This TechCrunch article on the NESTA emergency venture capital fund kicks off an interesting debate. I have meeting tomorrow where I might be able to raise some of the issues it touches on.
Mike Butcher says that he favours the “allocation of cash towards early-stage companies, and put what money this fund raises (if any) into small batches which are spread around. In particular should create 2/3 person teams who can build beta companies. These companies will need to pitch, just as they would on the TV show Dragons Den (in fact, culturally Dragons Den may prove more useful than we thought), to a body of people who know startups. Avoid, at all costs, allocating this cash to regional funds administered by pen-pushing civil servants, the woeful Business Links and local authorities.
So, put this cash into beta startups. Put £175,000 into 8 million startups not £2m into a few thousand.”
18 comments ↓
Answering this is at least a full post, if not a book
. But a couple of initial comments:
- The money needs to be allocated by people who understand starts ups (ie have worked successful ones, but also unsuccessful ones or have funded many companies). Why not out source the decision making like the Israeli government did: offer to match VC funding £1 for £1. The VC put their money where their mouth is, and the government puts the money where the VCs brains are.
- It should be used as seed money to kick off innovation, rather than bridge money to keep companies that probably would have died anyway above water. Let’s emerge from this next economic phase with a vibrant rock-bed of innovation under the country.
Tom,
I absolutely agree, with not allocating the money to Business Link and the like. My own experience of trying to use Business Link in Nottingham a number of times over the past 15 years has been woeful. Show any sign of competence and that immediately casts you into the “not in need” bin. I have had nothing useful from them because of this.
A fund like this could be great for promoting entrepreneurship during this tough period. Now is exactly the time to invest, strong companies are born from tough times as it forces people to cut their cloth and focus on getting to revenue creation far more quickly.
To that end I think it’s best focused at the startup end of the business spectrum. Most startups are boot-strapped with personal money or loans from friends and family and later angel investment to get them to the next stage.
I believe it’s exactly this kind of money that the recession and lower property prices will dry up. People will be a lot more wary about speculating their own money when their own value is under threat.
Dragon’s Den style entrepreneurial panels are a good idea. I believe successful entrepreneurs (who often have had some failures in their history) are far better placed to assess and critique a business proposition than civil servants.
I would however call for these to be operated regionally. Every city has it’s entrepreneurs, make sure they are represented on the panel alongside roaming industry experts. The combination should enable the panel to consider both the regional and industry aspects of the business in question.
I also wonder whether the Dragon metaphor should be carried further and have these panel members adopt an advisory role to the companies that receive the investment. Time is obviously precious to entrepreneurs, especially at the moment while they are navigating the current stormy waters, but if they could share the benefit of their experience that help make the fund successful in it’s aims.
Namely to drive the GDP of the UK and stride out of this recession fighting.
I would have to agree with Mike about spreading the fund into small beta startups. This would encourage innovation in many more areas, stuff outside of the box!
But it’s worth mentioning that support and ongoing community around those startups will make or break those 8 million companies.
I completely agree with Mike on this. The UK tech startup scene has been incredibly lively in recent months. Mike will know the percentages of companies that get past seed and VC funding stages, but without a thriving hopper of early-stage startups the sector will decline rapidly.
Sponsor a fund which keeps the hopper full, which will stoke the entrepreneurial fires, encourage bright technical talent to stay in the sector, and keep the VCs interested in taking up the next stages.
Follow his advice. £175K goes a very, very long way these days.
I think Mike’s right not to be happy, but I don’t agree entirely with his approach. I commented on Techcrunch (reposted here, sorry in advance for the length):
Erm, I mostly agree with what’s being said.
But…
I don’t think all of the money should go into start-ups. By their very nature they are the highest possible form of risk and surely, if we’ve learnt anything over the last few months, putting all of your cash into the riskiest investments can lead to tears before budget-time.
I’d advocate a 3-tiered approach, someone much smarter than we should figure out how the amounts should be split down:
Start-ups
A substantial chunk of cash to fund start-ups, to support through through incubators and other support services e.g. the scheme at Westminster University out in Harrow and the Institute of Digital Innovation on Teeside which have both generated companies and provide lots of support.
Intelligent use of the crowd’s wisdom wouldn’t go amiss and these folks tend to be well plugged in to the more traditional sources of advice like Business Link and many of the newer virtual groups, too.
Supporting SMEs
Providing growth capital for smaller business through R&D schemes, support for intern programs to help cross-training and bringing graduates into the knowledge economy which would otherwise be out of reach of these companies. Supported through universities and local advisors who could help run and structure these programs.
Plus, and most importantly, expansion of the Small Business Loan Guarantee Scheme slicing through the red tape and making it feasible for a wide range of businesses to take part. We pretty much own the banks these days, so getting them to take part in this actively should be less of a stretch.
Other support for tax breaks for smaller companies – without overseas tax havens and a phalanx of lawyers, smaller companies get stung for more tax while larger ones better able to pay it manage to wriggle free.
Government help should be expanded for companies looking to expand their markets outside of the UK through trade missions, help internationalising their profits and also defining the UK as a centre of excellence for all things digital.
Research & Development and Social Enterprise
We know the open-source movements and the development of standards have changed this industry beyond measure. Now’s the time for the government to support these movements not with tonnes of cash necessarily, but with grants to allow some of the great technicians about to spend quality time on projects that support the industry as a whole but don’t generate direct profits on day one.
And in the process of doing this, the academic sector needs a royal kick in the butt. The way courses and structured and delivered needs to be radically updated so they’re up-to-date when deilvered, connections with industry are built-in from day one rather than an after-thought.
Further on this tack, there should be funding available for older companies to spin-off new ventures into start-ups as we know it’s almost impossible to innovate within large-scale older companies. Some cash plus support from the originating company but a hands-off approach would unlock some of the massive IP that these companies are sitting on.
Holy monkey. I didn’t mean to get on quite such a rant. I’ll go and lie down now.
The government is a huge customer – and local government is even bigger. It really isn’t very good at procuring suppliers and has a huge bias towards large monolithic businesses that deliver projects of a questionable quality.
If HMG wanted to help startups, it would allow them to meet senior civil servants, point to bits of work that are being done by the usual suppliers and say “we could do that more cheaply – and we’d care about the outcome as well.”
Tom,
good to see that you are taking an interest in this debate. There are many good things that the government could do to support start-ups. There are also many things that it can do to support SMEs.
The one key message that, if you could get it across, is this:
Start-ups are companies that are younger than three years.
SMEs are small companies.
They are NOT the same.
Obviously, start-ups are small. Yes, they are SMEs. But the vast majority of SMEs are not start-ups. They are simply small companies that have been around for a very long time.
The point is this: good support mechanisms for start-ups have absolutely nothing in common with good support mechanisms for SMEs. They are fundamentally different.
Good support mechanisms for start-ups:
- Creation of small VC funds (e.g. Enterprise Capital Funds, e/g/ 3i when it was founded 50 years ago, it invested in start-ups for some 40 years of its existence)
- The old SMART awards (not the ones that replaced them)
- SBIR-like grants that are awarded to tech start-ups (doesn’t exist in the UK)
- Entrepreneurship Centers at universities (possibly biggest bang for the buck that there ever was, sadly discontinued)
- Low capital gains tax for founders (who can re-invest in other companies at a later stage in their lifes)
- Low company foundation cost (UK is already best in Europe)
Bad support mechanisms for start-ups:
- Advice centers/schemes (e.g. Business Link)
- Direct investment schemes (never worked, countless number of schemes)
- R&D tax credits (as a pre-revenue start-up I get National Insurance back. That helps, but it doesn’t change my game)
- Collaboration grants (start-ups have no personell to administer this, they also defocus companies)
- Any form of EU grant (the way in which the cash flow works would destroy a start-up, this simply doesn’t work)
If you want to hear more detailed thoughts on the subject, I can be reached at:
info AT jenslapinski DOT com
The trouble with social tech start ups is the need for big front end investment in technology and community building – some high potential but risky and difficult startups could be at risk due to lack of investment long term enough to ride through the story and build their idea. Start in the social/creative sectors – a bit like C4IP?
The idea of £175K into a million start-ups is definitely preferable to a million into a few thousand. Although I’d say not just start-ups, but high growth young companies.
My company, and I know of many others in a similar position, is growing very rapidly but this means cash flow is our biggest problem. And its one that in the current climate banks don’t/won’t/can’t help with at affordable rates. Even things like the Small Firms Loan Guarantee Scheme are hampered by the fact you have to go via a ‘useless’ bank to apply.
I agree with Mike Butcher. If you need millions you can still get it, if the business plan is strong enough.
The smaller sums will be riskier but support businesses that are finding it most difficult. Small money can help them demonstrate proof of concept which will give the larger financing market the evidence it needs to reduce their risk.
Wow, thanks for you comments. I think I better meet these NESTA guys to talk about this.
Here’s some other comments from Twitter:
http://twitter.com/danversbaillieu/status/1044949008
http://twitter.com/OllyWhatTalent
http://twitter.com/markashtonb
http://twitter.com/tombeardshaw
The comment “£175K goes a long way these days” is at the forefront of my mind.
Excuse me, but why the hell should this government set up a venture capitalist? Aren’t we giving fund managers enough in the bail out? Is this a Labour and Cooperative government or a Labour and Capitalist one? At worst, the money should be split between Venture Capital and a Common Ownership Fund.
Sadly, I agree with many of the comments above about not rewarding bad Business Link – I tried to get advice from them last month (the Business Support Simplification Programme seems to be killing off other government-funded support) and got pretty much nothing except referrals to people who can’t or won’t advise us.
The same debate is being had over the water. Intersing point about relying on lobbyists to moderate conversations with politicians. Much better to get CEOs and the elected to talk directly says the author. Here here.
http://bostonvcblog.typepad.com/vc/2008/12/the-government-is-here-to-help-mit-vc-conference-panel.html
To ensure a maximum return investments need to be targeted towards ideas that have legs, market tested and to entrepreneurs who are able to deliver or at least recognise they need a help/a partner.
A local Technology park near me has a big problem!
They managed to attract some fantastic innovations but the scientists and inventors like to do just that! – They do not have the management skills and commercial aspiration to fully realise the business potential – they are emotionally attached to their ideas and therefore unable to sit above the business and see it as a commercial venture.
The park is now full of micro businesses going nowhere which does not provide a good return for the tax payer who subsidises the park – this is a huge missed opportunity.
Surely a condition when accepting government handouts should be a contractual commitment by the entrepreneur to accept the necessary help to fully realise their companies’ potential – thus benefiting the economy and the tax payer. If the entrepreneur has a problem with making money they can always give it away to charity or other potential entrepreneurs.
The science park is full of micro businesses going nowhere blocking access to other entrepreneurs who may have better big ideas.
[...] easily participate in debates (if you are in a start up, you might want to join this one: ”How does the government support technology start-ups in a downturn?” and the one on TechCrunch UK), and we can read around a topic, rather than taking just one [...]
I can’t quite believe it has taken me so long to join the debate, but here’s my penny’s worth:
Firstly, I wholeheartedly agree with Jens, but the interesting fact is aside from a few minor differences of opinion, what you find here is that we are all violently agreeing. So why doens’t government listen?
Contrary to what some might think, I actually believe there is a place for business link (just not necessarily in its current format), but it is not THE answer. The fact is there is no one answer. We have to be collaborative. We have to be brave – we have to CHANGE the staus quo. This has to be driven by SME owners and entrepreneurs, not by policy makers in isolation.
The question over how to finance / fund start-ups is clearly not just amount money either. For some businesses £175,000 will go a long way, for others it will only scratch the surface. Why do we need to produce a one size fits all solution? It won’t work.
If a business has the chance of being incerdibly successful, but it can only get £175,000 of funding, you will strangle it at birth. For those businesses that show real merit, there has to be follow on money. Of course they need to meet criteria / targets, but if they do, the necessary money to enable their growth has to be there.
Money alone is not enough. Advice and support, both peer to peer and professional is crucial.
Everyone has commented on the importance of leveraging the experience of successful entrepreneurs for the benefit of new and growing businesses. From my experience, entrepreneurs are one of the most giving group of people – ask and ye shall receive.
But you have to take action. Listening is not enough. As the old saying goes ‘Money talks, ******** walks’
Or, we could incentivise entrepreneurs with tax breaks that reward startups. Say, a reduction in Capital Gains Tax for starting and staying in a company for a period of time?
Oh no. We just scrapped that, in an attempt to get at private equity companies who were exploiting this – in doing so, stitched up all the entrepreneurs!
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