Want to help startups? Just give them money

April 04, 2013
David Wong
David Wong

Founder of Plantedd

Would the government be better giving money directly to startups and letting them decide what to do with it?


The question crossed my mind a few days ago when I read an article that was on the front page of Hacker News. Its title was “Want to Help People? Just Give Them Money” and it was written by Google’s Director of Charitable Giving about GiveDirectly.  GiveDirectly are a charity that help the poor in Kenya by transferring money to households in need and they do so without stipulating how the people should spend it.

There’s maybe something a little counter-intuitive about this approach that can provoke an initial scepticism. Perhaps it’s because people are used to their donations going towards the provision of food or shelter or medicine. Or because there’s a risk that recipients could spend the money on drink or gambling, or some sort of worry that it breeds a ‘dependency culture’. However, there’s evidence to suggest that transferring donations directly to people can be more effective than traditional help and GiveDirectly are carrying out their own randomised controlled trials to measure the impact of their work.

Google have backed GiveDirectly to the tune of $2.4 million so that they can test out their model in other countries.

What if the likes of Scottish Enterprise or Enterprise Ireland did this with startups? These government bodies have a constellation of different schemes and funds and grants and programmes and competitions. To paraphrase the article, what if every government organisation that focused on supporting businesses had to prove that they could do more for the entrepreneurs with a pound or a euro than the entrepreneurs could do for themselves?  In this world, cash transfers could play a role like index funds play for private investors. They could be a sizeable share of these organisations’ budget and a benchmark used to evaluate more expensive, “actively managed” investments. We’d learn more about which programmes need additional funding and which are falling below the “direct to the entrepreneurs” mark.

I’d be confident that I could do more for my startup, Plantedd, with whatever equivalent amount spent by government organisations to pay consultants to help us with marketing or IT or training. I might very well choose to spend it on these things, but there are any number of other areas that could help the business.  I’d be entrusted with the faith that I can decide for my own business whether marketing would make more of a difference than say, optimising the product pages of the website.

This would also be a more cost-effective way to distribute financial support to startups. There’s no need for panels to convene and decide on the awards because selection would be randomised (a lottery, effectively). There would still be an initial appraisal, of course, to make sure that startups are eligible but apart from that, the process of determining which startups actually receive the support would be random.

I imagine that the criticisms of such a system would echo some of the criticisms of GiveDirectly. It all boils down to the fact that it’s a lot harder for a startup to misuse the time with a marketing agency, for example, than to misuse money. The risk exists. No form of support can be guaranteed to be entirely effective, but to fixate on that would be to miss the point. The crucial consideration is to look at what the relative impact is when you compare the different ways of supporting startups.

So is it worth trying this “direct to the entrepreneurs” method?

I’m not suggesting that this is a silver bullet for achieving business growth in the UK or anywhere else. The issue of stimulating entrepreneurial activity is one of wider economics, so there are many component parts.

However, as far as targeted support for startups is concerned, I think this is at least worth a pilot programme because it’s potentially a more efficient and effective way to do it – both for the government to administer and for the recipient to spend. This could arguably unlock time and resources that are currently tied up in the paperwork and processes that characterise any application.

Will it ever happen though? Well, apparently entrepreneurs are extreme optimists.

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