As we know, Silicon Valley is home to the majority of the Unicorns in the world, partly because that is where over 43% of the global venture capital is deployed. It's impressive that this small geographic area has such wide impact to largest economy in the world. Evidence suggests that venture capital has had direct impact on the national economy in the United States by producing one fifth of the public companies and growing. No wonder so many economic indexes that measure economic productivity and competitiveness use the amount of venture capital as one of the key indicators. Because of this, over the last decade, many national and local government policy makers across the globe have implemented polices to drive more venture capital, mainly through subsidized capital or tax credits. There is no better example of this than the Chinese government, according to Bloomberg China has made a major push to increase the amount of venture capital available--from $44 billion to $336 billion--hoping to increase its rate of economic growth.

Is this smart economic policy? Is government support for venture capital the most optimal way to generate jobs? The research on government supported venture capital has been very mixed so far. While venture capital (VC) in the United States has had a positive impact on economic growth and job creation, the history of government creating a VC industry like Silicon valley is negative.

Is there another answer?

Several economic studies on entrepreneurship development and job creation focused on Gazelles, which are generally firms where revenues are growing at 20% annually. While there might be some overlap between Gazelles and Unicorns, for the most part these are different creatures. The big difference is how these two creatures are measured; while one is measured on market valuation, the other is measured by revenue growth. This difference is important because these indicators can often influence the entrepreneurs in different ways. A Unicorn will focus on shareholder value while a Gazelle focuses on driving customer value. The Inc. 5000 (which is the best indicator of Gazelles in the US) highlights an overlap of only about 6.5% of the fastest-growing companies in the US ever used venture capital. For the most part the vast majority of Gazelles in the United States and around the world don't use venture capital to grow.

Another big difference is that there are fewer than two hundred Unicorns in the world while there are hundreds of thousands of Gazelles. Many Unicorn founders feel the only option is to locate themselves near centers of venture capital, like Silicon Valley. In fact, over half of U.S. Unicorns' founders were born outside of the U.S. and many felt obligated to move to Silicon Valley. There are small growing number of VCs, such as 500 startups who are taking Silicon Valley venture capital around the globe instead of the globe moving its founders to Silicon Valley.

Founders of Unicorns or Gazelles have different backgrounds. For example Y-Combinator, probably one of the most famous Unicorn accelerators, wants to have founders who are young, are friends (or at least have a relationship), and are not from the industry they are developing products for. Meanwhile, the book the Founders Dilemma say most growth companies (Gazelles) don't have friends as founders, are often older and have experience in the industry they are going into.

If governments truly want to use entrepreneurship to create jobs, it should focus on Gazelles, which means they should focus on opening up their own local markets. Usually this starts with governments looking internally at their own procurement policies. In many of the countries I work in, 40% to 70% of the economy is controlled by the government. Government controlled sections of the economy are usually markets new entrepreneurs cannot penetrate which in turn limits economic growth in these countries. The United States is one of the better examples on government procurement (although not perfect) which is open to Gazelles. Government services are the 8th most popular sector for the Inc. 5000. One of the reasons for the success is the U.S. Government not only has procurement goals for small businesses but the Small Business Associations (SBA) are tasked with advocating in the different government agencies to ensure the US reaches its goal.

An economy needs good economic governance where political leadership is separated from business leadership. I usually find government policies on market structures to be traditionally the biggest constraints for Gazelles. In countries where government leaders have close relationships with business, market barriers are created for new entrepreneurs. This includes countries that still protects State Owned Entities (SOEs), or where political leadership has major ownership of private business. The economic governance of these relationships typically focuses on government leaders protecting their existing unproductive businesses by blocking opportunities for new entrepreneurs to enter the market place.

While Unicorns and VC's that back them are a big part of America's entrepreneurial success, government should instead focus their attention on Gazelles which have had a bigger impact on economic growth and job creation. If other countries want to follow U.S. entrepreneurial success they need to stop doing the easy things by supporting a VC fund, but do the hard things and open their markets so entrepreneurs have access to them.

Published on: May 22, 2017