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- Jay Maharjan
My recent visit to London and my interaction with scholars at the London Business School and London School of Economics had me thinking about the venture capital model in the UK versus the one that we have in the United States. Venture capital model is no doubt the way to go to encourage entrepreneurs to take risks and focus on scalable innovation. The subtle differences that I found in the UK are that the government seems to play a major role in the venture funds. The way the UK government gets involved varies in scope, but the involvement is quite rampant – the last one being the 1 billion pound fund launched last year calling it ‘the fund-of-funds’. Government involvement changes the dynamic of private venture capital model and it is important to understand the implication of variation in dynamics.
According to the World Economic Forum’s “The Global Economic Impact of Private Equity report 2010″‘ entitled Governments as Venture Capitalists: Striking the right balance, came up with quite surprising results. The report found that VCs with moderate government support do better than companies with pure Private venture capital. However, ventures that received more than 50% of funding from the government performed poorly. “At high levels of Government Venture Capital support, additional government support reduces success” the report says.
This takes to my earlier claim in my previous piece that the reason that entrepreneurship is more successful in the United States over the UK is because entrepreneurs in the United States are given far more independence whereas venture funds in the UK tend to have higher government influence. In turn this creates a culture in the EU with strong influence of doing things the old way – more using a consensus driven model than the true independent undertaking found commonly here in the United States.
Entrepreneurs by nature are free thinkers, independent workers with remarkable ideas. Consesus based undertaking kills the entrepreneurial spirit and usually unnecessary bottlenecks are created during evolutionary phase. That is the reason Bill Clinton was stating in Yesterday’s White House Press conference that the key is to leave it to the private sector to self manage and self govern - leverage on 1.8 trillion corporate treasury (with 6.2 trillion capitalized value / another group sitting on a large capital base) to encourage investment within the United States. The rationale that Clinton articulately makes is that this group of investors are not interested in investing in economies influenced by governments or else they would have done it already.
Having said that Government intervention has worked relatively better in some countries over the others. According to the study, Australian government backed VC has been the most effective in terms of outperforming Private VC in that country, followed by VCs in S. Korea, France, US, China, ROW, UK and India. The countries that fall behind Private VC include Germany, Japan and Canada. Some Venture capitalists believe that Government involvement in funds allow taking risks with disruptive technologies as they wouldn’t need to worry about ROI.
In my view, government intervention during commercialization process is a bad idea and it is a recipe for disaster. However, early stage grants, R&D support and co-sharing risks with disruptive technologies would be of big help for entrepreneurs. Beyond early stage evolutionary development and R&D, the governments should stay clear from commercialization process.
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Jay, here is a good piece talks about how The US government is steering away from commercialization and how it prefers financing more fundamental research and leaves applications to industry. http://korrekt.com/technology/biomedical_applications_of_nanotechnology/biomedical_applications_of_nanotechnology.pdf
yes that’s how it should be. rationale is fairly simple. marketing, commercialization is more of an art, drive and persistence. End of the day its about incentives for parties involved when it comes to sales and commercialization – and it is best left to the private sector.
In the U.S. we have the SBA which in my opinion is worthless.
SBA model is outdated. Its worse than government backed venture capital. SBA lending follows lending criteria of a brick and mortar banking institution. Banks have never been in the forefront for funding innovative start-ups like eBay, Google and Facebook. None of these business models would probably qualify for any form of loan on its own merit under SBA guidelines.
US embassy cables: Branson says British education does not instil entrepreneurship http://www.guardian.co.uk/world/us-embassy-cables-documents/139255
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Branson is about the only British entrepreneur that I can think of!
the leaked cable on British entrepreneurship is fairly accurate. As I stated in this piece, enterprises and people in general in the UK are driven by class and social status over risk taking, assertive behavior that entrepreneurship demands. Having said that I did find that the UK government is trying to encourage students at business colleges to change that habit. One thing I observed – I met several American implants holding on to some key admin, management positions at some of these schools. would be interesting to see breakdown on backgrounds of entrepreneurs who are succeeding in the UK.