Recently, an electric car manufacturing plant in Indiana closed only two years after state officials there gave the company tax incentives in order to lure 400 jobs to the region. This brought to mind several other examples I know of where state and local economic development officials have dealt with start-ups the same way they deal with establish companies with disastrous results. Wisconsin and Maine’s experience with Kestrel Aircraft is a recent example.
In all of these cases, a start-up company approached state and local officials, promising hundreds of jobs. These officials responded with the usual array of tax incentives designed to attract new industry to an area. However, the validity of the promises of the start-ups was never questioned, largely because these officials are used to dealing with large companies whose job projections are generally quite credible.
Managers of programs that explicitly deal with start-ups know that a little skepticism goes a long way in deciding which companies to invest time and effort into. A good rule of thumb is that one out of ten will be a hit, and two or three will never get off the ground, and the rest will limp along. These managers know how to assess the probability of success of a start-up, and will decide how many resources to apply accordingly.
The gold standard for assessing a start-up, used by public managers and those with private capital, is to judge the market potential. Will anyone buy the product being proposed? What evidence is there of market acceptance? And for public managers, the presence of private capital in the form of equity or debt invested by professionals is a way to establish the credibility of the start-up, their management team and their ideas.
[Note that I am do advocate helping all entrepreneurs further their ideas, but the entrepreneurs must make forward progress and through his/her actions instill the confidence that any investment of time is a good use of public funds. So, having “skin in the game” for instance, shows that an entrepreneur is willing to invest in his/her own idea. So do personal guarantees.]
In the case of the Indiana electric car company, and Kestrel, and others, there was no private capital. The companies simply could not raise any. And so, they appealed to the public sector. By going it alone, the public sector took on a lot of risk, with a higher probability of failure. While it is difficult for public officials to walk away from promises of hundreds of jobs, the validity of the claim needs to be carefully investigated, and the public properly protected.