The Pitfalls of Promoting Entrepreneurship

Image courtesy of Flickr user JimFrazier.

Lots of governments would like to promote high-tech entrepreneurship and venture capital in their regions — but many don’t know how to do it effectively. In his new book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It (Princeton University Press, 2009) Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, examines which types of policies to promote entrepreneurship and venture capital tend to work — and which don’t. Lerner supports his carefully researched analysis with numerous examples chosen from around the globe.

Perhaps the most important chapter in the book is Chapter 5, which is titled “The Neglected Art of Setting the Table.” What does that title signify? “In their eagerness to jump-start entrepreneurial activity, governments frequently race to hand out capital,” Lerner writes. “This is equivalent to serving the main course before setting the table, and unlikely to lead to a successful dinner party.” Instead, Lerner argues that one of the ways governments can effectively foster the entrepreneurial sector is through policies that create an overall climate conducive to entrepreneurship and venture capital. Examples of such policies, according to Lerner, include legal systems that recognize convertible preferred stock — a type of sophisticated security often used by venture capitalists in the United States — and legislation that facilitates technology licensing from universities.

On the other hand, Lerner’s book contains many examples of entrepreneurship-promotion programs that weren’t designed or implemented well. In fact, when it comes to policies to foster entrepreneurial growth companies and venture capital, Lerner observes that “far more often than not, public programs have been failures.” That’s too bad, because one of Lerner’s points is that such policies, if well designed, can have an important role. For example, he notes that effectively designed government policies to stimulate venture capital and entrepreneurship have played a part in the evolution of emerging technology centers such as Singapore and Tel Aviv.