Kazakhstan’s Path to Successful Startup Ecosystems

Over the past decade, governments around the world have actively promoted entrepreneurship. The reason is simple: startups are linked to innovation, job creation, and economic growth. Yet, as seen in the experiences of the U.S., China, and Saudi Arabia, many well-intended initiatives fall short. Why does this happen? And what can Kazakhstan learn to avoid similar pitfalls?

This article is based on Harvard professor Josh Lerner’s research paper, “Government Incentives for Entrepreneurship.” We explain why many public initiatives fail and outline practical solutions that can make a real difference.

Expectations vs. Reality: Three Case Studies

1. United States: Green energy, big hopes, and bigger losses

After the 2008 crisis the U.S. Department of Energy spent over $34 billion supporting clean tech. That figure was higher than private sector investments. But the outcome was disappointing: public money crowded out private investors, and several high-profile startups (like Solyndra, A123 Systems, Beacon Power) went bankrupt. Cleantech’s share in venture capital dropped from 14.9% in 2009 to just 1.5% in 2019.

2. Saudi Arabia: Billions spent, little impact

Despite launching funds and investing $45 billion into SoftBank’s Vision Fund, Saudi Arabia’s domestic venture market raised only $50 million in 2018 – a mere 0.006% of GDP, 60 times less than Israel. The ecosystem simply didn’t emerge.

3. China: Boom, bust, and disillusion

In 2015 China injected $231 billion into government-sponsored venture capital funds. By 2018, this number ballooned to $1.8 trillion. But between 2016 and 2018 fundraising collapsed by 90%. China’s share of global venture funding dropped from 45% to 15%. The cause? Massive public money created a bubble that lacked proper market filtering.

Why Do These Efforts Fail? Three Structural Issues

1. Misguided geographic allocation

Startups naturally concentrate in major hubs-places like Silicon Valley, London, or Tel Aviv. But political pressure leads to funding being spread across regions, regardless of viability. In the U.S., the SBIR program only generated strong results in existing tech clusters.

2. Venture capital cycles are volatile

The startup market is feast-or-famine. When money flows freely, even weak ideas get funding. When the cycle turns, even great projects go unfunded. In 1975, no venture capital funds were raised in the U.S.-just as the personal computing revolution was beginning. These cycles lead to poor timing, overvalued investments, and wasted resources.

3. The human mismatch: governments aren’t built to pick winners

Civil servants often lack the skills to evaluate innovative, high-risk businesses. Worse, programs become magnets for lobbyists. In the U.S., over half the cleantech startups backed by top VC firms hired lobbyists to secure public funds. Without transparency and expertise, government support distorts the market rather than enhancing it.

What Actually Works: Two Key Principles

1. Independent institutions make better decisions

Just as central banks operate independently to control inflation, startup support institutions should be free from political interference. Canada’s CPPIB is a great example-a pension fund with professional governance and long-term strategy. The CIA’s In-Q-Tel is another case: an independent non-profit that invests in startups relevant to national security.

2. Co-investment filters out bad ideas

Governments should only invest when private capital is also at risk. The Yozma program in Israel is a gold standard: the government put up $100 million, matched by private foreign investors, with a buyback option if successful. Within 10 years, Israel’s venture ecosystem grew to over $10 billion.

What Should Kazakhstan Do?

Current problems:

•  Government support is spread thin across regions with no real startup clusters

•  No independent venture institution

•  No outcome-based performance tracking

•  Private investment plays a small role

Policy recommendations:

1. Create an independent venture agency like CPPIB or In-Q-Tel with market-based salaries and professional leadership

2. Require co-investment from private investors to ensure real market demand

3. Focus on developing 2–3 hubs (Almaty, Astana, Karaganda) with complete startup ecosystems

4. Measure success by growth and return, not number of grants

5. Make selection processes transparent and data-driven

Entrepreneurial support is a long-term strategy. Kazakhstan must avoid the mistakes of others by building a smart, professional, and market-oriented system. Support should go not to those closest to power-but to those most likely to succeed. With transparency, co-investment, and independence, Kazakhstan can foster a startup ecosystem that delivers real economic impact.