How governments can support digital startups and build domestic capability

How government can actually help digital startups

Digital startups have become an increasingly important part of national economic capability. They create new products and services, introduce technologies into established industries, develop intellectual property, attract investment and, when they scale successfully, create highly skilled jobs and new sources of exports. For governments, however, the objective should be more ambitious than simply increasing the number of startups created each year. The real strategic question is whether public policy can help build a domestic ecosystem capable of repeatedly producing, financing, scaling and retaining successful technology companies.

This distinction matters because a country can have a lively startup scene without developing much lasting economic capability. Entrepreneurs may launch companies locally, obtain funding from overseas investors, sell to foreign markets and eventually relocate their intellectual property, headquarters or ownership elsewhere. The country may then capture some employment and tax revenue, but much of the long-term value accrues outside its borders. The challenge for policymakers is therefore to create the conditions in which startups can emerge, grow and connect to the wider economy while remaining sufficiently open to international capital, talent and markets.

The evidence suggests that government has an important role, but it is not the role of a conventional investor or business manager. Governments are generally poor substitutes for private markets when it comes to identifying commercial winners. Their greater advantage lies in addressing market failures, building infrastructure, reducing unnecessary barriers, connecting otherwise fragmented actors and taking calculated risks where the potential social and economic benefits extend beyond the individual company.

The strongest startup policies therefore do not attempt to pick winners. They build an environment in which more potential winners can emerge.

Startups are an economic capability, not simply a business sector

The first policy mistake is to treat startups as a narrow technology-sector issue. Digital startups increasingly operate across financial services, health, agriculture, manufacturing, logistics, education, energy, government and professional services. Their importance comes partly from their ability to introduce new business models and technologies into the wider economy.

The OECD research supplied for this article emphasizes that innovation-driven entrepreneurial firms are particularly important because they can pursue radical technologies and adapt rapidly to changing markets. Yet these firms also face unusually high levels of uncertainty, intangible assets, long development periods and failure risk. These characteristics make them difficult to finance through conventional bank lending and can leave potentially valuable companies without sufficient capital.

This creates a legitimate role for government. A startup ecosystem needs much more than entrepreneurs. It requires access to capital, skilled workers, digital infrastructure, research institutions, customers, mentors, professional services, investors and international networks. If any of these components is seriously underdeveloped, the entire ecosystem can struggle to progress from startup formation to scale-up.

The policy objective should therefore be to develop the complete pipeline. A country needs entrepreneurs who can identify opportunities, researchers who can generate new technologies, investors who can finance risk, companies willing to become early customers, institutions capable of transferring knowledge and markets large enough to support growth.

In other words, startup policy should be treated as part of national economic development policy.

Build the funding pipeline, not just the first round

Access to capital is one of the most visible barriers facing startups, but the problem is often misunderstood. Policymakers frequently concentrate on grants and seed funding because these are the easiest interventions to design. Yet a startup that receives an initial grant can still fail several years later because it cannot obtain Series A or growth capital.

A stronger approach treats funding as a lifecycle. Grants and incubators can help an entrepreneur test an idea and build an initial product. Angel investors and seed funds can finance early commercialization. Venture capital can support rapid expansion. Growth equity, venture debt and other instruments can help companies enter international markets and build the infrastructure required for scale. Finally, functioning acquisition and public-market channels allow investors to exit and recycle capital into the next generation of companies.

The OECD's research makes precisely this point: startups face different financing requirements at different stages, while growth-stage companies can become constrained when substantial capital is needed to commercialize and expand. It also emphasizes the importance of exit pathways because liquidity allows investors to reinvest in new ventures.

For governments, this means asking a more useful question than, "How much startup funding do we provide?" The question should be, "Where does the domestic funding chain break?"

In some countries, the problem may be a shortage of seed capital. In others, local investors may be willing to finance startups but unable to provide the much larger amounts required for international expansion. In still others, the problem may be a weak domestic exit market, meaning that investors have limited opportunities to realize returns.

Government intervention should target these gaps rather than creating another general-purpose startup grant.

Use government venture capital carefully

Government venture capital can be valuable, but it is one of the areas where policymakers need the greatest discipline. Public capital can help finance companies that private investors consider too risky, particularly where technological development is lengthy or where there are wider social benefits that cannot be fully captured by the company.

The OECD study provides useful evidence from 196,115 venture-funded firms and identifies 412 government venture capital entities across 37 OECD countries. It finds that government-backed investments tend to reach companies with riskier profiles, including firms in high-technology sectors and those working with longer development lead times.

But this does not mean governments should attempt to become large-scale substitutes for private venture capital. The same research finds that firms receiving government venture capital alone generally perform less strongly than privately financed firms on subsequent fundraising, while outcomes are substantially stronger when government and private investors participate together. Mixed public-private investments show innovation and exit outcomes closer to those of private venture capital.

This has an important policy implication. Government venture capital works best when it expands the market rather than displaces it.

One effective model is therefore co-investment, where public capital helps reduce risk and attracts private investors who contribute commercial expertise, networks and additional funding. Government can also invest indirectly through private funds, matching arrangements or fund-of-funds structures. The objective should be to crowd in private capital and develop investment capability rather than permanently replace it.

Governments also need strong governance around public investment. The OECD research notes the risks of political pressure, insufficient technical expertise, inefficiency and crowding out private investment.

A government investment vehicle therefore needs commercial independence, professional investment expertise, transparent rules and clear evaluation criteria. Ministers should establish the mandate; professional investors should make investment decisions.

Make government an early customer

One of the most powerful tools available to government is also one of the most underused: procurement.

Governments are major buyers of technology. They purchase software, cybersecurity, cloud services, data platforms, payments systems, professional services, infrastructure technology and increasingly AI-enabled products. Yet procurement processes are often designed around large established suppliers, lengthy contracts and highly specified requirements.

This creates a structural disadvantage for startups. A small company may have a superior product but lack the financial resources, procurement history or administrative capacity required to compete for a major government contract.

Governments can change this without compromising procurement integrity. They can break large requirements into smaller components, create innovation procurement pathways, simplify qualification processes, use challenge-based procurement and design pilot contracts that allow emerging suppliers to demonstrate their capabilities.

This matters beyond the individual startup. A government contract can provide revenue, credibility and a reference customer that helps a young company sell internationally. It can also force the startup to improve its product, security, reliability and operational maturity.

The strategic opportunity is to turn government procurement into a market-development instrument. Rather than simply asking which supplier can deliver today's requirement most cheaply, governments should also consider how procurement can strengthen competitive domestic capability while delivering value for money.

That does not mean protecting local companies from competition. It means ensuring that procurement rules do not unintentionally exclude innovative suppliers before they have an opportunity to compete.

Connect universities, startups and industry

A large proportion of future digital capability will emerge from research institutions, yet research excellence does not automatically translate into commercial success. The supplied OECD research estimates that around one in ten startups in OECD countries are founded by academics and finds that these companies often require additional support to bridge the gap between research and markets.

The policy challenge is therefore not simply to increase research funding. It is to strengthen the connections between research, entrepreneurship and industry.

Universities need mechanisms that make it easier for researchers to commercialize discoveries. Researchers may require access to entrepreneurs, product-development expertise, intellectual-property support and experienced commercial managers. Startup founders, meanwhile, need access to laboratories, specialist equipment, research talent and technical knowledge.

Incubators and accelerators can play an important role in this process. The OECD evidence suggests that academic startups are substantially more likely than non-academic startups to use assistance programs, grants or government venture capital, while training and networking can be particularly useful in connecting companies with investors and follow-on finance.

The deeper lesson is that commercialization is an ecosystem function. Countries that produce excellent research but lack the mechanisms to move ideas into companies are effectively exporting part of the economic value of their own intellectual capital.

Build the digital infrastructure startups depend on

Digital startups cannot scale without reliable digital infrastructure. High-speed connectivity, cloud computing, data access, digital identity, digital payments, cybersecurity capabilities and interoperable government platforms increasingly form part of the basic infrastructure of a modern economy.

This is particularly important for smaller countries and regions. A startup operating in a relatively small domestic market needs to be able to develop and test products efficiently before expanding internationally. Open standards, interoperable digital systems and accessible public data can reduce development costs and allow companies to build products that can operate across multiple markets.

Governments should therefore view digital public infrastructure as part of the startup ecosystem. When governments create reusable digital capabilities rather than requiring every organization to develop its own proprietary systems, they reduce barriers to innovation across the economy.

This can create a compounding effect. A digital identity system, for example, can support financial technology, government services, healthcare and online commerce. A payments platform can create opportunities for thousands of businesses rather than one government project. Public data, when appropriately governed and protected, can support new applications and analytical services.

The principle should be simple: build shared infrastructure once and allow the wider economy to innovate on top of it.

Develop the talent that startups actually need

Capital alone cannot create a technology sector. Startups need software engineers, product managers, cybersecurity specialists, data professionals, designers, salespeople, commercial leaders and founders capable of operating in international markets.

Governments therefore need to connect startup policy with education and workforce policy. Universities and vocational institutions should work with industry to identify emerging skills gaps, while lifelong learning programs should allow workers to move into digital roles as technologies and business models change.

International talent can also play an important role. Startup ecosystems often benefit from people who have worked in other markets and bring technical expertise, entrepreneurial experience, investment relationships and knowledge of international customers. Immigration policy can therefore be an economic-development instrument when it is designed to attract scarce capabilities while maintaining appropriate safeguards.

At the same time, domestic capability requires local talent development. A country that relies entirely on imported expertise may build a startup sector without building a sufficiently deep domestic skills base.

The goal should be a reinforcing cycle in which startups create demand for skills, education systems respond to that demand, and experienced employees eventually become founders, investors and mentors themselves.

Help startups reach international markets

Domestic markets are often too small to support the ambitions of digital companies. Governments should therefore help promising startups become international companies rather than designing policies around permanent dependence on domestic demand.

Trade agencies, diplomatic networks and investment promotion organizations can provide useful channels into foreign markets. International accelerator partnerships, trade missions, landing programs and connections with overseas investors can help companies establish relationships that would otherwise take years to develop.

However, internationalization should begin earlier than many governments assume. Startups should be encouraged to design products, pricing models, cybersecurity arrangements and intellectual-property strategies with international markets in mind.

There is also a geopolitical dimension. A country with a stronger domestic technology sector has greater strategic resilience because it is less dependent on foreign suppliers for critical capabilities. This does not mean technological self-sufficiency is realistic or desirable. Rather, governments should identify areas where excessive external dependence could create economic or national-security vulnerabilities and encourage domestic companies to develop capabilities in those areas.

Protect competition while encouraging partnerships

Large companies can be important partners for startups. They can provide capital, customers, distribution networks, technical expertise and acquisition opportunities. Government policy should encourage these connections, but it should also recognize the risk of dependency.

If startups become dependent on a single large customer or investor, their bargaining position can weaken. If a dominant company systematically acquires emerging competitors, the market may lose future sources of innovation.

The OECD research highlights this tension, finding evidence that acquired startups can experience a significant decline in patenting relative to comparable firms. The implication is not that acquisitions are inherently harmful, but that policymakers need to consider the longer-term effects of consolidation on innovation and competition.

Competition policy therefore needs to become more sensitive to technology markets. Regulators should consider not only current market share but also whether acquisitions remove potential future competitors.

The policy objective should be a healthy relationship between startups and established companies: partnership where it creates value, acquisition where it is economically justified, and competition where competition is necessary to preserve innovation.

Design regulation as an enabler rather than a barrier

Startups frequently operate ahead of established regulatory frameworks. This is particularly true in areas such as fintech, health technology, artificial intelligence, autonomous systems and digital identity.

Poorly designed regulation can prevent experimentation. Yet weak regulation can create risks that undermine public trust and allow irresponsible businesses to damage an entire emerging sector.

The answer is not deregulation. It is better regulation.

Governments can use regulatory sandboxes, staged approvals, controlled pilots and clear guidance to allow companies to test innovative products while regulators learn alongside them. Regulators also need the technical capabilities to understand new technologies rather than relying entirely on regulated companies or external advisers.

This is another area where domestic capability matters. A government that lacks the expertise to regulate new technologies effectively becomes dependent on the very companies it is supposed to oversee.

Measure outcomes that matter to the economy

Startup programs often measure activity rather than economic impact. Governments report how many companies received grants, how many people attended an accelerator or how much funding was distributed. These are useful administrative measures, but they do not demonstrate that public policy created lasting value.

A stronger measurement framework would examine whether supported companies survive, grow, attract private capital, export, create high-value employment, generate intellectual property and develop into sustainable businesses.

It should also measure the ecosystem itself. Has private venture capital increased? Are more experienced founders becoming investors? Are universities commercializing more research? Are domestic startups winning international contracts? Are government procurement processes attracting new suppliers?

These measures should be reviewed regularly because startup ecosystems change quickly. The OECD emphasizes that support programs need continuous assessment and adaptation as markets and technologies evolve.

The most successful policy may therefore be one that eventually becomes unnecessary. If public intervention creates a deeper private investment market, stronger entrepreneurial networks and better commercial links, the government can gradually reduce its direct role.

The danger of building a government-dependent startup sector

There is a legitimate alternative perspective: perhaps governments should do much less.

Startup ecosystems ultimately depend on entrepreneurs and private investors, and excessive government involvement can distort markets. Public officials may lack the information required to select promising technologies. Grant programs can encourage companies to optimize for funding rather than customers. Public investment can crowd out private capital. Procurement preferences can protect weak companies. And excessive regulation can undermine the agility that gives startups their advantage.

These are not theoretical concerns. The OECD evidence explicitly identifies the risks associated with government venture capital, including political influence, limited investment expertise and crowding out. Its research also shows that standalone government-backed companies can have weaker subsequent financing outcomes than privately backed firms.

The answer is not to abandon government support but to be much more precise about where government adds value.

Governments should provide infrastructure, fix market failures, support research commercialization, improve access to finance where gaps are demonstrable, open public markets to innovative suppliers and connect domestic firms to international networks. They should be cautious about permanent subsidies, protection from competition and political involvement in individual investment decisions.

The test for every intervention should be whether it makes the ecosystem more capable of operating without that intervention in the future.

From startup policy to national capability

The most effective governments will stop thinking about startup support as a collection of disconnected programs. Grants sit in one ministry, research commercialization in another, immigration somewhere else, procurement in a separate agency and digital infrastructure in another part of government. Entrepreneurs experience these institutions as one ecosystem, however, not as separate policy domains.

A national digital startup strategy should therefore connect five objectives: capital, capability, markets, infrastructure and talent.

Capital must be available throughout the company lifecycle. Capability must extend from research and technical skills through to management and international sales. Markets must include government, domestic industry and international customers. Infrastructure must provide affordable and interoperable digital foundations. Talent policy must develop local skills while allowing countries to attract scarce international expertise.

Above all, these components must reinforce one another.

A government-funded research breakthrough is more valuable when there is a startup capable of commercializing it. A startup is more valuable when it can access skilled employees. Skilled employees are more likely to remain when there are successful companies in which to build careers. Investors are more willing to provide capital when they can see viable exit opportunities. And successful companies are more likely to emerge when they have access to customers willing to adopt new technology.

That is the ecosystem effect.

Build the conditions for success

Government cannot manufacture a successful startup ecosystem through funding programs alone. Nor should it attempt to predict which technologies or entrepreneurs will become tomorrow's winners. The better strategy is to build the conditions under which entrepreneurial companies can emerge, compete, scale and create value.

This requires a shift from startup promotion to capability building. Governments should strengthen the entire funding lifecycle, use public venture capital selectively and preferably alongside private investors, make government procurement more accessible to emerging suppliers, connect universities with industry, invest in digital infrastructure and skills, help companies internationalize and maintain strong competition and regulatory frameworks.

The economic objective should also be broader than the number of startups created. A successful ecosystem produces companies that employ people, develop intellectual property, attract investment, export products, raise productivity and generate experienced entrepreneurs who create the next generation of businesses.

The OECD evidence provides an important warning and an opportunity. Public capital can reach companies that private investors overlook, but its effectiveness improves significantly when it works with private capital rather than attempting to replace it.

That principle extends well beyond venture capital. The strongest government role is usually catalytic rather than controlling: build the foundations, reduce friction, connect people and markets, absorb some of the risks that markets cannot efficiently absorb, and then allow entrepreneurs and investors to do what they do best.

Countries that get this balance right will not simply produce more startups. They will build a deeper pool of domestic technology capability, stronger private investment markets and a more resilient economy capable of creating and retaining value as technology continues to reshape global competition.