Seeding Entrepreneurship: How to Build a Venture-Finance Ecosystem
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an excuse for hiding behind the “market failure” mantra to gain political power. If governments are serious in judiciously using public resources to address a market failure, they should welcome such discoveries.
5. Subject financial support programs to the market test. When Yozma, the successful 1990s Israeli venture fund of funds, gave the private managing partners the option to buy out government’s stake in each fund at an agreed upon annual return, Yozma not only recouped the government’s investment (with about a 50 percent gain); more importantly it proved that it had permanently stimulated something of demonstrable value. This was a powerful signal to other potential venture investors that there was money to be made. Requiring matching funds by equity providers, royalty-based grant paybacks, and outright sale of government’s stake, are all ways to responsibly use public funds by testing them in the market place of profit-seeking investors.
6. Regulate-in easy failure, the quicker the better. To risk using an analogy, one of the major recent biological discoveries is how essential protein death is to protein synthesis and life, because the protein components get recycled and reused. Similarly, venture failure allows people, ideas, and capital to be recycled and applied more productively, IF there is an ecosystem that fosters this natural selection. As I have written in the Harvard Business Review, bankruptcy laws, transferring unemployment protection to unemployment insurance as Denmark has done, and credit reform all make it easier for entrepreneurship ecosystems to naturally dispose of their own “toxic assets.”
7. Build venture “chimneys,” not silos. The regulatory support of failure makes it much easier for entrepreneurs to take risk: Paradoxically, easy exit actually is a powerful stimulant for easy entrance. This circulation of entrepreneurial assets, which I liken to that of a chimney, also helps create and sustain the blaze of entrepreneurship.
Of course, there is no panacea—constant stakeholder dialog is essential, experimentation is necessary, learning from mistakes is necessary. It is not necessary to get things perfect, and it is very possible that from time to time, conscious violation of one or more of these principles might work because of other mitigating factors. But there is no substitute for having an appropriate set of policy guidelines.