Federal government backs the most promising startups

By Kevin Manne

BUFFALO, N.Y. — The U.S. government is good at identifying and funding successful entrepreneurial ventures, according to new research from the University at Buffalo School of Management.

Recently published in Academy of Management Discoveries, the study analyzed firms that received Small Business Innovation Research (SBIR) grants and found the federal government can effectively implement entrepreneurial programs and select the kind of ventures that make a big impact.

“The SBIR program has invested more than $25 billion in new ventures over the last decade, but nobody has answered the question of whether these agencies fund the most promising applicants—despite how important it is to economic growth and prosperity,” says Supradeep Dutta, PhD, assistant professor of operations management and strategy in the UB School of Management. 

Using a natural experiment made possible by the sudden release of additional funds through the American Reinvestment and Recovery Act (ARRA), the researchers analyzed two sets of startups that received SBIR grants through the National Science Foundation (NSF). They compared two sets of firms—one set that was prioritized by the NSF through their regular funding process, to a second set that was initially rejected by the NSF but received funding through the additional ARRA money—to determine if the prioritized firms outperformed the others. 

What they found was the innovation at regular-funded firms is greater than those funded through the ARRA, showing that the NSF prioritizes cutting-edge projects with big payoffs. 

“Our findings contrast with a body of work suggesting that markets should be the exclusive source of venture funding,” says Dutta. “Whether governments can effectively identify and reward the most promising ventures is a topic of considerable debate. We empirically demonstrate that governments are capable of identifying and funding ventures with the most promising long-term outcomes.”

Dutta collaborated on the study with Timothy Folta, the Thomas John and Bette Wolff Family Chair in Strategic Entrepreneurship, and Jenna Rodrigues, PhD candidate, both from the University of Connecticut School of Business.