Venture Capital: Public Funding vs. Private Financing

I have to admit that the title is intended to attract attention to “Venture Capital: Public Funding vs Private Financing”. I don't really think that public funding can or should compete against private funding, I simply see them as complementary. Private financing is structured on the basis of good practices, perfected over time, and basically depends on the capacity - but above all on the experience - of private analysts employed in the context of venture capital firms. On the other hand, public funding is a more slippery terrain, in which there are significant opportunities for improvement. However, before starting to suggest improvements, I would like to make clear important aspects of the prevailing system in Spain. The first of all is that there is a system to promote the creation of innovative companies and the development of new technologies. The system works and so far, in the course of my work, I have encountered first-line officials, whom more than one private company would like to have among their management cadres. In particular, it must be recognized that the CDTI and ENISA are doing a very commendable job. Of course, everything can be improved and faced with the question of how public funding should be approached aimed at promoting the creation of innovative companies and technologies to extract the greatest social benefit, I would like to suggest some ideas. The first are related to the mechanism chosen by organizations such as the above-mentioned CDTI or ENISA. Currently, both organizations, after detailed analysis, decide to invest in innovative companies through the participatory lending mechanism. While this instrument has advantages — especially when startups are doing poorly — it also has a clear disadvantage if investments ultimately work out and companies prosper. A relatively simple way to improve this is to copy what venture capital firms do from some savings banks: add an option to buy shares to a pre-agreed valuation to the shareholder. This would have two positive effects: a) it would give the state a positive “upside” if things go well (which could then be used to reinvest in other new ventures) and b) it would limit the ambitions of entrepreneurs to ask for as much as possible... since if the loan is subject to conversion they will be more than encouraged to ask for the minimum necessary so as not to have to give up a very high percentage of shares. This should be extended to all loans for innovation and technological development granted by the state and autonomous communities. I have doubts, on the other hand, about the effectiveness of programs such as Plan Avanza. To begin with, these programs generally operate on more complicated, fuzzy, and ambiguous bases and criteria. This greatly complicates the interpretation, by companies, of what is and what is not bankable. In addition, the agencies that manage these programs interact very little with companies. This is not good because there can be cases of attractive projects that, because of the early stage they are in, are not fully focused on what they request or how they request it, but with small changes in the structure of the request, they could become much more attractive and - consequently - bankable projects. On the positive side, I note that the Plan Avanza promotes the presentation of projects involving universities, contributing research resources. On the negative side, there are rigidities in the interpretation and formalization of these alliances or consortiums, which could be easily remedied if the bodies that approve these grants had a more interactive role with appropriate resources. It doesn't make much sense for a project not to be approved because the agreement with the university is of one type and not of another. If the project is attractive, we must put the company and the university at the table and encourage them to formalize the agreements in the format desired by the administration... which, on the other hand, we suppose are required in this way because it has been analyzed that it is the best practice for reasons that arise from rigorous impact and profitability studies. Finally, I think ENISA's initiative to channel public funds to private venture capital entities managed by experienced professionals is laudable. It's one of the best things the state can do to encourage the creation of innovative companies. The biggest problem facing Spain today in the field of creating innovative companies is that venture capital is scarce compared to the large number of existing projects. This is more acute at times like the current one. Hence, state intervention through bodies such as CDTI and ENISA, although with the weaknesses exposed, is a notable initiative to complement the private money that is channeled to this type of activity. However, the government should consider how to maximize the amount of money that is channeled to venture capital, particularly in the stages that are called “early stage” and “development stage”. To find the answer, you don't have to go far, you just have to look at the results of the “Enterprise Investment Scheme (EIS)”. The EIS has raised nearly £6.3 billion, which has been invested in 14,500 small companies. In turn, the econometric analyses carried out on the performance of these companies show positive results in all key variables, such as capacity development (growth of fixed assets and increased employment), improved productivity and improved profits. It is key to the development of new innovative companies in Spain that the government advances in the implementation of tax relief schemes similar to the EIS in the UK or those introduced by the “Loi pour l'initiative économique” in France.