Boulevard of Broken Dreams

Lerner, a Harvard Business School professor who has studied venture capital and private equity empirically for decades, examined government efforts to create entrepreneurial and venture capital sectors.

His starting position is that the standard economic case for intervention is real. Innovation produces spillovers that the innovating firm does not capture, venture markets have coordination problems where investors will not enter until entrepreneurs exist and entrepreneurs will not start until investors exist, and information problems limit early-stage financing. Public intervention can address these.

His empirical finding is that most such programmes fail, and he identifies the recurring reasons. Programmes are captured by incumbents and by politically connected recipients rather than reaching the firms that would generate spillovers. They are designed without understanding what venture capital actually requires, particularly the compensation structures and the willingness to fail. They are allocated geographically for political reasons rather than concentrated where clusters could form. They are too small to reach critical mass or too large for the available deal flow. They lack sunset provisions and evaluation, so failing programmes continue. They are designed by officials with no operating experience in the sector and without input from practitioners.

The successes he identifies include Israel's Yozma programme, which used matching funds with an option for private partners to buy out the government stake at a fixed price, so the upside went to the private investors and the programme attracted genuine venture firms; the American Small Business Innovation Research programme, which awards research contracts through peer-reviewed competition; and aspects of the Singapore and New Zealand efforts.

His prescriptions follow: address the whole entrepreneurial ecosystem rather than only financing, use matching structures that require private capital at risk, build in evaluation and sunset provisions, resist geographic distribution, and let private parties take the upside.

The evidence base is a mix of academic studies and programme reviews rather than systematic comparison, and outcomes in this field are hard to attribute.