Impact of public seed-funding on academic spin-offs

In the entrepreneurial economy of today, it is not the multinational firms which are the predominant driver in the creation of new knowledge, but the individual entrepreneur. Correspondingly, new ventures of small size are leading in commercializing new knowledge and transferring it to the market. This economic shift has been reflected by broad entrepreneurship policies, which aim at supporting the individual on the challenge of a high-growth start-up. However, prior experience shows that uniform entrepreneurship policies do not address the individual needs in different countries and ecosystems adequately. In this paper, we study the performance of academic spin-offs that received public funding from the German EXIST Business Start-Up Grant, a support program which aims at increasing the number of innovative start-ups from academia. Using a control group matching approach, we provide evidence that these start-ups are smaller by two full time equivalent employees, generate 1.7 times higher losses and have a nearly three times lower return on capital than science-based entrepreneurial firms with comparable characteristics in the first 5 years after foundation. We interpret these results to be primarily caused by the inferior financial contracting structure of the program compared to private venture capital funding and by the resulting adverse selection and incentive effects on the entrepreneurs. The evidence calls for rethinking public interventions in a national system of entrepreneurship.