Government's role is to stimulate that funding ecosystem and provide comprehensive support within this very complex space.
Government incentives targeting the development and growth of new businesses are an essential part of the financing mix.
Government has a vital part to play in facilitating and encouraging entrepreneurial development. Among the entrepreneurs surveyed for Entrepreneurs speak out: A call to action for G20 governments, 80% felt that governments had a central role to play in developing such opportunities.
Because business development is not a single-stage process, government incentive programs needs to recognize the life cycle of entrepreneurial companies. The combination of multiple stages of business development and multiple funding sources available at each stage creates a complex group of touch points where incentives could impact the funding ecosystem.
Government's role is to stimulate that funding ecosystem and provide comprehensive support within this very complex space.
A holistic approach to stimulating a given industry or sector may provide additional impact beyond what can be achieved through programs targeting individual players. In many countries, different types of programs that would make up this holistic approach already exist, but combining them into a coherent system of comprehensive support is the next step.
By filling funding gaps and correcting market failures that occur along the way, governments can ensure that there is a healthy entrepreneurial ecosystem that maximizes growth opportunities and creates a more dynamic, competitive and innovative economy.
There is a huge diversity of incentive programs across the G20 that target different stages of the entrepreneurial journey, but these can essentially be broken down into two categories: direct funding and indirect funding.
Program for Young Entrepreneurs Development in Argentina
Offered by the Argentine Ministry of Industry, the Capital Semilla program is designed to support the development of ventures led by young entrepreneurs in Argentina who are between the ages of 18 and 35.
The program is structured as an annual competition that awards grant funds to the winning applicants. Applicants can access three funding levels depending on the current phase of business development.
For entrepreneurs in the Project Idea phase, ARS15,000 is available to help them complete research necessary to start their business. The second phase is the Start Up phase, in which winners can receive up to ARS30,000 as seed money to make their first investments.
Consolidation is the final business phase in the program, offering up to ARS60,000. Funds are distributed once the necessary agreements are signed between the government and the entrepreneurs.
This program clearly provides impactful value to its intended target group and in pursuit of its goals. By providing a source of funding to entrepreneurs at multiple stages of business development, the program has the potential to support entrepreneurs through a progression of critical phases. The volume of funding provided is not substantial compared with investments such as VC, but entrepreneurs successful in receiving funds might be viewed as more worthy of additional investment.
For entrepreneurs in general, the program has a limited availability. Only those between the ages of 18 and 35 can access the funds, although targeting this group may result in a higher impact than a more broadly available program.
For entrepreneurs successful in applying and winning grant funds through the program, there will be very high stability as funds are distributed upon the signing of the necessary agreements with the government. Therefore, the funding provided will be available to include in any budgeting or planning processes that may take into consideration the external support available to the companies.
The benefit provided by this program is in the form of a cash grant. Given that the program targets entrepreneurs and new ventures, which will likely not yet be in a taxable position, the cash grant format can ensure a positive impact of the funds. Cash benefits represent the most flexible and broadly applicable type of benefit available through incentive programs.
- Government grants to businesses in all phases of development
- Low interest start-up loans sponsored by governments
- Partnerships between investment funds and governments to provide funding via multiple stakeholders
- Grants for specific business activities such as technical development, R&D or job creation
- Preferential tax treatment for companies and individuals investing in new business ventures
- Tax deductions or exemptions for companies performing certain activities or at a certain stage of development
- Grants available to investment companies researching the viability of initiating investments in SMEs and new ventures
- Grants designated for specific nonbusiness or advisory functions such as hiring development consultants or executive advisors
Approaches to government incentives
The approach that governments take to incentives varies according to the maturity of the economy. In low-growth developed markets, policy-makers are likely to prioritize incentives that will ignite potential high-growth sectors or encourage specific business activities with plentiful underutilized resources.
But with many developed economies under pressure to reduce deficits and spending, policy-makers face a difficult balancing act in determining which incentives to prioritize. Many are taking steps to review the effectiveness of current and planned incentive programs.
This will ensure that their limited resources are being directed towards those programs that have the potential for the biggest impact.
The importance of innovation to economic growth means that many governments across the G20 will continue to prioritize incentives that promote the commercialization of innovative products and services.
Thinking outside the box
While funding is essential to promoting the establishment of a thriving set of entrepreneurial businesses at every stage of development, it is not the only driver of growth. There is a strong argument that linking comprehensive business development support to funding can increase funding impact.
When developing a business idea, entrepreneurs will also need to seek out other resources including expert management advice, legal counsel and the skills of marketing consultants. Government programs that target funding could increase their impact by combining access to other resources to support the funding they provide.
Whether it is through the provision of specific advisory resources or categories of funding designated for particular tasks, the ability to access comprehensive business development support will allow entrepreneurs to leverage the additional assistance they may need to succeed in developing a business.
Indian Fund for Sustainable Energy
INFUSE is an alternative energy and sustainability venture capital fund backed by the Government of India and leading businesses. It is designed to encourage the continued development of businesses that target sustainable energy and clean technology.
This fund provides a combination of financial support, expert business advice and mentorship from experienced members of the sustainable energy sector. For new entrepreneurs with developing ideas, the fund will provide up to approximately US$200,000 to support the development and incubation of ideas for new sustainability or alternative energy solutions.
Entrepreneurs who have already launched a venture can receive up to approximately US$1.5m in equity investment to expand or scale up existing solutions.
Funds provided are invested as equity contributions. Along with these investments, entrepreneurs and business owners will gain access to mentorship and the guidance of a consortium of experts in the field of renewable energies and sustainable technology. This represents a potent combination of support that will help recipient companies take advantage of market opportunities and grow their businesses.
INFUSE is specifically targeted at one sector, so its availability is limited. In addition, because the fund is structured as a venture capital fund making equity investments in prospective companies, there will be an increased degree of selectivity in the investment decisions made by the fund.
The equity nature of the investment will lead to a partnership between the entrepreneur and the investor. Recipients of investment can be reassured that the funding will not be unexpectedly removed, which will enable them to make long-term plans in cooperation with the fund investors.
As entrepreneurs take advantage of the benefits of the program and build successful businesses, the fund will reseed itself and be able to continue to develop new ventures. Accordingly, the Government will have supported its goal of economic development in an efficient manner that also benefits the entrepreneurs who are the targets of the program.
Brazil: Brazilian National Development Bank
The Brazilian National Development Bank (BNDES) is Brazil's primary financing institution for economic development projects. The bank provides financing services in three formats—programs, funds and products — throughout Brazil for small, medium and micro enterprises. BNDES offers many programs that target different aspects of economic development. Some are aimed specifically at SMEs and provide loan financing in unique ways tailored to the needs of these companies. Loans are available directly through BNDES or through partnering organizations and are broadly accessible across industries and activities.
BNDES provides substantial loans of up to 20 million Reals to eligible companies through multiple lines of financing. Yet, while BNDES can provide substantial sums of money, the repayable nature of the funds, as with any debt, increases the risk carried by an entrepreneur. Despite incurring additional risk, BNDES represents a major source of value in the Brazilian market. The diversity of loans and credit available in conjunction with the variety of activities BNDES targets gives entrepreneurs many routes by which they can secure funding to grow a business.
The programs provided by BNDES are broadly available to both entrepreneurs and larger businesses. The number and diversity of loan and financing programs allows BNDES to make funds available to a broad spectrum of businesses. Most programs are targeted at a specific group of businesses, based either on size, stage of development, location or industry. As each of these lines of funding has a more specifically defined target, availability will be decreased in relation to the scope of the target group.
A long-term history of supporting economic development and the current growth of the Brazilian economy will likely contribute significant stability to the future of the BNDES. In addition to its organizational stability, the funds BNDES provides will be readily available to recipients so long as obligations are upheld.
BNDES benefits are structured as loans. Such a delivery method makes sense for entrepreneurs who not only need to raise funding but secure liquid value. A loan affords an entrepreneur with flexibility to invest the funds where they are needed. An entrepreneur can use the value provided by the program to make necessary investments without having to raise additional working capital to cover expenses.
South Africa: Support Program for Industrial Innovation (SPII)
The Department of Trade and Industry of South Africa provides a variety of support programs for business development under the umbrella of Small Medium Micro Enterprise Development. The Support Program for Industrial Innovation falls under this umbrella and provides funding for the development of technological solutions within the industrial sector in South Africa.
Funds are provided through one of three different schemes that target different-sized companies. Two of the schemes provide non-repayable grant funding for the pre-competitive development phase and the development phase, while the third scheme offers conditionally repayable grant funding.
The grant or loan funding offered by SPII provides recipient entrepreneurs with liquid funds for continuing the development of their innovative products. The amount of the funding received is consistent with the early to mid-stage investments made by venture capital or angel investors and each stream represents a significant infusion of funds for the recipient organization.
The tiered scheme structure of the program allows it to present impactful value for innovative companies of any size, although the ability to access expert advice could promote a higher impact of the funds received.
An advantage of the tiered structure of SPII is its ability to provide impactful value that is available to companies of different sizes. In addition, the different schemes promote the program's availability to projects requiring multiple levels of investment. Although SPII has a high level of availability within its target category, some aspects of the program may limit its overall availability. Projects that receive additional government funding are not eligible to apply for a grant or loan from SPII, which could reduce the impact of the program as a whole.
Entrepreneurs receiving funds from this program can be comfortable planning for the ability to access and implement the grant and loan funds. Grant funds and loan funds are available as soon as they are received, and funds are distributed at multiple milestones within a development project. This multi-point distribution may somewhat decrease the ability to plan for access to the program funds, but a lack of access for an approved company represents a seemingly unlikely outcome.
By providing funds in the form of grants and loans, one advantage of this scheme is that companies and entrepreneurs will have immediate access to the value defined by the program. The structure of the funding mechanisms also reduces the risk to the recipient organizations, as the grants are non-repayable, and the loans are conditionally repayable pending the success of the project.
Turkey: KOSGEB – Small and Medium Enterprise Development Organization
The Small and Medium Enterprises Development Organization (KOSGEB) offers a variety of incentives for entrepreneurs and small businesses in the Republic of Turkey. For example, the Entrepreneur Support Program provides both non-repayable cash grants and repayable loans to entrepreneurs who are developing new businesses. The program contains three components that work together to stimulate the development of the entrepreneurship ecosystem in Turkey. The first component provides free training to potential entrepreneurs.
Once they have completed the course, entrepreneurs can receive funds in the form of grants and loans through the second component. The third component supports the development of Business Improvement Centers, which aim to improve the success rate of new ventures.
The KOSGEB Entrepreneur Support Program represents a clear example of a comprehensive value proposition. First, entrepreneurs are educated and gain experience. Subsequently these entrepreneurs are eligible to receive seed funding for up to 80% of the expense of investing in a new venture. And, through the Business Improvement Centers, entrepreneurs can gain access to advice and mentorship.
The requirement to complete the first training component would appear to limit the availability of the program but, in practice, this is not the case. By providing free training, the government is offering to prepare any interested potential entrepreneur to pursue a new business venture and potentially to receive government funding. Thus, the availability of the funding provided is not dramatically limited by the training requirements.
The KOSGEB programs demonstrate a sizable commitment to promoting the growth of the entrepreneurial ecosystem in Turkey. This commitment can give entrepreneurs some reassurance that the government will maintain its investment in these programs. For entrepreneurs planning to take advantage of the program in the future, some level of risk mitigation should be considered based on the potential for political turbulence and the threat of another economic downturn. As we have seen though, deepening economic doldrums may increase them emphasis placed on developing entrepreneurship.
The benefit available through the Entrepreneur Support Program is cash funding provided to entrepreneurs who have completed the applied training phase of the program. These funds are provided as a combination of non-repayable grants and repayable loans that support a progression of business development phases.
By providing non-repayable grants during the early phases of the support program, the program avoids creating additional liability during the most precarious early stages of business development. The businesses receiving funding have some opportunity to develop business protocols and potentially revenue streams prior to incurring the liability of a repayable loan.