Robert Litan: NetWork Kansas is boosting entrepreneurs

I am skeptical of direct government funding of entrepreneurs. Politicians can distort funding decisions. Even if they didn’t, bureaucrats administering loan funds are unlikely to do better than bankers, venture capitalists or angel investors. The opposite concern is that government may take too little risk and displace what the private sector would fund.

But what if private investors are unusually risk averse? Can government assist the financing of entrepreneurship without running into the pitfalls just mentioned?

Israel found a way to answer this question affirmatively about two decades ago, and to help launch a remarkable surge in tech startups that are the envy of the world. It did this through its Yozma program that matched government money with private venture capital funding of Israeli high-tech companies. Government followed but did not lead the private sector.

Kansas launched its own version of Yozma in the Economic Growth Act of 2004 when it created NetWork Kansas, which raises capital through an entrepreneurship tax credit up to $2 million per year, to support small loans in startups and businesses expanding throughout the state. NetWork Kansas makes no investment decisions itself, but instead tops off bank loans, many of them guaranteed by the Small Business Administration, with critical working capital that otherwise would not be available.

Credit NetWork Kansas’ founding president, Steve Radley, a former entrepreneur himself, with the idea of decentralizing and effectively outsourcing NetWork Kansas’ funding decisions to private decision-makers, which include local boards of knowledgeable businesspeople. NetWork Kansas started with six such “entrepreneurship communities” and is now up to 55.

Radley argues persuasively that NetWork Kansas is providing funding to riskier projects or businesses that otherwise would not be funded, but not with excessive risk. He estimates that over the lifetime of NetWork Kansas’ financing activities, only 9 percent of the businesses that have benefited from network-backed loans have failed, and one-third of these owners nonetheless have continued to repay their loans to preserve their good credit standing.

By leveraging private-sector financing, NetWork Kansas dollars go much further than if loaned directly. Through mid-2015, NetWork Kansas’ financing programs had helped induce $280 million in private-sector loans and investments for more than 500 new companies.

NetWork Kansas does more than fund new companies. Early on, it contracted with KCSourceLink, a pioneering nonprofit in Kansas City that builds websites showcasing entrepreneurial support organizations and service providers (lawyers, accountants and the like), to build and help maintain NetWork Kansas’ own support website. More than 16,000 Kansas businesses have received assistance in this manner.

Under the leadership of Radley’s colleague Erik Pedersen, NetWork Kansas also has been working with other youth entrepreneurship organizations in the state, such as Youth Entrepreneurs, to sponsor local business idea competitions for middle and high school students. The winners go to a statewide competition. This year, NetWork Kansas is partnering with Kansas State University to jointly host the state contest in Manhattan on April 25.

Many entrepreneurs are skeptical of any governmental efforts to help them. NetWork Kansas’ programs should reassure them and Kansas citizens more broadly.

This story was originally published March 10, 2016 at 6:02 PM with the headline "Robert Litan: NetWork Kansas is boosting entrepreneurs."