The U.S. government is an important driver in identifying and funding successful entrepreneurial ventures and is adept at identifying those with strong potential.
That is the finding of new research by UConn management professor Timothy B Folta and UConn Ph.D. candidate Jenna Rodrigues, and their colleague Supradeep Dutta, at the University of Buffalo. Their findings were recently published in the Academy of Management Discoveries.
“The question that we wanted to address was whether the federal government’s Small Business Innovation Research grant program was funding the most deserving ventures,” Folta said. “It is not obvious that governments should be effective at identifying the most promising venture opportunities, yet this is a fundamental issue because billions of dollars are spent annually in this country for such programs, and when we consider governments around the world, the capital flowing to new ventures to jumpstart economies is astronomical.”
During the last 10 years, Small Business Innovation Research grants have totaled more than $25 billion. The researchers were able to evaluate the program using data about startups that received grants through the National Science Foundation (NSF). They compared two sets of firms, one that was prioritized by the NSF through its regular funding process and a second group that was initially rejected by the NSF but received funding through the American Reinvestment and Recovery Act. They determined that the ventures prioritized by the NSF were more innovative, had more valuable innovations, raised more capital, and were more likely to “go public.”
“Our findings contrast with a body of work suggesting that markets should be the exclusive source of venture funding,” Dutta said. “We empirically demonstrate that governments are capable of identifying and funding ventures with the most promising long-term outcomes.”
Folta, who is also the Thomas John and Bette Wolff Family Chair in Strategic Entrepreneurship at UConn, said the findings were significant as little previous research had been conducted on the subject.
“The findings are novel, and a bit surprising, considering the skepticism existing around government involvement in entrepreneurial finance and how robustly we confirmed our conclusions,” Folta said. “We believe these findings also have strong implications for governments beyond the United States.”