November 26, 2012
Readers of this blog will know that I post my thoughts about innovation policy from time to time. One of the key areas – at least in my mind – of the innovation policy area is that of funding. Typically an entrepreneur with an idea does not also have the required money to back the project.
Over the past few weeks your author has been reading about this a lot. I have an idea and do not have the savings to fund it. Looking into this arena from a practical perspective is much harder than from a theoretical policy perspective. Questions such as what should happen and why rapidly become when, how and who.
The phrase ‘venture capital’ seems to be used as a catch-all for many. They seem to be discussing financing in general when of course, venture capital is typically a late stage funding option for existing ventures that have some sort of IPO or exit in mind in a few years time. For the much smaller project (such as my own), venture capital would not be of use. My idea of a worthwhile investment would be a long way short of their idea – it wouldn’t be worth their time to even meet me…
For the smaller scale projects, business angels (from family and friends to wealthy investors) are more likely to be the answer. But that isn’t always an answer either. I for one, have very high-hopes for my idea, but it might not work. If it doesn’t work, I have no intention to pull my family and friends down with me!
This is a complex and confusing area of finance and policy for sure. That policymakers are yet to figure it all out and make improvements is no surprise. Having moderated a VC policy event a couple of years ago, it was clear that the VC titans and business angels in the room did not have the answers either. And so, this is one of the issues that the EU really needs to find workable solutions and answers to if it is to find the high-growth companies1 that can help reverse the economic malaise and unemployment we face.
It isn’t all about the Benjamins
One problem that I think is very difficult to overcome is that of the role of capital. Money is important, I get it, but not that important. It is, I believe, the ultimate commodity. It all looks the same, it is printed by central banks in ludicrous quantities and often is just a number on a screen with no physical form. You can get it from any ATM machine and essentially it is everywhere. And yet, we recognise it’s power to the extent that we suplicate to it at every turn. Venture capital (even I am using the term as a catch-all now!) is important but I think that we are too deferential.
In contrast, the good business ideas aren’t all that common. I know that I have lots of good ideas, but only a very small number that are big enough to really pursue. Without being unkind, most people don’t have either the idea or the cojones to pull a start-up off. I might not. There ought to be a lot of money out there for a good idea…!
As a policy and legislative community, there needs to come a time when alternatives are established to the VC industry because we need them. Ultimately, crowd funding is such an idea and it is happening without any help from government. People see good ideas and want to fund them. On a smaller scale, there are micro-finance websites that enable the public to participate in projects in the same way as Grameen Bank does. Some innovative people with an idea and an online solution are changing the world. These platforms will not be the ‘VC killer’ that has happened to many other sectors (such as stockbroking and publishing) but it will come. It is only a matter of time.
Is VC in Europe working?
At the moment, the relationship between policy and industry does not seem to be very clear to me. I know there are many working on this, but I think that the dynamic needs to change. While on the one hand the VC industry tells government that “we know what we are doing” and to “get out of the way”, we all know where that approach to financial services has lead us. More importantly, the system does not seem to be working in the way the European economy needs.
That said, I am not convinced that government is the right format for business financing either – the rules and regulations imposed on start-ups to access the finance are often ridiculous. Personally, I know enough to know how I’d get financing from government and also enough to know that I don’t want it.
This is an almighty mess and it needs our best minds to try and improve it. Clearly I do not have the answers, but we need to find them.financialguy