Why startups don't need government money

There’s a debate currently in Denmark about government support for innovation and research, particularly in small and medium businesses. The debate is centered around Højteknologifonden (The Hi-Tech Fund; page doesn’t work in Safari), which has impressed everyone by giving around US$ 2 million to Microsoft for developing an ERP system.

I have to agree with the critics such as Finn Helmer. This is no way to get more successful entrepreneurs, startups, innovators. And not just because it doesn’t work. Because it is downright hurting the goal.

Startups need to focus on one thing, and one thing only: The market. They need to develop a product and quickly get paying customers for it.

When you are doing true innovation, by definition you cannot know how the market is going to react in advance. And the details matter a lot—almost right can easily be as profitable as completely wrong. So you need to get out there before you’ve sunk too much money into it something that is almost guaranteed to be wrong in some respects.

The longer you wait hurts, not just because you will have wasted more money, but also because the more you have invested in something, financially and emotionally, the harder it is to change in response to the market.

For governments to throw in this kind of funding hurts in two ways. First, it allows entrepreneurs the luxury of waiting longer before they confront the market. But just as important, it diverts their attention away from the market, and into the rules and restrictions and processes surrounding the funding, something that is guaranteed not to contribute to market success. Now you have two masters, the funder and the market, and your goals are not likely to be aligned.

During my time as an entrepreneur (4 years so far), I’ve had countless offers from people wanting to do EU-funded projects. And they’ve always struck me as overly complicated, doomed to fail from the project definition alone, and generally suggested by people who weren’t all too busy serving a real market need.

I’m not sure what to do instead. A reading of Porter would suggest growing more sophisticated buyers. This might be what Finn Helmer is getting at when he suggests that we invest in high-speed internet like South Korea. It would also make distributed production and global selling cheaper. Then again, Porter may be too focused on the local market—it seems natural for startups in this age to sell to the global market from the get-go, like Skype.

I don’t know the answer, but I’m convinced that the notion that you can help people make it in the market by giving them support wheels is flawed. Throwing money at the problem doesn’t solve it.