Fish out of water

A very good analysis of the shortcomings of public sector involvement in promoting entrepreneurship and venture capital in this week’s Schumpeter column in the Economist. Interestingly (but perhaps not that surprising) it is Israel which emerges as the most successful promoter of such initiatives:

“The Israeli government’s venture-capital fund, which was founded in 1992 with $100m of public money, was designed to attract foreign venture capital and, just as importantly, expertise. The government let foreigners decide what to invest in, and then stumped up a hefty share of the money required. Foreign venture capital poured into the country, high-tech companies boomed, domestic venture capitalists learned from their foreign counterparts and the government felt able to sell off the fund after just five years.

Last year Israel, a country of just over 7m people, attracted as much venture capital as France and Germany combined. Israel has more start-ups per head than any other country (a total of 3,850, or one for every 1,844 Israelis), and more companies listed on the NASDAQ exchange, a hub for fledgling technology firms, than China and India combined.”

The question we should be asking is: what can be done to replicate that success here? We have no shortage of talent, and plenty of would-be entrepreneurs, it’s just a question of harnessing those ideas and providing easy access to VC funding. More initiatives like the Enterprise Finance Guarantee (formerly the Small Firms’ Loan Guarantee Scheme) would help, but with an emphasis on providing access to equity as opposed to debt funding. As I’ve discovered myself, the SFLGS sounds great until the sponsoring bank requires security for the part of the loan that is not guaranteed by the Government.