Can Public-Funded Entrepreneurship Work? A Q&A With the Author of Boulevard of Broken Dreams

In recent months, the U.S. government has taken on a challenging and controversial new role: private sector investor. This development has raised a host of questions about the government’s role in the economy and a new book by Josh Lerner, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It, is required reading for anyone hoping to understand the issues.

Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, describes government interventions in countries as varied as the U.S., Singapore, and Israel, and explains the case for intervention. His analysis of successful and unsuccessful programs worldwide ultimately suggests a cautious approach to government intervention that bears little resemblance to the reality of today.

He has agreed to answer some of our questions about his book:


Silicon Valley is traditionally viewed as the epicenter of independent entrepreneurialism but you paint a different picture in the book. What role did the public sector play in Silicon Valley’s history?


It is received wisdom that the rugged individualism of entrepreneurs and venture capitalists established Silicon Valley as the high-tech hub it has become. But a review of the histories of the region suggests two facts that are little appreciated.

First, the justly celebrated culture of, and approach to, doing business in Silicon Valley was profoundly shaped in the early decades of the 20th century by the region’s firms. The first three decades of the 20th century saw a series of pioneering technology firms established in the Bay Area. While the level of activity was modest relative to contemporary ventures in the eastern United States, these entities established the template that other groups would follow in decades to come. Among the elements that would become commonplace in subsequent years were the active involvement of Stanford University as a source of technology and funding, the proliferation of spin-offs, and the reliance on local financiers for capital.

Second, the public sector, especially the U.S. Department of Defense, played a crucial role in accelerating the early growth of the region. Many of these pioneering firms and entrepreneurs relied on military contracts to get established and grow, such as Federal Telegraph and Magnavox during World War I and the years thereafter; Ralph Heinze‘s work on airplane-based power systems between the world wars; Dalmo-Victor, Hewlett-Packard, and Litton Engineering during World War II; and Varian Associates during the Korean War.

The impact of public funding, to be sure, was considerably less during the Valley’s years of spectacular growth, the late 1970’s and the 1980’s. But in many senses, federal money played a crucial role when it mattered most: during the period when the foundation for that spectacular growth was being built and key aspects of the Silicon Valley business culture were being developed and refined.


Your book focuses on policies to encourage both entrepreneurs and venture capital investors. Why is the venture capital industry so important?


The financing of young and restructuring firms is a risky business. Uncertainty and gaps in information often characterize these firms, particularly in high-technology industries. A lack of information makes it difficult to assess these firms, and permits opportunistic behavior by entrepreneurs after financing is received. To address these information problems, venture investors employ a variety of mechanisms that seem to be critical in boosting innovation. These include the screening process that venture capitalists use to select investment opportunities, the way in which the investments are structured, and the intensive oversight that is provided after the money arrives.

As a result of these tools, an extensive body of academic research suggests venture capital plays an important role in boosting innovation. This assistance has two dimensions: accelerating growth and ensuring long-run success. Venture capitalists not only provide the capital to speed the development of companies, but the evidence suggests that the early participation of venture firms helps innovators sustain their success long after their company goes public and the venture capitalists move on.

Involving venture capitalists has another benefit for public programs: it introduces a layer of “insulation” between the government officials and the entrepreneurs. In this way, the danger of distortions — for instance, those brought about by lobbying and political influence — is minimized, as the public sector is not directly deciding who receives funding.


Why should the government care about encouraging entrepreneurs and venture investors?


This question is timely because of two sets of circumstances.

First, there is a keen awareness on the part of many governments of the need for “green shoots,” high-potential firms that will lead to growth after the recession. The financial crisis opened the door to massive public interventions in the world’s economies in which the government served as venture capitalist, but one that focused on the most troubled and poorly managed firms in the economy, some of which may be beyond salvation. Many nations are now asking the question: if these extraordinary times call for massive public funds to be used for economic interventions, should they be entirely devoted to propping up troubled entities, or at least partially used to promote new enterprises?

Meanwhile, the venture industry in many nations is on “life support” and fighting for survival. The industry has struggled to realize good returns from investments since 2000. Many traditional investors are questioning whether they should continue to provide capital to these funds. Given the important role that venture capital has had in spurring innovation, it is natural to wonder whether there is a public role in ensuring the industry’s survival. Indeed, governments from London to New Delhi have announced venture initiatives in the past few months


Are government interventions to boost entrepreneurship always successful? Why do these programs fail?


Sadly, for every successful effort such as those in Israel and Singapore, there are numerous unsuccessful ones.

There are two well-documented problems that can derail government programs to boost new venture activity. First, they can simply get it wrong: allocating funds and support in an inept or, even worse, a counterproductive manner. Decisions that seem plausible within the halls of a legislative body or a government bureaucracy can be wildly at odds with what entrepreneurs and their backers really need. When Australia legalized the venture capital limited partnership structure earlier this decade, for instance, legislators worried that foreign funds or firms might exploit the favorable tax treatment these entities enjoyed. So they required that each company backed by a venture partnership have at least half its assets in Australia. The venture funds found that this restriction handicapped the companies in their portfolio. The entrepreneurs could not expand their software development activities in India or their manufacturing operations in China without putting the venture funds’ tax status in danger, even as they competed against American ventures that made heavy use of “off-shoring.”

Economists have also focused on a second problem, delineated in the theory of regulatory capture. These writings suggest that private and public sector entities will organize to capture direct and indirect subsidies that the public sector hands out. For instance, programs geared toward boosting nascent entrepreneurs may instead end up boosting cronies of the nation’s rulers or legislators. The annals of government venturing programs abound with examples of efforts that have been hijacked in such a manner.


You write about “The Neglected Art of Setting the Table” i.e. establishing a favorable environment for entrepreneurs. Tell us about the ideal place setting.


Often, in their eagerness to get to the “fun stuff” of handing out money, public leaders neglect the importance of setting the table, or creating a favorable environment. Such efforts to create the right climate for entrepreneurship are likely to have several dimensions. Ensuring that creative ideas can move easily from universities and government laboratories is critically important. However, many entrepreneurs come not from academia, but rather from corporate positions, and studies have documented that, for these individuals, the attractiveness of entrepreneurial activity is very sensitive to tax policy (particularly low capital gains tax rates). Also important is ensuring that the law allows firms to enter into the needed contracts — for instance, with a potential financier or a source of technology — and that these contracts can be enforced.

The government which has taken this imperative the most seriously is undoubtedly Singapore. In addition to creating a favorable business climate more generally, they have launched a wide variety of efforts, ranging from subsidies for leading researchers to move their laboratories to Singapore, efforts to mentor fledgling businesses, and even awards for failed entrepreneurs in the hopes of creating a culture of risk-taking.


The final chapter of your book outlines some guidelines for designing successful policy interventions. What are the most important “rules of thumb” for policymakers hoping to jump-start entrepreneurship and venture capitalism in their countries?


I would highlight five key principles:

  • Remember that entrepreneurial activity does not exist in a vacuum: building an environment where new ventures can thrive is a critical first step.
  • Be sure to let the market provide direction when distributing subsidies, rather than seeking to stimulate this activity on a “top down” basis.
  • Recognize the long lead times these initiatives require.
  • Realize that programs to promote entrepreneurship need creativity and flexibility; sometimes they must be refined or killed off.
  • Recognize that “agency problems” — when individuals and organizations act to benefit themselves, rather than the broader social good — are universal, and take steps to minimize their danger.

These lessons are important not just for countries where venture activity is nascent, but also for policy-makers in more developed markets. For instance, efforts to boost “cleantech” by Federal and state governments here in the U.S. pose a number of concerns in light of the guidelines above.


had to giggle at the line about VC's "intensive oversight that is provided after the $ arrives"- as opposed to Paulson/Geithner's policy of handing over .7 trill to the banks and answering 'i dunno' when asked how the $ disappeared


If I am reading this piece correctly, it appears that the big difference is while, yes, the US government did provide funding in the early years of Silicon Valley, it did so as a customer of the technology rather than just funding startups, which appears that's what Singapore or Israel is doing (or has done).

That's a big difference.


Nice paradoxical and opposed statements within the same answer. fail.

"Be sure to let the market provide direction when distributing subsidies, rather than seeking to stimulate this activity on a "top down" basis."

"Recognize that "agency problems" - when individuals and organizations act to benefit themselves, rather than the broader social good - are universal, and take steps to minimize their danger."

And didn't some guy named Greenspan belatedly figure out that these issues always come up?


(1) Gov funding do provide invention and innovation: sometimes, in an un expected way: e.g. After downsize of Litton system, many same engineers went to invent new technology, including V-chip. e.g. Many technologies were developed when someone is on Gov R&D funding payrole, (although not necessary fund that technology, such as Linex).
(2) Singapore has consistently provide excellent Managements talents and good policies to stimulate economic growth. The Gov understand the support structure for the small and medium new industry and actively try to attract the new technology companies to move to Singapore. Unlike US, they understood the role of small business in the current economic situation:

"Low economic growh means a small change in the country's GDP which often spells less demand for goods and services. With lower demand for goods and services, that will be lower number of job vacancies, perhaps even rising unemployment as firms, big or samll, retrench staff and workers to cut costs. There will be no or marginal wage increment. This will adversely affect purchasing power. For the small business which primarily depend on the bigger companies or the general publich for business will be more severely affected because they will be the first to be affected and the impact will be much greater. There is no economics of scale that they can exploit and they absorb cost much less effectively and efficiently than the bigger companies. They have a lower level of capitalization to sustain procie cuts to boost demand nor will they have they ability to sustain losses and continue to operate till times become better. Small business are more susceptible to economic slowdown than do bigger firms." (from Level A Management of business exam question/answer book)

Now ask a US MBA grads or politician what is the characteristics of low economic growth and how these affect small business, I bet you will get opposite answer to the above: "small and medium business create jobs". Unless the business school start to singing different tune, the success rate of tech boom and VC will be less than the probability of flip a coin (<40%). (let's not mention few of the VCs run the start ups like slot machine).


ceonyer received VC funding. No wonder we are looking elsewhere to invest. $300M spent on a sock puppet. Actually, this is one case where I think government investors would have actually done a better job - they would have cut off investment at $295 million.

Entrepreneurs Blog

Direct governemnt funding will, sadly, rarely work. How would a government body decide if a business was worthy? Civil Servants are, with all due respect, not the most entrepreneurial people. However schemes like the UK EIS scheme, which is a tax break for investing in private companies, works well.

Last time i looked, the maximum downside if an investment went wrong was 40% of your investment, everything else was saved in tax breaks.

If the giverment wanted to give a boost to entrepreneurship, let them launch a scheme where 100% of the investment could be offset to tax with a normal capital gains tax on the successes... maybe not a permanent solution but one that would boost investment in early stage companies.

jim evans

my friend Jyrki was working in Moscow and while giving evidence in a Moscow courtcase overheard a case involving the janitors of a government building selling blown light bulbs at a roadside market. Customers bought the blown bulbs (cheap) then took the bulbs into their buildings and swapped them for good bulbs which they took home. The swapped out bulbs were then replaced by the janitors resulting in the government paying for all the new light bulbs in Russia .(until they got caught and many years hard labour)
Is this the only type of government funding that works????

Georges van Hoegaerden

The way to get innovation started is to realize that our financial systems are not designed to detect and stimulate groundbreaking innovation.

Venture Capital as an important financial driver to spur groundbreaking innovation is the most close minded, artificially arbitrated, in-transparent (to all marketplace participants) and demi-cartel of all financial systems.

Under the cover of darkness it deploys more then 10 levels of diversification which fragments risk and investment dollars to the point where it has turned into the deployment of micro-PE risk and therefor only yields micro-PE returns (see my presentation on 2010: The State of Venture Capital at

20 Years of subprime VC (as I coin the sector) attracts predominantly subprime entrepreneurs who are driven to make a quick buck but are unable to produce social economic value that the public can trust and buy into.

In the meantime, our most precious entrepreneurial assets are turned off by an unattractive custodian of innovation (our financial system) that operating the way it does today, will never meet their vision to change the world.

Our financial system is the reason why the outliers of innovation (who have many other options in life) do not use Venture Capital to spawn their ideas. Yet, just because Venture Capital is broken does not mean innovation is.

The behavior of the dog is the responsibility of its owner, and so is the behavior of innovation the responsibility of its financial system. And the financial system is the responsibility of our government. Financial reform should be about changing the system to avoid economic improprieties, not implementing regulations on a market system that is not a free-market to begin with.

A new financial system that embraces a meritocracy, formed by marketplace transparency (not all transparency is created equal), where private investors have public reporting requirements, and a dramatic flattening will systemically change the way the moving target of innovation is supported.

After all, innovation is driven primarily by public money, and the public deserves to know what happens under-the-hood of innovation before it buys into it again by way of IPO.

I have developed a new financial system to overhaul Venture and to revive innovation that I am happy to share with those with the wherewithal to make change happen.

We are a unique country with all the assets at our disposal to make innovation happen, all it takes is the right chef to turn the individual ingredients in a wonderful dish.




One who knows

Although I have a lot of respect for Professor Lerner, he needs to reassess some of the public incentive programs such as Singapore's for instance. It is one thing to spur innovative companies by providing seed incentives and incubators however if the next stage of funding is not available innovation stops dead in its tracks and discourages entrepreneurship. Venture Capital is a series of relay and if one relay is tripped then the flow is stopped. Without a doubt Venture Capital returns have been dismal but could one of the reasons be that the Capital Markets and the M&A technology markets have been dominated by large banks who are not geared to work with sub $100 milion companies as opposed to the specialty banks present in the 90's and which disappeared around the time that VC returns started going down?