Skip to Content

Publicly Funding Entrepreneurship

We need to take politics out of government efforts to spur innovation.
February 23, 2010

Literally thousands of government programs worldwide have tried to boost innovative new ventures in recent decades. While some–such as those in Israel and Singapore–have dramatically encouraged entrepreneurial and venture activity, many more have been abject failures. The same critical mistakes have been made again and again, most recently in efforts to boost entrepreneurial innovation in clean tech.

One major problem is that funds end up getting distributed in ways that have less to do with the needs of high-­potential ventures or society generally than with the whims of the powerful and well-connected. From the empty BioValley site in Malaysia to the many U.S. Small Business Innovation Research grants won by DC-area firms that produce few real innovations, the pattern is depressingly familiar. Successful programs, by contrast, have well-defined investment processes and limit the danger of political influence by establishing independent administrative bodies.

Faced with a clean-tech funding bonanza in the stimulus bill, entrepreneurs have responded the old-­fashioned way: by hiring lobbyists. The big winner of the Department of Energy’s battery funding orgy, A123 Systems (see the TR50), spent about a million dollars on Washington representatives from 2007 through early 2009. A partner at New Enterprise Associates suggested last March that at least half of its 25 clean-tech firms had hired lobbyists.

The only sure way to prevent political and other pressures from distorting public efforts to boost innovation is to look carefully at which firms private investors think are viable. By focusing on supporting firms that have raised matching funds, public officials can boost innovative entrepreneurs far more successfully.

Yet many recent efforts on behalf of clean-tech firms have shown a willful disregard for market signals. Consider Massachusetts’s support for panel maker Evergreen Solar. As its stock price has tumbled from almost $19 in late 2007 to under $1.50 today, the state has continued to fund the firm, in apparent violation of its own spending limits. The crucial consideration in these decisions seems to be not the potential for innovation but, rather, the PR nightmare that could result if the company failed.

High-potential ventures do not exist in a vacuum. And the Japanese government’s unsuccessful efforts to boost entrepreneurs over the past 15 years are evidence enough that without a suitable environment, failure is certain. The United States should focus on ensuring that the overall economic environment is attractive to entrepreneurs (for example, through low marginal tax rates on long-term capital gains), that subsidized firms and venture funds are able to raise matching funds from private investors, and that government programs to promote innovation are implemented in a thoughtful and transparent manner.

Josh Lerner is a professor of investment banking at Harvard Business School. His latest book is Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It.

Keep Reading

Most Popular

A Roomba recorded a woman on the toilet. How did screenshots end up on Facebook?

Robot vacuum companies say your images are safe, but a sprawling global supply chain for data from our devices creates risk.

A startup says it’s begun releasing particles into the atmosphere, in an effort to tweak the climate

Make Sunsets is already attempting to earn revenue for geoengineering, a move likely to provoke widespread criticism.

10 Breakthrough Technologies 2023

Every year, we pick the 10 technologies that matter the most right now. We look for advances that will have a big impact on our lives and break down why they matter.

These exclusive satellite images show that Saudi Arabia’s sci-fi megacity is well underway

Weirdly, any recent work on The Line doesn’t show up on Google Maps. But we got the images anyway.

Stay connected

Illustration by Rose Wong

Get the latest updates from
MIT Technology Review

Discover special offers, top stories, upcoming events, and more.

Thank you for submitting your email!

Explore more newsletters

It looks like something went wrong.

We’re having trouble saving your preferences. Try refreshing this page and updating them one more time. If you continue to get this message, reach out to us at with a list of newsletters you’d like to receive.