1. OECD Workshop on Entrepreneurial Ecosystems
and High Growth Entrepreneurship
The challenge of public/private (‘hybrid’)
Venture Capital programs
within the Entrepreneurial Ecosystem
Professor Gordon Murray OBE
University of Exeter, UK
The Hague 7th Nov. 2013
University of Exeter Business School
2. An ‘Entrepreneurial Ecosystem’
perspective
On the upside:
But …:
Takes policy seriously
Removes the ‘magic
bullet’ approach
Gives clear guidance
on weaknesses… and
thus priorities
? Increases complexity
? Requires
integrated/collaborativ
e policy approaches
? Raises the bar for
success
4. Early-stage Venture Capital investment
as a percentage of total Venture Capital
and Private Equity investment
60%
50%
EUR (2012) – 5.3%
UK (2012) – 1.1%
40%
30%
UK
20%
EU
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Ergo, let us assume:
There is a shortage of skilled and
successful early-stage VC funds
The median/average returns to early
stage VC remain persistently poor
Institutional investors have largely
abandoned VC
Government feels obliged to act on
supply-side issues
Most governments remain
inexperienced VC supporters and
funders
Government is often
on the
Horns of a Dilemma?
5. The state has been
riding to the rescue
and supporting
venture capital for
over half a century
Academics have
(increasing) been
studying venture
capital since the
mid 1980s
… so what have we
learned?
Did you bring
any money?
Oh. @:#*#**!
7. 1. Is ‘the learning government’ an
oxymoron … or merely moronic?
Government needs to
build up its own
knowledge resources in
order to design effective
VC policy programmes
and to be able to
negotiate with authority
with the VC industry in
setting realistic
performance and
incentive structures
8. 2. Yes. Good early-stage investment
managers do NOT grow on trees
Human Capital, i.e. sourcing
experienced and successful
investment management to the
new programme is likely to be at
least as large a constraint as
securing initial funding for the new
fund/programme
9. 3. Schumacher go hang – small is,
and remains, UGLY
The economics of VC fund
activity are such that
material scale and scope
efficiencies need to be
recognised in the initial
size of the funds raised
and managed. Several
public supported VC
funds are too small to be
economically viable.
10. 4. Learning by doing
There is a substantial
‘experience curve’ effect
in VC investing. It is
unreasonable to expect
that a new VC fund managed by new GPs - will
beat the ‘industry odds’ of
a very modest IRR
performance.
11. 5. Private investors (LPs) will need
(public) encouragement to participate
Given ‘4’, it is likely
that, at least
initially, incentives will
need to be
asymmetric to
encourage private
investors to participate
in hybrid VC schemes.
Jääskeläinen, Maula & Murray VC & Public Leverage
Research Policy 2007
12. 6. Spillovers are just that … ‘spilt’,
i.e. the interests of public and
private investors are not aligned.
Given a government’s public
objectives, a modestly
performing hybrid VC fund
can still provide sufficient
Gross Value Added and other
‘externalities’ to justify its
continuance in cost-benefit
terms. The critical issue is
maintaining the support of
private investors (Limited
Partners).
13. 7. Difficult to ‘crowd out’ when
no-one turns up to the party.
There is little evidence that
public early-stage VC
programmes ‘crowd out’
private investors given the
continuingly poor performance
of ‘classic’ VC investments
across the developed world
and the industry ‘shift’ form
early-stage investments.
14. 8. No, Minister this will NOT help
your re-election
i.e. successful VC is a ‘long game’
Public VC programmes need to
consider investments over
several rounds of finance (i.e.
successive funds) in order not
to be vulnerable to the
serendipity of economic cycles
or insufficient learning.
Accordingly, support for
venture capital needs to be a
cross party policy decision
that is measured in decades
rather than the life of a single
government (3-5 years).
15. 9. You can have a VC policy OR a
regional policy but …
DO NOT CONFUSE THEM
Public VC programmes
cannot be used to address
social or regional
inequities as a noncommercial investment
activity and expect to
remain credible to
commercial and private
co-investors.
16. 10.‘Field of Dreams’ versus ‘In your Dreams’
i.e. did anyone mention DEAL-FLOW?
Quality deal flow is a nonnegotiable requirement of
venture capital activity given
that it is premised on the
realisation of rare event of
exceptional returns from a
minority of portfolio
businesses.
The Fairchild Eight
17. in summary:
Please read the instructions on the label first
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The policy case for VC is not proven
It is a minority instrument, i.e. irrelevant
for the majority of firms
However, VC can – sometimes - have
positive and significant returns to both
the state and investors as well as to
entrepreneurs
Its use presumes the availability of high
levels of human and intellectual capital
+ a working entrepreneurial ecosystem
In the absence of such strict
preconditions, formal VC is in danger of
being wasted
Investors will always prefer the
government to waste its own money –
preferably on them
