VCs snaffle £200m of UK taxpayer gold ... to bet on high-risk biz The UK government has showered venture capitalists with £200m of taxpayers' money for high-risk investments, the science and universities minister David Willetts told MPs today. Willetts said £50m of this cash has already been set aside as an angel investment pot. “For the first time, we’ve said we’ll co-invest,” he said. …
Conservatives traditionally only support state intervention in cases of market failure.
If you only listen to party speeches you might think so but policy decisions would indicate otherwise. Railway privatisation springs to mind as a nice way of spending more money after privatisation than before it.
[quote]Conservatives traditionally only support state intervention in cases of market failure[/quote]
I nearly fell off my seat laughing at that statement. They are quite happy to support their friends/relatives/business associates and their associated businesses. Especially if the relationship involves sponsorship of the party !
I have been trying to get investment for a long time. No one will lend though they all are really interested and would like to be on board if I get it all set up.
The problem? I need money to set it up but no one will lend. They still won't lend with this. Money going to where there is already money again!
Hi Tim Worstal,
You were defining a gift, much like the money the banks got from the taxpayers under false pretenses. But don't get me started on that.
A gift woud be equity, since it not going to be paid back, however, an investment is paid back with interest, or net income or percentage of revenue. Therefore, an investment is a long term liability on the books.
Here's a link: http://www.investopedia.com/terms/r/returnoninvestment.asp#axzz26WBi7d2e
An investor usually protects their investment, by having a say in the way the company is run. Government, on the other hand, does not know how to do that, due to their general incompetency and poor business acumen, so the money is gone forever.
Hang on . . . yes, you are correct! Government investments are equity!
So why are they doing this? To get more startups? You'll get more pets.com type failures this way.
If you want startups, you first need to know what attracts them. Looking at silly valley, it's easy to surmise that big companies do. But this isn't so. They just started out as small ones, once upon a time, and stuck around. Does the government understand that correlation is not causation? Has the government given thought, or rather paid someone too much to pretend to give a thought or two, about what really attracts, or better yet, brings into being, new startups?
VCs? They're investors. And poor ones at that: They throw money at any one wild idea, or rather a lot of them, in the hope that a few will pay off big. A hundred startups for a hundred million? Just hope one of them is the next facebook so you can rake in a hundred milliard, maybe. Then see the stocks tank and you run, but I digress.
So who will bring the magic? Have you looked at what worked elsewhere, have you understood it, are you making it work? Well, no, the government isn't. It's just doing that it does best: Squander other people's tax money. As long as the money keeps going 'round and 'round, everybody wins, right? Right, carry on government.
And so, you ask, AC, do you know the answer? Well, I do know an answer. Found it on the internet, of all places. And it's more than six years old. Should be time enough for the government to catch on, right? Right?
... but not more so than VC's (who also subsidise bad ideas "most ventures fail"). But VCs works because on average they make money, so a priori so might the taxpayer.
Whether taxpayer-backed VC's are more or less successful than private ones, I do not know. But since you might consider some funding for academic research as a sort of VC-like process (i.e. sometimes you get a big commercial or societal benefit back), it's not fair (without evidence) to suggest ("subsidy for bad ideas") all taxpayer-VC is somehow automatically wasted.
it's not fair (without evidence) to suggest ("subsidy for bad ideas") all taxpayer-VC is somehow automatically wasted"
The dismal performance of government grants in creating or protecting jobs is probably a good proxy for the likely performance of state VC funds. A particular problem that the state always has is that instead of the complex enough goal of "go away, turn this one shekel into several more", it starts adding caveats abour "creating employment", "tackling climate change", "improving diversity and equality", "regional development", and suddenly the purpose is lost in a fuddle of immeasurable and often conflicting intentions.
Look at how the English Regional Development Agencies spent two billion quid a year for several decades to achieve nothing (other than some over payed jobs-for-the-boys). Or, over thirty years, the Welsh Development Agency spent about two billion, yet Wales is still a public sector theme park. Look at how we're on the hook for billions of debt because the last government backstopped the investment in the Channel Tunnel link on the basis of clearly made up traffic forecasts (a failing which the current shower are repeating for HS2). Look at the persistent failure of government to manage conceptually simple cost reduction projects, like the national Fire Control Centres project. Government can't do commerce, it really is that simple.
The unfortunate liklihood of the government VC investment is that it will become a limited partner in real VC's schemes. But as an LP, with no relevant oversight expertise, they will be the ones on the hook for first losses. Private equity & VC companies are smart, and self centred, and the chances of them sharing the average gains with government seem vanishingly slim. Or, if UKFI set themselves up as a GP or a VC house, they'll be the finance house of last resort. Anybody with any sense wants more than just money from their VC, but do you think governement is going to be able to help you run your business better?
Paul Graham thinks Silicon Valley started because of rich individuals? You don't think this is a rich individual pleading for special treatment?
Silicon valley started because of large companies like HP luring techies there. HP went because there was a market for lab equipment for aircraft factories that moved there because they could build things outdoors and land was cheap.
So Silicon valley is there because of orange groves.
Andrew don't be so sceptical, this is a good idea and needs to be massively more than £50m.
Bottom line is VCs are more effective than government quangos at selecting and supporting the successful start-ups this country needs. Co-investing is a force multiplier whereas subsidies are a black hole. More detailed explanation below for the freakonomics readers among you.
VCs may lose money on most investments, but make it exceptionally big on a few. Studies differ dramatically and suffer from timing and survivor bias, but even in the USA, the most competitive VC market out there, the average returns for VC investment funds is meaningfully above stock market return, in the order of 15% (e.g. http://faculty.chicagobooth.edu/steven.kaplan/research/kaplanlerner.pdf) . This is explainable from an investor behavioural bias point of view, but tragic for both the UK economy and for company founders seeking funding. It means that there is a whole spectrum of investments with on average good solid positive returns that are not being made due to lack of capital and secondly that founders are getting low valuations for their companies (disincentivising people to dream up and action ideas that have the positive returns). The only beneficiaries are the Dragons and other VC backers who are rich enough to disregard the fear of loss for the comfort of statistical averaging.
So should the government invest in VCs? From a cost perspective UK Gov can raise debt at c. 1-2%, and take a sufficiently long and steady view that many of the volatility risks of investing are not seen. So certainly they can afford to invest, but including the impact on long term tax take, is it a better total return investment than infrastructure, or NHS/teachers salaries? IMHO the reason that VC investment makes sense for governments whereas equities much less so (though there is a case to make for for sovereign wealth funds) is that in addition to the potential financial return on investment, £1 spent via VC will be rapidly injected into the economy via startup spending (e.g on staff costs generating tax income, reduced dole costs, and second order effects as staff spend their salaries). Invest £1 into VC fund, generate c.20p tax/savings, and you can break even as a government even when the VC fund makes a small loss and returns you only c.90p ( 20p+90p = £1 + c.10 years funding costs at 1%).
Now you can argue that the government is already doing this to some degree - investing into startups with Enterprise Capital Funds. Except here's the rub. Who do you trust to invest in the right companies? Your local government quango appointee, or the fund with a prove track record earning 15% returns and helping the startups in more ways than just cash. I believe governments should just piggyback on the highly successful VC knowledge and incentivisation structure and link the fee structure they pay VCs to long hold times and proportion of UK based staff in the funded companies. The appropriate investment levels by the way are measured in the billions, not in the £50 millions. The appropriate quantum is dictated by the point at which average VC returns are reduced to slightly below equity market levels of 5-10% (which is the point at which government should be economically indifferent to buying stock in listed UK PLCs and hence supporting the IPO market which indirectly feeds back to VC funding). A good start would be to heavily trim this 'Technology Strategy Board' and redirect the £390m.
Everything you propose could be achieved by stimulating the wholesale capital market through (for example) cap gains tax changes, eg, persuading the superrich to have a flutter.
"£1 spent via VC will be rapidly injected into the economy via startup spending"
If the economy was comprised of Shoreditch bars serving mojitos to Nathan Barleys, you well be right. It doesn't, and money doesn't grow on trees. Budget choices must be made.
1) There is no shortage of VC funds for good ideas
2) There always are more bad ideas than capital available to fund them
3) Increasing the amount of capital increases the number of bad ideas that get funded
4) The taxpayer therefore subsidises bad ideas
So please tell me: when social services are being cut, should why should Nathan Barley get a subsidy?
Pls define your use of the words 'subsidy' and 'good ideas'. I would use 'investment' and 'ideas + teams with returns exceed their cost of capital'. I'm suggesting that there IS a shortage of funds for the latter. I accept one can only prove this on the global average return and (lack of data) not the incremental investment that you are suggesting goes only to 'bad ideas'. Anecdotally though, the sucessful funds employ a large degree of investment scattering. This suggests it's rather hard to know in advance which ideas+teams are good and which bad. Certainly the founders of google must be rather glad there were some 'incremental VCR' funding above that available through the first few VCs that turned them down.
I confess I dont work in VC and don't know Nathan, if he is one of the shoreditch 'why can't I make money by ignoring property law' crowd then I sympathise. Nevertheless he should get VC funding (in which the government may be one of the fund investors) if a VC with a track record feels he is investable. Nobody should be getting a government subsidy
Just tried the post code checker at AngelCo Fund and was amused to see that one of the most desirable and expensive parts of London is eligible.
I'd argue that if an idea is good enough it shouldn't matter where the business is based. It seems the Gov think so too.
"The Angel CoFund will not invest in post codes which score in the top quartile against all three of these measures.
Education: 71%
Employment: 97%
Income: 90%"
http://www.angelcofund.co.uk/looking-for-investment/post-code-look-up.htm
And what proprietary trade secrets would El Reg be able to offer for unlimited bungs of flash cash, diodesign, lest they disappear abroad to the competition and/or opposition ..... for that is both the fate and destiny of futurebuilder great game changers and simple available choice if home governments and special relationship partners are primarily focussed on existing power systems and elite proxy puppets remaining in control in systems which bypass their needs and concerns.
And if you think such as limitless bounty to fund a dream which can easily morph itself into a nightmare is an impossible and unlikely fiction, what on Earth do you think Uncle Sam and Helicopter Ben Bernanke and the Fed are doing in and to the virtual market place, other than throwing money at a problem which they don't have the proporietary intellectual property to solve or stop it collapsing the dollar economy. ......... http://www.zerohedge.com/contributed/2012-09-13/fed-panicked
And the last sentence in that Zero Hedge analysis says all of the above quite succinctly ........ We need a new direction.
Good article but again HMG focus on institionalised innovation and fail to recognise real issue of commercialisation. All their initiatives in "IT" are failing. Skunk works, Innovation launch pad, Solutions Exchange and even the GCloud -all PR jargon! No one made responsible so guess what it does not happen!
Vulture capitalists don't all make an average of 15% on their investments. Some of them go bankrupt. Some of them stop making high risk investments before they declare bankruptcy. VC's nearly always take keen and active interest in the companies that they invest in, constantly evaluating progress, management decisions, expenditures and market conditions. A government VC organization would probably just require scheduled reports that could be cooked or are so generic as to be useless. If the (or a) government has some surplus cash to throw around, how about a raise for teachers. How about improvements to public transportation. Or, cringe, a reduction in taxes.
Re taxpayers money: consider that £1 billion worth of bank bailouts is the equivalent of seed-investing £1m in 1,000 startups. So if you take the £860 billion that was spent on bank bailouts just in 2009, of which I am sure at least £100 billion went to banker bonuses, you could have started 100,000 companies in 2009 with a seed of £1m instead of dropping £100 billion worth of bonuses on city bankers (aka friends of politicians).
What do you think would have been the better option for UK Innovation, creating UK jobs and have a chance of a return? Banker bonuses or equity investments? You would think perhaps UK could have had another FB or Google growing by now out of those 100,000 bad ideas...
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