Technofile Europe: NESTA-Brown Ventures LLP

Just when you thought the US Congress was gunning for a monopoly on bad ideas, along comes the stumbling Brown administration with a whopper of its own. It takes the form of a purported £1bn venture fund for UK technology start-ups, supposedly left behind when 3i decided to get out of the venture game to focus on growth equity and buyouts.

Fred Destin does a great job dissecting this issue here. All I would add is that governments playing VC rarely leads to an increase in the number of successful companies. Post-war reconstruction (via 3i) may be the exception, but that was only due to the complete absence of private sector funds. There is no shortage of investment funds for start-ups today. In fact, the industry is still trying to work through the overhang created by record fundraisings in recent years.

I suspect no one has told Brown that VC funds -- unlike hedge funds -- can't pull out of a market on a dime. They're usually locked in for 10 years, which makes it pretty difficult for them to react to a recession by pulling back.

Government intervention in the venture capital industry has at least 3 deleterious effects:

it prolongs the life of bad ideas and wastes the energy of the people involved in them;
it crowds out smarter private investment; and
it pushes valuations to unnatural levels which makes it more difficult for the few successful companies to raise follow-on financing.

Oh... and most government funds (or funds benefiting heavily from tax breaks like VCTs in the UK, or FCPR funds in France) attach so many strings to their investments that their portfolio companies are strangled by shareholder constraints that prevent them breaking loose from the pack.

If Brown wants to promote the technology industry, he should reduce the bureaucratic and tax barriers to setting up private venture funds, support basic R&D at universities, and consider tax breaks for entrepreneurs.