How Governments Can Foster Entrepreneurship

Good news, not so good news…

On the positive side, governments have launched a series of significant new initiatives designed to inject capital into the Middle East’s entrepreneurial sector. To cite two examples, Saudi Arabia will establish a $1.1 billion fund to develop its venture capital industry, and Dubai will invest over $270 million in a program for enabling rapid development of transformative technologies. Across the region, we are seeing a welcome commitment by governments and private investors to encourage and fund entrepreneurship. The goal is simple: to spur innovation and economic development.

On the somewhat less positive side, it takes more than money to spark meaningful innovation. Government officials and leading investors need to think about the right way to connect this capital with entrepreneurs who can compete effectively with the world’s most aggressive innovators.

This region needs a near-frictionless mechanism for bringing government investment to entrepreneurial teams, without slowing down these startups or pushing them in the wrong directions. The nature of government is quite different than entrepreneurship, and few governments on the planet have been successful at spurring growth and innovation by injecting capital directly into small and medium-sized companies. So it makes sense for governments to look for creative ways to spur innovation, which may include partnerships, contests, education, and incentives.

The Global Innovation Index 2015 suggests that “maximizing innovation requires maximizing innovation across all industries,” rather than just a few especially promising industries. They also suggest that countries “need to enable disruptive innovation, which is often generated by new market entrants, especially those emerging in their own economies.”

If government investments are to be successful, they must spur not just one or two successful firms; they must spawn an entire entrepreneurial ecosystem. This includes universities, private investors, angel investors, early adopter/beta customers, corporate ventures, mentors, up-and-coming entrepreneurs, as well as proven entrepreneurs who have already made successful exits.

Here’s the quandary: long before a startup is big enough to have a meaningful impact on the region’s economy, it must come to life as a fragile idea. Such ideas are most likely to survive in a thriving entrepreneurial ecosystem. This is why there are dozens of successful startups in California’s Silicon Valley, but almost none from the state of Connecticut, where the government tries to invest in startups but often fails because almost no entrepreneurial ecosystem exists there.

The biggest challenge to the lofty plans of Middle East governments is not money; it is the “soft” skills that make it possible for great ideas to morph into great businesses. Examples of such skills include spotting market opportunities, hiring the right team, and mentoring them.

This is why venture capitalists exist at all. As professional investors, one of their responsibilities is to navigate the waters between venture-fund investors (including sovereign funds) and entrepreneurs. They know that venture-fund investors are basically just looking for a sound investment, and don’t have the time or inclination to deal with the messy nature of the entrepreneurial process. They also know that many entrepreneurs are driven as much — or more — by the power of their idea, rather than by the financial returns that success can bring them.

Since these groups have very different goals, they generally don’t do well working side by side. VCs soften these differences, and balance them out. Under a success scenario, they nurture enough successful entrepreneurs to make investors happy, and they provide enough access to capital to power the most promising innovators.

In other words, governments are wise to fund this sector, but they will be wiser still to fund it through third parties who understand — and can nurture — the entrepreneurial mindset.