than if it had never been designed with such inherently risky OS integration in the first place.
Yes, but the whole premise of the venture-capital scene is that the price system is inefficient. =] That is, there are places where you can put in $10m and get $100m out, because you find an area of potential production that just needed a catalyst.
I see cities as more or less trying to do the same thing; they want to find a way to provide a catalyst to local businesses that will pay for itself 10x over the next N years. May or may not work, but nothing in the market precludes it from being possible (the main reason for it not to work is just that city bureaucrats are bad at it, partly due to the political situation they operate in).
PS on taxes, we've got the lowest tax rates in the post-war era right now, and record corporate profits, but new jobs still aren't appearing. Why? There's no business reason for them. Taxes are only one of many variables. Contrast with the 50s and 60s when taxes were much higher as was growth and employment. That's not to say that higher taxes cause economic growth, obviously. Other variables in play.
You're assuming something about the value of the innovation and the cost of the risk.
Would you be willing to pay 1000 failed startups for one Google? I would, because the cost of those 999 startups is largely borne by the folks involved while I get significant benefits from the existence of Google.
Safe is usually just losing slowly but surely.
Given that the vast majority of startup financing in the US is late-stage, it seems to me that a lot of companies that take investment in the States are doing it to de-risk participants, exactly the same thing that happens when pre-revenue founders take funding to pay themselves salaries. I think this is a good thing, but the insinuation that the rest of the tech world is building digital surf shops because we are beach bums who don't understand scalability is insulting and inane.
I like what Steve has done here. He has a tendency to over-think things but understanding the different kinds of startups is critical to understand why things are so screwed up. The only thing I would add is that political groups, that is, groups of people who make decisions, make decisions based on politics. What else would we expect?
That sounds a bit circular, so let me expand it out. If I am part of a committee who has ten million to spend to bring jobs to the region, my primary goal is to make us all look good, to look as if we are bringing jobs to the region, to whatever group set us up. It is not, necessarily, to bring jobs to the region. I can't, for instance, blow the ten million for twenty years in a row and then end up with a Yahoo. The numbers might work, but the politics never would. The acceptance criteria is not the jobs, it is the appearance.
That's not saying that somehow there's anything crooked going on. It's simply damn hard to fund startups, as any VC will tell you. It's not hard, however, to construct some system of allocation and reporting that makes things look as if they are going along nicely, as any consultant would tell you. So a thousand government startup programs hum along, all giving out money and doing things that look important, all reporting back with solid numbers on how things are changing, and not much else happens. Everybody wants Google or some big startup that was formed somewhere else to move in -- that generates a lot of publicity and makes even more money flow in. Nobody wants a hundred lifestyle/small business startups that might employ 2-4 people. As Steve points out, those guys don't get their pictures on the front of magazines. Hell, most of the time you never even know they are there. Kind of hard to put that in an annual report somewhere, kind of hard to do a standup with the local TV station outside a new warehouse, kind of hard to do a ribbon-cutting ceremony with the local pols, even if the impact is the same or greater than the big score.
What would I do? Beats me. I think the problem is somewhat intractable. But if I had to, I'd work on things that formed communities -- incubators, free wi-fi, regular talks from industry leaders, open-air forums, free beer night, setting up near a college, etc -- and ditch any kind of reporting whatsoever. I'd definitely ditch business plan competitions and other wonkish old and tired ideas that seem to be everywhere but never amount to much. My only metric would be startup attempts and the size of the community actually interested in entrepreneurialism. From there I would get the hell out of the way. Then wait about ten or fifteen years.
For example, I dislike Dick Cheney and the past Bush administration as much as anyone for a whole host of reasons. But I'd be willing to bet that their thought process with the no-bid halliburton contracts was actually based on comfort level rather than plain old corruption.
Of course, on the flip-side, it's easy to tell yourself all kinds of justifiable reasons why your buddies getting the contract is just a side effect of the things you really wanted.
This is the crux of it right here. VCs have the opportunity to directly earn themselves millions of dollars by making good funding decisions. Some of them are good at it, but there's no formula to apply; it requires intelligence, savvy, drive and a good dose of luck.
Now if you think about how government works, even the most upstanding public servants with the best of intentions simply do not have what it takes to make the right cut-throat funding decisions that are necessary. Hell it might even be illegal in some jurisdictions to show the kind of aggressive preference that is required.
All the cynicism about bureaucrats wanting to look good might be true, but even if it's not, they're still fucked if they try to do it themselves. The best a government can hope to do is to not get in the way of people who are capable of doing it.
No cynicism was intended. I'm simply trying to share my direct experiences, as indicated. My interests are in solving this problem, not throwing mud around and claiming it is impossible. When given a bucket of money, a vague and somewhat impossible task, people create systems of allocation and reporting that show progress, even though no actual progress is being made.
This has nothing to do with the government, government programs, or bureaucrats -- one of the big mistakes funded startups do is generate a lot of activity and paperwork without generating any results. There are a ton of startups generating mountains of paperwork -- reports, contracts, studies, research, white papers, market position statements, etc -- that will never have enough business to break even. Why? Because results are freaking hard, that's why. It's difficult to dynamically create a flow diagram full of ideas of various providence and adjust and tweak it as necessary. Much easier to construct some other, simpler measurement criteria that's more doable and simply measure against that. This is an attribute of groups of people put into stressful, complex, and difficult-to-tract situations that have to report to other groups. Organizational setting is not important. Apologies if somehow it read cynically. There is a great tolerance for dealing with uncertainty involved in the area of value creation that most people, frankly, find very uncomfortable.
I like your idea's a lot. To add to them, it would be really good for entrepreneurs wanting to form scaling-businesses to have their cost of living covered by the government for a time period of 6-12 months to get started. That way they could potentially build a business and launch it without having to worry about working a full-time job. For example:
- Free housing
- Free food
- Free medical
- Free office space (w/internet and electric)
Giving people a time-period of 6 or 12 months of this could result in a lot of businesses being spawned. Kick those out who do nothing, and have experienced overseers (previously successful entrepreneurs) decide who to keep/cut.
You could sell the idea based on this requirement; any individual who takes up the offer must incorporate their company in your municipality for X number of years. That way your state gains future tax revenue from successes (corporate and earned income) to pay for the program, and hopefully make a profit.