How policymakers can better support start-ups: Insights from OECD research

Start-ups require different types of funding throughout their lifecycle. Early-stage ventures often struggle with initial funding gaps and risk mitigation for emerging technologies. OECD research suggests that while venture capital plays a key role, a comprehensive funding ecosystem must include grants, accelerators, and incubators to support nascent innovations. Likewise, government venture capital brings in additional funding to support nascent ventures and proves effective when co-investing with private venture capital.

As start-ups mature, their capital needs shift dramatically. Growth-stage companies require substantial investment to bring innovative products to market at scale. Policymakers should ensure access to late-stage funding instruments, including growth equity and venture debt, to prevent promising ventures from stalling before reaching their potential.

Equally important are viable exit pathways, such as stock market listings, which provide liquidity to early investors and facilitate reinvestment in new ventures. OECD data reflect this growing funding ecosystem, with venture capital transactions accounting for 1.2% of GDP in 2021 across member countries, showing increases across all funding stages.

Collaboration between start-ups and established companies creates valuable opportunities for knowledge sharing, market access, and resource pooling. However, policymakers must carefully balance promoting these partnerships while preventing excessive dependence that could stifle innovation.

OECD research finds that acquired start-ups often experience a significant drop in patented innovation post-acquisition. This suggests that while acquisitions and corporate venture capital investments may generate immediate benefits by providing funding and liquidity, they may ultimately reduce competitive dynamics in the marketplace.

Effective policies should encourage strategic partnerships that preserve start-up autonomy and competitive incentives. This might include monitoring acquisition patterns and implementing targeted antitrust measures giving higher relevance to the dynamic nature of innovation and competition. At the same time, investors need alternative exit channels allowing them to recoup and reinvest their capital. The goal is to capture the benefits of collaboration while maintaining the entrepreneurial spirit that drives breakthrough innovation.

About one in ten start-ups in OECD countries are founded by academics. These academic start-ups represent a unique opportunity to transform scientific discoveries into commercial solutions with broad societal impact. However, they face specific challenges in bridging the gap between research and market applications. Limited industry connections often hinder their commercial success, even when the underlying technology is groundbreaking.

Policymakers can address this disconnect through targeted support systems that facilitate knowledge transfer and research commercialisation. Specialised funding mechanisms should acknowledge the longer development cycles typical of academic start-ups, which often make them less appealing to traditional investors.

The effectiveness of such targeted approaches is evident in OECD findings, which show that between 2010 and 2021, academic start-ups were 70% more likely to use funding and support provided through assistance programmes (such as accelerators and incubators), grants, or government venture capital compared to non-academic start-ups. Providing start-ups with training and networking opportunities seems to be more effective than grants in giving start-ups access to investors and follow-on funding. This demonstrates the importance of tailored support that recognises the unique trajectory of research-based entrepreneurship.

Green start-ups play an essential role in addressing pressing environmental challenges, from climate change to resource efficiency. OECD data reveals that these ventures often outperform other start-ups on business success metrics such as securing venture capital or receiving grants, and they demonstrate a higher propensity to file patents for valuable innovations.

Despite these strengths, green start-ups face unique challenges. They typically require longer timeframes to secure venture capital financing and encounter more significant obstacles during seed funding and exit phases, because of long development times, market demand uncertainty and other obstacles. Policymakers should address these specific pain points by de-risking green technologies through research and development grants and public procurement, particularly during the vulnerable seed and scale-up stages.

The potential impact of such targeted support is substantial. Since 2010, venture capital investments in green start-ups have grown by an impressive 23% annually on average, with the low-carbon mobility sector experiencing a remarkable 52% average annual growth. Given the dimension of the green transition, policymakers need to ensure that green start-ups across all sectors benefit from targeted support instruments to accelerate this positive trend and enhance environmental outcomes.

Start-ups represent a crucial force for innovation and economic growth in today's dynamic business landscape. By implementing these four key strategies — creating diverse funding environments, balancing co-operation with independence, supporting academic entrepreneurship, and nurturing green initiatives — policymakers can foster a thriving ecosystem that not only supports start-up success through technological advancement but also delivers broader societal benefits such as equitable opportunities for women and foreign born workers fostering economic prosperity.

The OECD research underpinning these recommendations offers policymakers a solid foundation for developing effective support systems. However, implementation must be tailored to local contexts, acknowledging the unique characteristics of each innovation ecosystem. In addition, the start-up landscape is highly dynamic and evolves with new markets and technologies. Support programmes that proved effective yesterday may no longer address today's challenges, requiring continuous assessment and adaptation. By adopting an evidence-based, adaptive approach, policymakers can maximise the transformative potential of start-ups in driving economic growth and addressing societal challenges.