There is a wide disconnect between government innovation policy and the needs of early stage startups. By having a firm understanding of the startup life cycle and the needs of the innovators, governments can build policy to maximise their chances of success. Merely encouraging startup creation is not enough, governments must strategically commit resources to support them.

Throughout our work with several government departments, we have noticed recurring objectives for industrial strategy which include:

• Encouraging start-up creation
• Sponsor and Support R&D
• Attract talent to create innovation clusters
• Improve sector specific productivity
• Further existing competitive advantages
• Use innovation as a tool to meet long term commitments such as international development, or address long term public challenges such as Healthcare (in Europe)

The metrics used to assess industrial strategy avoid placing too much weight on the success of startups, instead choosing to focus on macro collaboration and investment figures between industry and the research base. Examples include

• No of collaborations between industry and research base
• Related R&D Spend by private sector
• Value of inward investment projects
• Number of inward investment projects

Although some governments such as the UK Agritech and France’s AI strategy include more specific ‘market success’ metrics, they do not go far enough focussing on the end outcome and not the benchmarks and milestones as part of the startup growth cycle. These include;

• Number of new products successfully taken to market
• Profile of sector specific startups on international stage

The Problem:

Underpinning this is a fundamental belief that successful startups occur out of the ashes of failures left by others, therefore governments role is to create the ecosystem and ashes of innovation.

The high failure rate and unpredictability of startup success provide sufficient ammunition to avoid measuring policy success by startup success. The civil-state boundaries in western governments also prevents state overreach into the private sector. Much of the broader aims of state innovation policy are directly dependent on the success of innovative startups, in their domestic markets and international.

Solution:

Governments must view a key parts of innovation policy through the lens of founders and venture capitalists and align innovation policy success metrics with the startup life cycle. By compartmentalising the startup life cycle, understanding the unique challenges faced by innovators at each state of their growth, governments can strategically commit resources to maximise their chances of success.

Example: Venture Capital

At Challenge Advisory, our Venture Capital Team specialises in securing large early stage capital for disruptive tech startups within our industry expertise. Government innovation policy typically commits resources to the early stages of the startup life cycle, whether its investment in R&D or fostering startup creation. Following establishment of product-market fit in domestic markets and capturing a sufficient market share, founders usually will return to the venture capital markets to raise their Series A, usually to fund international expansion or sales and marketing.

VC’s are hesitant in funding international expansion opportunities because a large percentage of startups fail due to underestimating the technical and commercial challenges in capturing market share in foreign markets. From VC’s perspective, scaling a domestic American startup which has established product-market fit is more attractive than gambling on a European startup enter the US and scaling. To add to the challenge, the European venture capital market suffers from a lack of growth funds. Early stage capital is in abundance but the larger rounds (post Series A) are lacking.

To address this issues like this, governments must strategically commit resources to help startups create product-market fit validation in larger markets earlier in the startup life cycle, where access to capital is easier. Utilising bi-lateral trade relations, access to market, helping with R&D to address problems facing larger international markets etc.

By breaking down the startup life cycle, understanding the challenges faced at each stage, and strategically committing resources to address those, governments can maximise the chances of success of the innovators. In the case of attracting venture capital, governments can proactively help startups raise successful funds.

The challenges of securing venture capital is just one of many challenges experienced by founders at a specific time in their startup journey. Governments can proactively help startups address their different challenges, but must understand their challenges at each major milestone of the startup growth cycle. The broader objectives of innovation strategy rely on startup success.