Sunday, 16 May 2010

Dont expect the government to fund start ups

Time and again I am asked questions by young people about why the government doesn’t do more to help start ups. Why, for instance, doesn’t the government fund start ups? This question is usually asked by people who have some sort of a sense of entitlement and they believe it is their right to get funding from the government for their enterprise.

This sort of attitude is a throw back to twenty or thirty years ago – to the days of nationalized banking.

There are enough private sources of risk capital available now for the government to not do this. Apart from Venture Capitalists, there is even an emerging category of Angel investors.

Admittedly early stage capital is still somewhat scarce but it is there if you knock enough doors.

The easiest thing to do is to ask the government for a dole or a subsidy. However actually extracting it from the government is usually a very bureaucratic and time consuming process. And taking money from the government does require skills that are not the same as those required to build world class products for customers.

If your start up really deserves funding chances are that you will get if faster from private sources than from government.

And if after trying from many places you fail to obtain funding then the market is giving you feedback – listen to it. Perhaps your project actually isn’t the sort that will get funding or you need to achieve some more milestones before you approach an investor.

Whatever it is the fact is that every start up will not receive VC funding. Less than one in a hundred business plans gets funded. It must also be remembered that most successful companies did not receive venture investment. So the belief that you cannot succeed without venture capital is somewhat misplaced.

The entrepreneurial eco system is Darwinian in nature – and that is the way it should be. Only the fittest will survive. Some start ups will die – sounds harsh but that is good for efficiency. The ones that do make the cut however will go on to become large valuable businesses.


The mindset of those who want government funding for startups hasn’t changed twenty years after economic liberalization -we want free markets when it benefits us and we want govt. intervention when we are at the receiving end of free markets.


There is no such thing as risk free entrepreneurship. It is a requirement of entrepreneurship to bootstrap, sacrifice, do more for less and struggle for financing. That experience creates a mindset of frugality and a laser sharp focus on only that which is essential. It is scarcity of capital and the accountability that a free market imposes that leads to capital efficiency.

The role of the government should be limited to creating the right environment for a healthy entrepreneurial eco system rather than taking direct financial risks in commercial enterprises. This would mean creating the right regulatory framework.

One useful rule for the government to follow is to let markets work when they are doing a good job and intervene only when markets fail.

There could be a case for the government to intervene where private venture capital or angel money does not reach rural areas, under developed regions of the country, the bottom of the pyramid or other sectors where there could be large social impact. However even these projects – to scale and impact the lives of a large number of people would necessarily have to be financially viable and generate a positive return on capital.

Therefore even where the government does intervene the filters of what projects should be backed and which should not, should be very discerning and the process well managed.

3 comments:

KIRAN said...

Hello Sir,
great pointers. Thanks.....The govt. is promoting lot of entrepreneurial projects through DSIR (TePP scheme), Dept of Science and Tech , MSME etc...more recently the Agri business Incubator project for Agribusiness Start ups by ICAR institutes and State Agri Universities called Business planning and Development Unit (BPD Unit) Would look forward to more insights for managers running such incubators, being one myself. The incubator project in itself is a start -up being funded by the govt.

Tarun said...

Hi,

I totally subscribe to this line of thought. I believe its reflective of your years of struggle.

I wish and hope you will write an autobiographical account of your struggles to share with fellow bootstrapping entrepreneurs.

Thanks,
Tarun

nisha said...

Good work, i like your blog theme, and content ofcourse
mba