James Mawson: We now have a very interesting panel discussion moderated by Erik Vermeulen, from Tilburg University, that will be looking at government impact.
Erik Vermeulen (Philips and Tilburg University Law School, pictured standing): Good afternoon everybody.
We have a very nice panel here, but first I will introduce myself. I am a Senior Counsel Corporate at Philips in the Netherlands and we are heavily involved in corporate venturing. I am also a professor at Tilburg University doing some research on corporate venturing. I am in the same book as Gary Dushnitsky at London Business School; he mentioned this book – the handbook of venture capital I think it is – he is chapter 6, I believe and I am chapter 7. Just copy these two chapters and you know everything.
We are not going to talk about this book. This is not a book promotion. We have a very nice panel. From left to right we have Matthias Ummenhofer, he is Head of Equity Fund Investment of the European Investment Fund. We have Masato Hisatake, he is obviously from Japan, also a Government official, from the Ministry of Economics, Trade, Industry, better known as METI. Then we have Gary Dushnitsky from London Business School, and then on this side we have Dr Adam Lent and he is the Director of Programmes in the Royal Society for the Encouragement of Arts, Commerce and Manufactures (RSA). Three of them are affiliated to government, one academic, so this will be an interesting pre-lunch session.
Before we start I am a very happy guy. Why I am happy? Not only because I am here, which makes me feel happy because it is a great conference, but I live in the smartest region in the world. I live in Eindhoven and we were named the smarted region in the world in 2011 and ‘12. The question is why are we the smartest? When we ask this question to people who live in that area and we are all very happy, many will say that it has something to do with Philips because they were founded in Eindhoven and they still have a campus that does a lot of research. We have numerous spinouts from Philips so it should be something to do with the corporates, as we hear from Gary.
However, Government officials will say "No, it is nothing to do with the corporates, it has nothing to do with VC; it is the Government. We started the venture capital innovation ecosystem in the main port area." The question to you before we start, who believes that governments are important to create an entrepreneurial ecosystem? Our two views, before you raise your hands; two views: one view is they are very important. If you look at Berlin, we have some data which shows Berlin is now becoming a high tech cluster very fast and more than 50 per cent of the start-ups that are venture capital backed, the Government is involved.
We also have the Economist article from 19th April showing that in venture capital right now 39 per cent comes from government, so it is very good. If you talk to some other people they say that governments have a crowd out effect because they are slow, they cannot find the right innovations, they just finance research projects instead of creating the next Steve Jobs or whatever.
A question to you before we turn to the panel: who really believes that governments are important? Is it crowding out or do they have a very good effect on the ecosystem? Who thinks they have a very good effect on the ecosystem? Who thinks they have a crowd out effect? Five people to convince. I believe there are more but they don’t dare to raise their hands.
Let’s start with a question because most of them are related to government and they all have two to three minutes to share their views. Why are governments so important to create an innovative and entrepreneurial ecosystem, starting again from left to right; Matthias, you first?
Matthias Ummenhofer: Firstly I am not representing a government. Secondly EIF is a European institution so it is easy to say we are a European player. Just to follow up on your first point I would say you are absolutely right. Principally venture capital and all the innovation ecosystem and entrepreneurship systems are inherently private sector organised. Why the hell should governments or public money mix in there? That is the first thing. Looking back in the past of course there are some pros and cons, usually you always look into US and your role is saying "There is no public money there". There is an interesting study which is a brilliant policy paper on Mind Europe’s Early Stage Equity Gaps, so for people interested in the subject that is a nice piece of work. You find references to studies in the US where you see that in the US the government programmes, public programmes, if you put them all together and it is not only the SBIRs, but there are other programmes, equal the total aggregated sum of business initial investment in the US and are two to eight times the investment of private funds in technology venture capital firms. That is an interesting figure which is never mentioned.
Also in the US there are public programmes who have supported the ecosystem is to be established. The big difference and I give it to the other chaps, is about money being smart, being selective, being focussed and the government being very well aware of when it should start and stop fiddling into markets because it is a pretty intrepid thing to do things there if you are not taking a fully commercial approach.
Erik Vermeulen: Before we go to the others do you have any information about EIF, how many funds do they invest in?
Matthias Ummenhofer: At the moment we are in 220 venture funds throughout Europe, aggregated since EIF has been established from 260 funds. We are clearly a very dominating actor in the space. The underlying portfolio, just to give you an idea, is around 3,000 venture companies being in this space. The active funds – we own 80 per cent of the equities is at the moment around 80 funds at this point in time. All over, with some 4 billion having been committed to this sector. That is a sizeable impact.
To justify the intervention of the EIF what we do is to say the policy issues come in at a very high level when we define what we call "mend-its", so a government or European Commission is coming with their policy objective and we say "That is what we do". The execution then is purely commercial. This morning again in a breakfast meeting with people, saying "You are even more commercial than the commercials; you are tough cookies". We are better out. Most of the way we were mentioned today is taxpayers’ money. It is getting more and more private sector money in there and people are entrusting us money. I also see your point regarding the financial performing should be really interesting, but most of the money is still public.
Erik Vermeulen: Thank you very much; that was a European view. Obviously we have the Japanese view. What is the situation in Japan? Do we have government involvement? Is it as successful as it is in Europe?
Masato Hisatake: Let me start with a same statement: I am not representing the Government. From my brief bio you can see, my title is a Visiting Professor to Tilburg University so I have been working on innovation now mainly in the position of the academician for business. I might share my thinking about that.
Yes, the Government can play a very big role in this respect also. Before that, we were saying that we should have at least two remarks. The first one is the government can be clever enough to select the right investment. The answer is yes, the Government can play a role as a cow bell or something. "This is the spot, you should invest", but nobody will believe in this kind of story; this may not be plausible.
The second question is the Government can be benevolent. In other words, do they have big pockets? Yes. You can take advantage of the Government, now they can share the risk with the Government. Sometimes they are met with some delay which you may experience, but still, they have big pockets, you can share the risk.
Without any fee or guarantee you can take advantage of this type of the role. Very simply speaking you can ask two questions. The first one is, "Are you clever enough?" The second one is "Are you benevolent?" The question in the parenthesis: do you have deep pockets? At least if you have one yes, you can count on the Government role and you should encourage the Government to take part in this one; you can shake hands with the Governments.
If two answers both are no, then instead of shaking you should wave your hands, "Get away". That is my very simple answer for this question.
Erik Vermeulen: Thank you. Before we go to Gary, because he will be the academic view, so we save him for last, first Adam. Governments are not only about venture capital and investing in funds for a start, but there is much more that they do. Can you elaborate on that a bit?
Adam Lent: Certainly. If you look at some of the most innovative economies in the world, obviously countries like the States and Germany, there can’t be any doubt that governments have a really fundamental role to play in generating innovative, productive enterprise and also playing a more specific role in encouraging venture capital. Clearly in both those countries, the States, state investment plays a very big part in that and has historically.
A really crucial aspect of this is to try to introduce some nuance in understanding what the role of government is. The fact that so many people here clearly think that the state does have a big role, is a reflection of the times we are living through at the moment. Certainly from time-to-time, different time periods, different periods in the business cycle people have different views about the role of the state. When clearly we are in such a difficult economic situation, people increasing do look to governments, not just to enhance the framework and give an extra boost to the venture capital sphere, but also to generate the more general confidence and confidence among consumers and amongst investors that will generally lift all sectors more generally.
Also across nations there are lots of different challenges and again governments have to take different roles. If you take the example of the UK, on a number of measures the UK generally has lower business investment than many other advanced economies. They have a very long tail of unproductive and un-innovative SMEs. That has been apparently a structure problem for a number of decades in the UK. It is difficult to see how you overcome those issues without quite forthright measures from the government to create a new type of regulatory and tax framework to address those issues.
Erik Vermeulen: Thank you. Then the academic view. Do you believe that governments play a role as important as corporates?
Gary Dushnitsky: The answer to that is yes. If I just summarise what I have heard my colleagues mention, basically there are two mechanisms by which they are doing that. The capital, putting cash on the table with the aim of potentially de-risking is one that I will get to in a second, but in terms of creating the infrastructure we heard about regulatory taxation considerations when you go back. If I pick up on the US, the Prudent Man Act 1979 which was starting the venture capital industry, Sarbanes-Oxley and now the JOBS Act have an effect on exits and will have an effect on the industry as a whole. Surely governments have a role in terms of providing an ecosystem.
Going back to putting your money on the table it plays to important considerations over here: one is acting in a way of de-risking some of the investments and it is one thing whether you are matching a fund or whether you are effectively subsidising some extremely early stage in the form of investments to Departments of Defence or other initiatives. The other consideration is also basically having enough money in the system so a lot of the support infrastructure stays above water. If there isn’t enough capital for the little mechanisms, the accountants and some of the others to stick around the whole system can wither and fail and it is going to very difficult to kick start it, and that is when the government can influence matters.
Erik Vermeulen: Thank you. Before we give the floor the opportunity to ask questions, one other question which is related to corporate venturing. We saw this fantastic presentation by Gary and in Europe there is still some ground to cover when it comes to corporate venture. I really believe that both governments and corporates play a very important role, but still we are not there yet. We did not reach the potential that is there. The question is can governments facilitate corporate venturing and corporate venture capital? I will give you one example, the High-Tech Gründerfonds in Germany. It is a Government fund supported by some corporates and the question is what are these corporates doing there? The interesting thing is I have some data on follow-on investments. When the High-Tech Gründerfonds is investing in a young company in 13 – 16 per cent, corporates will put money in in another round facilitating corporate venture.
We have a similar structure in Japan; it is called the Innovation Network Corporation of Japan and I know that the EIF is also working on a fund which they try to encourage corporates to be involved to put money in. Matthias, can you share some of these views? These new initiatives that the EIF is -?
Matthias Ummenhofer: Of course. Firstly the EIF is a specific model. We have been funded as a public private partnership. We have around 30 private investors as shareholders; we are the only European institution with private shareholders, which I always stress because it ensures exactly what I said previously that we have a clear focus on earning money for our shareholders, which we eventually do, otherwise we wouldn’t be around and we wouldn’t be entrusted with all the money we have been. We are a specific animal. We have more and more member states come and entrust us money because it is a very clever and smart way to do it. There is more and more evidence for it.
Coming back to the corporate world, two years ago we asked ourselves, we have one boring fund of fund, we were running this for 12 years, what is going on in the market? You mentioned it – more and more public money – this can’t be a thing. Also the EIF needs to wake up. We assessed what were the key apples in the ecosystem where we can move the needle? Two main things came out from it: one was the business angels, the family offices, so we launched a product called European Angels Fund, just started in Germany but we are now all over Europe to work with this very important group of people who are much more important than venture capitalists in the very early stages. Again, in the US you see all these stories and in Europe it is the same story.
The second big thing was it was very strange that we are not working more with corporates. Speak to a VC, after two or three minutes, the guys who were in the room, the Siemens, the Bosch the Ciscos, etc, but if you look a bit further on what is the real relationship between corporates and venture capitalists? Usually you can summarise with contact to the business development guys, the chaps show up once or twice a year with the list of portfolio companies and, "Listen, we have all these wonderful companies, please buy them". They go home and everything is still on the list. Now I exaggerating a bit, but what you see is also again in contrast to the distance between the corporate world and the VC community is very large. We said this is a role to play because this would be to the benefit of everybody and we just try to speak to corporates, the big ones, the major incumbents, international global companies, European companies and it was very fascinating, because people told us "We are desperately looking into tools, sourcing innovation in Europe", because it is a very fragmented market, it is a very important market in many areas, many verticals in Europe still have a very strong role, especially R&D, with up to be financed again, even in the start-up system, a lot of public money in finance, but for us it is difficult to access Europe. It is a mess: its 27 countries, its cultures, languages and legal systems.
As I mentioned we are the spider in the web; we have access, we know all the institutional side, we start to get to know and get relationships with business angels, family offices. We had the idea which was to join up in verticals, so we have one digital eye, we have one housing copy, we have sustainability with one which will cost nothing. Get a bunch of people, maximum 10 – major corporates in there, team up, reinvest the money, more in venture capital funds which are spun on these target areas and then it is a really collaborative approach, which has been mentioned during the whole day today. Away a bit from the pure and simple and somewhat boring M&A scene, but it is collaboration, dedicating the best of the two worlds, getting them together and coming to agreement. These are very promising examples; everybody in the room can mention a couple.
Providing efficient, focussed access, full pan-European, full scale and scope to some of the corporate players who want to play a role in the European ecosystem in a very efficient way. That is what we are working on and we will come to our first closing in the autumn, probably one of the themes and some of the guys in the room we applied as part of the discussions. This will be a very interesting product. Somewhat an experience, but it is worth trying it.
Erik Vermeulen: Thank you; Japan, a similar structure as High-Tech Gründerfonds but completely different outcome. Can you explain a bit to the audience what Japan is doing to stimulate corporate entry?
Masato Hisatake: It is a tough question for me, but I can count many reasons for the success or the failure of the Japanese initiative. I would like to discuss your question better, but it may take some time for the Government to learn what the right measures are. It is a kind of innovative trial- I am already thinking about this question – this might be something like industrialisation. Even in Western Europe where the primary conditions are all one and the same between England and perhaps France and Belgium, however, it takes at least several decades until all the regions of Western Europe could have a fruitful result from this trend.
Now we are living in the dog years so we should divide by – I don’t know the exact average life expectancy of a new borndog, but divided by 10 – but still we can wait seven or eight years to have a concrete result. Japan has just started that one, so we don’t have many talented people to manage the trend and also the way, – we could see never, how can I say, entrepreneurial type of venture capitalist are not there – I can’t wait, however we should wait. We should think of this process as another R&D programme undertaking a trial. Secondly, that the Government makes a much stronger commitment: how? In other words we should not give up until we can call that one successful.
Having said that, I would like to point out two remarks. One is while we are talking about this issue just as perhaps corporate venturing, the Government producing something, but we will see some diversities among industry. For biotech – just one patent, or several patents may mean totally new programmes, but in IT sector or automobile sector "No", we should have 100ormany product and cross licences across all assets. That means, if we were investing in the biotech industry you can share the risk with the Government very easily and you can see anyway failure or success result within a very short time, but if you are investing in the IT sector or something like that, sometimes you have to wait until the concluding result. Now the decision is much more wide for you because the things are going to change – let’s think about decisions like, say, a Google Car, then you have to have not only regulatory arrangements, but also the infrastructure, hardware. Entrepreneurs should share their views about the future with the Government. They can succeed, they can take advantage of it.
Erik Vermeulen: Thank you. Adam, a different view. Our 10 governments stimulate big corporations to invest, or to do something to make an environment more entrepreneurial.
Adam Lent: If you look at the European Commission report, which is quite old now, into corporate venturing that was undertaken a number of years ago, they identified a number of barriers which governments might address to encourage corporate venturing. The thing they felt was the biggest barrier was tax regime and particularly the complexity of the tax regime and also the levels of capital gains tax. The British Government in particular tried to address this by introducing special tax reliefs for corporate venturing. Unfortunately it was introduced in 2000, just as we were on the wrong point of the cycle and since then it has been abolished as a scheme. Certainly one thing the British Government has done is starting to do now is starting to address tax complexity and is introducing a whole range of tax simplifications. In fact there is a Parliamentary bill being published on Friday which will probably help with that. I don’t see any desire yet to address levels of capital gains tax and in terms of lowering levels it is around corporation tax that the focus is. More generally they are putting in place a certain number of support mechanisms, things like co-investment schemes for angel investors, for example, but the general scale of ambition is generally accepted not to be meeting the challenge at the moment.
Erik Vermeulen: Thank you. Gary, you final view on this, can governments and corporations work together and create a better entrepreneurial environment?
Gary Dushnitsky: I am a business professor so everything divides into two: better yet two by two. I am just going to make the core, focal groups. When you look at corporate investors one of the key issues that you have is you have two objectives: you have the financial and the strategic, but it is much more complicated than that. One corporate strategic involves entering into new markets, another corporate strategic entails novel technologies and so on and so forth. Strategically it is quite diverse. What I have seen in talking to some of the governments with some of the initiatives is that also what is their objective is quite diverse. Some of them are looking to grow or to create employment opportunities. Others want to stimulate the level of science. Others want to be able to not just sponsor entrepreneurial ventures, but retain large corporations. There are different objectives there and perhaps one of the most important things, as we are thinking about these two sets of investors coming together, making sure there is congruency between the unique strategic objectives of the corporates and the unique mandate or objectives of the government. There are a lot of opportunities there, but there is also an opportunity for a mismatch.
Erik Vermeulen: Thank you so much. Hopefully the four to five persons that were not convinced that governments play an important role are now convinced that they do. We have two minutes left for questions.
Chris Hasse (Shell) This is a very interesting debate. I appreciate all the panellists for sharing the different perspectives from different geographical areas. From the US perspective you mentioned SBIR programme. Sometimes these debates are so polarising because the VCs love to slap around the Federal Government because they get out of the way. When it comes to renewing the SBIR programme and getting access to all those funds they are the most fervent lobbyists to get access to non-dilutable money. The question I have for you is, is the role or could the role be of corporate venture capital as an effective bridge between that fundamental research that is so ground breaking and has a legitimate role in government to advance and the later stage, mid-stage mezzanine growth financing that is so necessary in order to build commercially sustainable channels? Do the corporates provide, and perhaps from an academic perspective, does the data show does the corporate provide that effective bridge between the early stage pre-seed stage government to late-stage investment money?
Gary Dushnitsky: Fundamentally you definitely have a very different risk profile. One of the biggest opportunities is to be able to recognise that it is not a single investment, it is going to take an investment from A to Z but you have different types of investors with different risk appetite and complementary assets that they can work together to overall drive innovation.
I started off being very optimistic about it and thinking about it and thinking about how departments of defence or other government initiatives can take a basic risk and VCs and corporates can take it beyond and so on and so forth. I have grown to be a bit more disillusioned, sometimes the potential for the illusion, sometimes the terminology, sometimes the fact that what it means to monetise and capture value for one investor types means something very different from another investor type. All of these things are at a point where they need more work for them to be able to work more immediately. One of the things that I alluded to earlier is when you have an initiative that has a particular geographical remit what does it mean for your ability to be able to take the IP and monetise it outside the location? These are all kinds of conversations that I know are currently taking place. I don’t know that we have a fully streamlined process at this point in time.
Erik Vermeulen: Thank you very much. I know there are so many more questions but it is also lunch and when he enters the stage I have to keep my mouth shut and take one step back. I am doing that and he is going to explain all kinds of other things, but before we do that, please thank the panellists.
[Applause]
James Mawson: That was tremendous. Thank you Erik, you did a great job moderating there.