State governments as financiers of technology startups: Evidence from Michigan's R&D loan program

State governments in the United States often fund and support technology startups within their borders. Yet little is known about the magnitude with which these place-based policy interventions shift the performance trajectories of entrepreneurial firms. We provide new evidence based on 241 startups that compete for advanced research and technology commercialization loans between 2002 and 2008 through a Michigan-based program. Among applicants with project scores near the threshold required for funding, we find that award recipients are 20%–30% more likely to remain in business four years after the competition relative to similar companies that seek but fail to receive funding. We also find that award receipt stimulates follow-on venture capital (VC) investments in surviving companies. The VC stimulus effect is, however, disproportionately driven by subsets of firms that are very young, relatively inexperienced at external fundraising, or located outside the dominant hub of entrepreneurial activity within the state. This distinctive pattern of heterogeneous effects remains visible for follow-on R&D financing from federal government sources, and for supplemental outcome measures that use news articles to track shifts in financing and business development activities. These findings are consistent with the view that public R&D programs are particularly beneficial when frictions in private resource markets are more severe.