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Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed--and What to Do About It (Kauffman Foundation Series on Innovation and Entrepreneurship)

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"How can we become more like the Silicon Valley?" Policy makers and civic-minded entrepreneurs across the world spend countless hours on the question and taxpayers spend billions billions on resulting projects. This book documents the record of failure for most of those efforts and provides a fundamental lesson that caution and skepticism should permeate any discussion about them. But those who look to this book for more -- for concrete guidance about what will work -- will find, unfortunately, another broken dream.

Harvard Business School professor Josh Lerner starts with a warning: "For each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditure bore no fruit." Lerner proceeds with a narrative of failures and successes from around the world. Malaysia, France, Norway, Iowa, New York City and others each had failed initiatives either small or large that Lerner describes. Singapore, Tel Aviv and Silicon Valley itself were his notable successes. It is in this narrative where the primary value of the book resides simply because there is no prior, book-length attempt to gather facts on these initiatives and their results.

But Lerner strikes out in his attempt to connect the dots to draw conclusions for the book's subtitle, "what to do about it." Most of his prescriptions are too vague to be useful and often not clearly supported by the stories in the narrative. A few examples: "Avoid initiatives too large or too small." The Singapore success that he describes was a massive, multifaceted collection of programs that largely transformed the entire city state, too large to pass his own test. "Leverage the local academic and scientific research base." Sounds like a line from a bad business plan, and doing so is its own book-length story of broken dreams. "Remember that entrepreneurial activity does not exist in a vacuum." Swell. "Let the market provide guidance" when designing any program. Seems pretty obvious. On the other hand, given that many elected officials seem to need remedial level economics, perhaps prescriptions this simple are good.

Readers will be confused about whether Lerner believes that any government efforts in this field are ever worthwhile, or instead are subject to too high a failure rate to justify their cost. On this he contradicts himself. He says on the one hand that the failures had predictable, consistent elements that can be avoided, but elsewhere says there is no "unified field theory" to guide governments and that the "case for public intervention" rests on the shaky assumption that governments can effectively promote venture capital and entrepreneurship.

My own view is that the dots do not connect well and that there is no "unified field theory." Occasional opportunities arise for government to act that are time and location specific, which account for many of the success stories. For example, a public/private effort landed a major international research consortium, MCC, in Austin and clearly put that city on the tech map, but that was a one-time shot. My list of programs to promote entrepreneurship worthy of taxpayer money would be pretty short. Most would come under what Lerner calls "setting the table properly" -- things like good airports, roads and schools, and an efficient legal system with courts that understand business.

Lerner says that government spending, particularly defense spending, plays a huge role in spawning tech communities, with Silicon Valley being the leading example, and he is certainly right on this. But that's a different story about private companies landing government contracts, not the result of any overt policy plan. Lerner details how many of Silicon Valley's largest companies got fat on government contracts and fed the tech ecosystem that grew around them. But he does not describe any state or local economic development plan that helped land those contracts and, to my knowledge, there was none. Behind-the-scenes Federal lobbying by state and local governments is no doubt a potent factor in where Federal dollars get spent, but lobbying is not the sort of public program that Lerner is addressing in this book.

Lerner devotes his last chapter to sovereign wealth funds. Not much relevance here for Americans, unfortunately. The topic is a reminder, however, that the real money -- the massive war chests available to some governments for their economic development -- ultimately derive from American trade and current account deficits. Until the U.S. eliminates those deficits, extraordinary wealth will transfer from here to surplus countries.

Even with these drawbacks, the book still has to be labeled a must-read for folks interested in the subject because it's the only-read on point so far. Its basic tone of skepticism about the efficacy of government sponsored efforts in this field is surely appropriate, despite Lerner's ambiguity on that.

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Lerner's "Boulevard of Broken Dreams" examines how governments have attempted to support entrepreneurs. Some initiatives have succeeded, others wasted billions. The topic is especially timely, given our stalled economy and two years of mostly unsuccessful government efforts to revitalize it, along with the rise of sovereign wealth funds ($3.5 trillion in 2008) and President Obama's goal of doubling U.S. exports in five years. Successful government-led efforts include Dubai's new port at Jebel Ali, and hubs of entrepreneurial activity in China, Tel Aviv, and Singapore; unsuccessful examples include Dubai's overbuilding that has created a sea of red ink, and U.S. efforts to encourage bank lending - despite entrepreneurs being faced with overcapacity in manufacturing, retail and office real estate, millions of homes in the process of being foreclosed, and large corporations holding nearly $2 trillion in cash. Moreover, the value of recent government bailout efforts for poorly-managed and failing G.M. and Chrysler remain unclear. G.M. is now succeeding, but so is Ford - without government help; meanwhile the future of Chrysler is still in doubt.

Lerner's focus is on one-in-a-thousand high-potential (hi-pot) ventures, not subsistence enterprises - eg. more 'Mom and Pop' stores. Roughly 600,000 new businesses employing others are started each year in the U.S., yet only about 1,000 receive their first VC funding in any year. Venture capitalists (VCs) have played a major role in the initial funding of American hi-pot ventures, and provide a comparison base for evaluating government efforts to stimulate new ventures. Lerner tells us that about 0.5-1% of business plans presented to VCs are funded; sometimes they're syndicated as a means of getting a 2nd opinion. Only one-third of those initially funded make to the initial public offering (IPO) stage, the most attractive exit option for VCs. (Since 1999, over 60% of IPOs were previously VC backed.)

VCs have little involvement with the mature manufacturing sector - instead they are involved mostly in software, biotechnology, and semiconductors. Whenever VCs invest, it's generally via preferred stock with restrictive covenants - eg. blocking additional financing, and requiring a certain number of VC representatives on the board. VC funds are typically disbursed in stages, conditional on achieving certain technical or market milestones. VCs also provide intensive oversight and advice, and introduce the firm to potential partners and managers.

Over the past three decades VC investments in R&D and capital have been less than the corresponding budgets of large firms. However, by late 2008, VC-backed firms that had gone public employed 6% of the total public-sector workforce, mostly high-salaried, skilled technical positions, and per Lerner, were 3-4X as patent productive per dollar than corporate R&D during the 1983-92 period. The 'bad news' is that VC returns have become mediocre, and their number is declining - too much capital chasing too few opportunities.

Most economists, including Lerner, contend that government subsidies are appropriate to encourage positive externalities (factors the market doesn't reward - eg. reduced smog, global warming, dependence on foreign oil). Unfortunately, Lerner sees government as having a poor record at picking winners. Some of this is because some groups become more skilled at filling out government paperwork than innovation, other instances because of non-market preferences (eg. race, gender,business size). (The same can be said for university VC funds and research parks.) The 'good news' is that Lerner sees Israel as an exception, thanks to its its practice of adding money to existing private funding and encouraging involvement of outside VCs from Europe and the U.S., bringing a broader perspective.

Lerner concludes that efforts to support entrepreneurs are likely to be more successful if built upon a foundation of private funding (especially an 'angel investor'), linked to local academic/research center talent in the San Francisco, Boston, or the New York areas, encouraged by low long-term capital gains tax rates, are not limited to local activity (eg. may include Asian programming contributions), and tied to previously successful entrepreneurs. Less successful government investments are associated with trend chasing and active involvement of political leaders.

Unfortunately, the timing of "Boulevard of Broken Dreams" does not allow its incorporating important recent developments. The first of these is the U.S.'s failure to set demanding green energy goals, despite the inevitability of peak oil, global warming, increased pollution, and our vulnerability to external energy shutoffs. Even our improved, though relatively weak fuel mileage goals are being politically challenged. Meanwhile, China has set demanding goals, and used them to spur rapid green energy manufacturing development within their boundaries.

Second, increasing numbers of American firms are moving R&D to China - partly because China requires this to participate in their huge markets, partly because R&D is cheaper there, and partly because R&D is more effective when more closely linked geographically to manufacturing (in China). Meanwhile, returns to U.S. R&D investments are falling because it has become increasingly likely that any resulting manufacturing would occur offshore.

Third, the ability of China's government to pick winners and support rapid innovation, especially in green energy, has made U.S. R&D more risky. Solyndra, a California solar power manufacturer opened a new $733 million robot-run factory backed with a U.S. $535 million loan guarantee in September, only to find Chinese manufacturers had driven prices down 40% during the plant's construction. "I don't see another Solyndra being done," says Anup Jacob, head of the VC firm that invested heavily in Solyndra. Solyndra originally planned for production capacity of 610 megawatts by 2013 - instead it now is closing its original plant, laying off about 200, saving $60 million in capital investments, and will only have capacity of 285-300 megawatts by 2013 (New York Times, 11/9/2010). Clearly we need to add accelerated implementation times (eg. use existing buildings and equipment, pay royalties instead of developing and patenting new methods, simplify product attributes and product lines) to Lerner's recipe for success. (Miasole, a California firm, now claims its new thin-film process produces power for less than $1/watt, vs. $3 for Solyndra, and competitive with peak-power gas instalations. Economist, 12/10/2010)

Bottom-Line: The U.S. now ranks behind every industrial nation except France in the percentage of overall economic activity devoted to manufacturing - 13.9%, down 4 percentage points in a decade, thanks to off-shoring (New York Times, 7/20/2009). The coming rise of India, and China's nascent pursuit of R&D, computer programming, etc. help validate former Federal Reserve Vice-Chairman Alan Binder's forecast of 40 million U.S. service jobs being vulnerable to outsourcing in the coming two decades, as well as continuation of existing job losses in manufacturing. BRIC (Brzail, Russia, India, China) nations realize they each have a target painted over them - most of the world's market growth lies within their borders. Their relentless focus on exports is intended to both boost their own employment, competencies, and cash, and as a defense to ensure their ability to defend against potential imports from U.S., other OECD nations, and their fellow BRICs. Meanwhile, the U.S. will find it increasingly difficult to export into BRIC markets as their own internal capacities expand, Since financial markets highly value growth, BRIC financial markets will also rapidly rise, U.S. markets will simultaneously fall, and American enterprises will become acquisition targets. Therefore, the U.S. government needs to go beyond the lessons offered by Professor Lerner in "Boulevard of Broken Dreams" on picking winners and funding them, create a sense of urgency, and also learn from China's government. Failure to do so places our manufacturing, service, and financial sectors all at risk of collapse within the next decade.

This book should be required reading for anyone running for public office. With debt levels reaching alarming levels in countries all over the world, a little light reading of Lerner's work would hopefully knock some sense into these current and future politicians.

This book presents a very real picture about the consequences of Governments thinking they can act as professional investors. Should be read by all politicians with an inclination for spending tax money on promoting entrepreneurship and venture capital.

This is outstanding contribution to the critical and current debates on how best to spur economic growth with public money. Virtually every developed country in the world wants to attract and nurture high tech industries that support well-paying jobs. Unfortunately in the US and elsewhere, public monies are overwhelmingly directed at 19th century industries like agriculture and banking. This book makes the authoritative argument that "virtually every hub of cutting edge entrepreneurial activity in the world today had its origins in proactive government intervention." Policy makers in China, Brussels, Seoul, Dubai, and elsewhere will be reading this book and adopting its recommendations. Can the same be said for the US? Let's deeply hope so.

Josh Lerner has written a thoughtful and fact based book about the failure of Public efforts to stimulate entrepreneurship, despite the huge grants supposedly intended to do exactly that. Our future jobs will come out of highly motivated technology leaders - the highest potential ventures are the most risky and are weeded out in the Venture Capital process. We need lots of failures in order to have a steady stream of successes. Who but the government is in a position to place these bets at the prototype level? If we have another stimulus package it should be based on the technologies of the future - we need to upgrade our roads and bridges but the long-term vitality of the US economy will come from the technology innovations that create industries that we don't even dream of today.

M. A. Taylor
President/CEO AURORA UV Inc.

I bought this book following a note at MIT Sloan management review. The book is easy to read and it gave me the data I was looking for. Basically, the most useful part to me was comparison of benefits of using private capital in start ups over gov funds. However, I can hardly imagine who is the target auditory of readers for this book.

This is a wonderful work on designing and implementing successful policies towards promoting entrepreneurial development. The author reviews the findings of numerous studies on different governments' various efforts towards that end and summarizes the lessons learned. The conclusions of the book are incredibly enlightening and some of them even shocking. This is an invaluable book for all those who are interested in government subsidy programs towards entrepreneuial development and venture capital initiatives. Resaons for success and failure are all there.

"Boulevard of Broken Dreams" is on the ROROTOKO list of cutting-edge intellectual nonfiction. Professor Lerner's book interview ran here as cover feature on October 12, 2009.