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?
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