Economic Development Myth 12 - We've Tried That Before

I’m just finishing off two events that remind me of the phrase:

We’ve Tried That Before

The corollary, in reality, is this belief:

It Didn’t Work, So Why Try It Again?

The first event was a dinner meeting with a group of VCs and an executive from an early stage startup; the VCs are - for the most part - people I worked with or for during the heyday of the late 1990s, doing go to market strategies and market / competitive landscape strategies. They’re now back in the business of moving video from one place to another, but doing it with handsets instead of desktop computers (the song’s the same, only the devices have changed).

The second event is a recap article I’m writing for one of the magazines I have the honor of writing for in my spare time between consulting projects - www.streamingmedia.com - as the magazine / website turn 10 years old this year. This has brought me back into contact with another group of peers that I’ve interviewed to find out “where are they now?”

Guess what? Some of them have moved to different industries but are shaking those industries up as well (one went into real estate technology, another into early influencer marketing, and a third into fashion). Still others have taken a break from the work, after selling a company, and are back in the game in the venture, angel or executive role. 

Some of them are even trying again what they tried in the late 1990s but couldn’t complete because the technology, environment and user base weren’t honed to the level that they now are.

So the next time you hear a government official say “we tried that before,” give this one back to them

If the situation is exactly the same - including the same customers, constituency and backers - maybe the failure wasn’t the idea. If the situation is different, are we trying it again or a different way?

My favorite use of the phrase “We’ve already tried that” comes when talking about entrepreneurs and incubators. Those government agencies which have tried an incubator and failed did so not because they didn’t have potential success stories, but because they refused to prune the system of the dead wood of “wannabe” entrepreneurs to let the true success stories grow. And then they made matters worse by stunting the success stories by asking them to remain as “anchor tenants”. Entrepreneurs that use incubation the right way get the heck out of Dodge when it’s time to grow, and then return to the incubator again when it’s time to seed the next idea.

Pushing the incubated business out the door often means you’ll get two or three more within six-seven years from that same entrepreneur. My former colleagues - the new VCs - will attest to that as many of them are looking to start private incubators to remedy the ill-attempted public incubators.

Economic Development Myth 11 - Seed Capital Must Be Private

I’ve often heard this phrase:

Seed Capital Is a Private Affair

At the core of this myth is this belief:

Government funds can’t be used to benefit a particular entrepreneur

I’ll be the first to say that government money (with government strings attached) isn’t in the best interest of entrepreneur: for one thing, the government’s not really qualified to make direct investments, and cronyism or nepotism could more than likely result.

There IS a way that works for government investment in the best and brightest, one that is being used in countries that have a limited amount of seed capital and one that fits within the boundaries of Myth 3.

In a fairly timely conversation, I just spent an hour with an investment manager that walked me through the way that Denmark is approaching seed capital. Denmark has Lego, Skype and a few other key industries but had never really figured out how to do seed capital.  Then, in 2005, it decided to put place a seed capital fund in the hands of a private investment firm called, appropriately Seed Capital. The first fund, at DKK 500 million (just over $100 million), was established in 2005 and required that at least $60 million of that be directly invested in new businesses and the remaining was invested as shares in existing businesses.

The fund’s investments are to be made by a team of professional investors with experience within financing of businesses in the very early stages as well as experience in the combination of public and private sector financing.

The investment partner told me an interesting thing happened: at first the government wanted to completely protect their money, which makes an investment manager’s job impossible; then it moved to asking for just half the money back, at least getting the point that some companies are going to fail (most, without incubation or mentoring) and need to be put down, regardless of whether they’re funded by private or public funds; then finally on to requiring a particular ROI from Seed Capital.

Based on the current capital base, the fund is expected to be able to invest in between 20 and 25 new businesses. The goal for the fund is to raise additional capital during the next year.

Guess what? Here’s the great part: the investment managers can also pick a few of the growing companies that they’ve invested the public funds in, and then put VC money into them for the second round. In essence, the 10-12 companies per year that government capital is invested in may yield a few companies that are ready to move to the next level, and the private VC money that is used matches or far exceeds the government funds put into the initial seed capital fund.

I know, some will cry “foul” because a few people profited off of it. But look at it this way: these people (the VCs and investment managers) will make this money anyway on other deals. The lack of serious capital within the country (or in a state, for instance, in a US example) only means that the VCs may have to invest in another country (or state).

What are the implications of that? No tax revenue, no jobs and eventually no entrepreneurs - a vicious cycle that’s not beneficial to anyone. On the flip side, government seed capital, in the hands of a wise investment manager means wealth creation for entrepreneurs and company owners, returns for the government, and jobs for the workforce.

In other words,

The government’s way of “investing” via tax abatements has no benefit to the startup entrepreneur; try investing the way an angel or VC fund would invest for measurable results.

How ‘bout them apples?