This article is part of a Global Entrepreneurship Week (#GEW2021) series putting a spotlight on policies designed to help entrepreneurs start and scale, and the crucial role policy makers play in building a strong entrepreneurship ecosystem.
Kauffman Foundation surveys have found that too many entrepreneurs are denied the opportunity to turn their ideas into businesses because they lack the funding required to do so. In the U.S., between 90% and 95% of entrepreneurs who hire employees say they required some amount of financing to start their businesses. This makes capital a critical element of new business creation. This is why a key pillar of the Kauffman Foundation’s America’s New Business Plan is for governments to support the ability of entrepreneurs to access the right kind of capital anywhere.
Many government capital access programs fail to do so effectively because, the Foundation notes, they do not reflect the fact that “the age of a business, not its size, is the key factor in job creation” and do not target “support to entrepreneurs launching new businesses.” The Foundation recommends “expanding capital access through “patient capital, innovative investment models and technologies, financing guarantees, user-centered service design, community banking, and other means.”
In Singapore, the Startup SG Founder i.JAM Micro-Funding Initiative presents an example of how this can be done. (See the GEN Atlas.) The initiative is a key component of the i.JAM (IDM Jump-start and Mentor) initiative, which is championed by the multi-agency Interactive Digital Media R&D Programme Office and aims to support individuals and start-ups with breakthrough ideas that can be developed into innovative products and services.
i.JAM provides up to $250,000 in seed funding in two tiers. Tier 1 Funding consists of grants of up to $50,000 for startups selected by appointed incubators. These grants are to be used to offset up to 100% of start-up costs over a two-year period. For startups that successfully meet and exceed Tier 1 performance indicators, Tier 2 Funding provides up to $200,000 of seed stage capital, which is split between public and private sector investors. The government incorporated i.JAM Tier 1 grants into the more comprehensive first-time-founder Startup SG initiative.
According to Jeffery Paine, a founding partner of Golden Gate Ventures, “the total amount of capital set aside is unlike any other country I have ever seen” and appointing incubators “is a move in the right direction.” He says, “governments are just are not suited to make these decisions.”
Christopher Haley, a senior entrepreneurship strategy specialist with the World Bank Group and a GEN senior advisor, says, “Grants are the ‘cheapest’ form of financing from the entrepreneur’s perspective since they do not require payment of interest or equity.” But, he cautions that while “winning a grant may give confidence to investors and banks,” reliance on public grants may signal that “insufficient consideration has been given to the ultimate commercial viability of the venture.” Thus, from a policy perspective, it is best to require that grants “be matched by private money,” as i.JAM does in Tier 2.
Paine analyzed the initiative a few years after it was launched and found a number of problems, which prompted him to write an Open Letter to the Interactive Digital Media Programme Office. One is that “approval time takes WAY too long” and suggests placing “more trust in the incubators” and streamlining the process online. He also noted that the initiative requires founders be full-time and that at least one possess technical skills. This automatically rules out entrepreneurs “with great ideas but need[ing] a guided way to test and validate what the market wants.” Because this “is not lean startup friendly,” he recommends allowing full- or part-time founders “as long as they execute and profess that they will commit to the project once traction/metrics are achieved.”
Paine also took issue that disbursement is based on a fixed budget, which is approved beforehand and claimed as the company spends. “As we all know,” he wrote, “99% of startups change directions, this means i.JAM companies have to maneuver in chaos within a budget constraint, and may not be able to pivot quick enough.” This again is not startup-friendly. He recommended “removing all the budget constraints and letting the founders use the proceeds with supervision from the incubators as they see fit” in order to facilitate “the fail fast, pivot or stop decision making that is needed for founders to build meaningful and enduring technology companies.”