There have been a number of media stories about the government’s latest Smart Economy initative: a new innovation fund featuring public money matched by money from venture capitalists. The Taoiseach was quite bullish about this program on RTE’s The Week in Politics on Sunday night and he has announced it in a speech in New York (press release here.) The details say that it is a €500 million fund. As I understand it, this is €250 million from the Irish government spread over five years (€50 million per year) matched by private venture capital funds.
The press release tells us that this is a “major boost for enterprise development and job creation.” Well, with GDP for this year projected at €161 billion, venture capital investments of €100 million per year corresponds to six tenths of one percent of GDP. Government initiatives to develop a venture capital industry in Ireland are probably a good idea (I say probably because these initatives are often poorly implemented, in which case they’re a waste of money.) However, in the grand scheme of things, this cannot be considered a major boost to enterprise. It’s certainly not a major boost to job creation.
64 replies on “Innovation Fund Announced”
But think of all the people who will have to administer the funds. If they keep setting these things up, we’ll all be employed soon…
I respectfully disagree. See http://bit.ly/99jbPG
Quite a number of years ago the government of the day announced a scheme that allowed an employee to leave his/her work and convert (claim back) so many years of taxes into credits which would then be added to a government investment (if the agency involved was so minded). I think the maximum number of years was three but I am open to correction, and it all sounded promising. In any event I attended a briefing on the scheme hosted by one of the major accounting-cum-consultancy firms. At the conclusion, the presenter turned to the audience and said something along the lines of “lads, it would be easier to survive a fall off Liberty Hall than get funding through this scheme.” Perhaps times and habits have changed. Let’s hope so.
I’m all for agreeing to disagree (I do it here all the time).
Still, Chris’s blog post leaves me wondering what the grounds for his disagreement are. I can see he’s enthusastic about it. But six-tenths of one percent of GDP being “as immense to Ireland’s economy policy as was the 1958 decision to open Ireland up to foreign direct investment” seems to be over-egging it quite a bit.
You are too polite.
50m per year is just nonsense. Any US fund in the valley would laugh at this.
Perhaps the most significant announcement as carried on Bloomberg TV was that he was prepared to write any cheque that AIB needed.
And now Frontline has the hole at Anglo at 50B.
Is there any end to it?
If we have to do this then what currency could one apply to all claims to innovation etc, prior to these most recent statements?
No offense, but that blog post link looks more like a prayer than a project
The first step Government should have done was to introduce an innovation incubation plan within its own sphere, controlling government itself to make it more effective.
This would have produced two choices:
1- An increased effectiveness that would have allowed it to do the same but cost less, reducing the tax burden which could be released back into the economy as a stimulus.
2- An increased effectiveness that could have allowed the Govt to do more and to do so at a lower cost so that more (capital projects, etc) could have been done for less
But, no, rather than roll up the sleeves on this, and actually innovating, it gave itself a pass, and now instead is writing cheques to buy innovation in rather than foster it within….
“In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”
James Madison, Federalist Paper 51
I hope that this enterprise works, but is it a dodge or distraction from a government controlling itself?
You “respectfully disagree”
So the three stooges Brian Cowen, Brian Lenihan and Eoin Ryan think that spending half a billion of the State treasure on “innovation” is a “good” idea.
No doubt they are doing it for the social good.
You however boast of taking €1,250 of your scarce resources and creating a company the envy of many.
“Starting with an initial investment of 1,250euro each, Sean Baker, Annrai O’Toole and I grew the company, without any venture capital but taking a minority investment from Sun Microsystems in Mountain View in 1993. We took the company public using Lehman in what was the 5th largest IPO in the history of Nasdaq in 1997.”
Perhaps you can explain why you think Fianna Fail and the Green Party are better placed than the Citizen to spend 400,000 times more than you did to “create” success.
Were you not free to take risk?
Would you have the State enslave me to its vision of “innovation through taxation”?
Is it because the State has licence to tax the Citizen?
Ok, so the State taxes 400,000 Citizens at €1,250 per head.
After all, not only did you not get a penny from the State. You didn’t get “any venture capital”.
Why do you think Brian Cowen is 400,000 times better than you or me?
What business is it of the State to engage in “innovation”?
“The Taoiseach said “Venture capital is an essential ingredient for supporting entrepreneurs and ensuring that businesses can scale and create jobs. Lack of finance consistently emerges as a key impediment for innovative firms.”
It didn’t stop Chris Horn and Iona.
Still. Brian knows best.
Tax the bejaysus out of’em. That’ll make them innovate.
@ Chris Horn
I respect you as an entrepreneur as most of those who speak publicly in Ireland about entrepreneurship, tend to have well-padded safety nets and no experience of the business world.
The Irish economy needs to generate thousands of start-ups each year and last week a Kaufmann Foundation study in the US, showed that in 23 of 30 years, start-ups (firms up to 1 year old) were responsible for all the net job creation.
There is a myth that most US start-ups are funded by venture capital.
Bank and credit card companies are the main funders of US entrepreneurs and the VC support is for less than 3% of start-ups.
As for the Yozma fund, which was launched in 1993, it coincided with an influx of close to one million people after the breakup of the Soviet Union; Israel’s overall population increased by 20%. Nearly 40% of these immigrants held academic degrees, many of whom were scientists, engineers and specialised technicians.
It also coincided with the developing tech-boom in the US and Israel already had a strong science base.
I absolutely disagree with you that the new fund is on a par with Whitaker’s ‘Economic Development’ publication in 1958.
The US VCs who may invest in the fund will be only interested in picking a few winners — and the exit is likely to be acquired by a US firm before there is any home employment benefit.
Because the job challenge is so great, it is crazy to put all our eggs in the one basket.
After 30 years, Cambridgeshire, the UK’s Silicon Fen has about 30,000 jobs in technology companies and the majority of firms employ less than 10 people.
I understand the argument that exploiting the synergies of the existing FDI base in Ireland can help but to me, it’s crazy to expect 120,000 new jobs from research in the coming 10 years when we have about that level today employed by foreign firms after more than 50 years.
It’s also crazy to extrapolate from the experience of Silicon Valley to Ireland.
Ireland won’t change in a decade and the best path to sustained riches is going to remain aspiring for the high pecking order in the rent-seeking professions.
In 10 years, ETH Zurich, one of Europe’s top universities, produces over 100 spin-outs but less than 1,000 jobs!
Besides, the latest digital economy world rankings from the Economist Intelligence Unit again says the Nordic countries ‘excel’ Ireland gets a 17th ranking.
Isn’t it a bit premature in seeing ourselves as innovation leaders in Europe?
Cowen’s Innovation Fund Ireland, jobs, Irish start-ups and failed entrepreneurs
@ Chris Horn
Just an additional thought…
As Irish policymaking is made either at glacial speed, if at all, after a raft of reports or on the hoof, it could be useful to have something similar to the Kaufmann Firm Survey (referred to in my article above) where a panel of firms is tracked over a multi-year period.
You need to have hard data such as survival rates, export obstacles etc, directly, rather than depending on the hunches of agency personnel.
“Innovation in Ireland is not about achievement but about activity, all wrapped in a bundle of strategy documents and accountability reports….rent-seeking has been seen as the clearest way to economic security in modern Ireland” http://tinyurl.com/25urdd2
Venture capital is a tough business in many ways. It is hard to understand. It is hard to attract. It is hard to actually use the money you get to build value. Despite what you year, it is very hard to make money in venture capital on a consistent basis. A lot can be said about how to administer venture capital. I certainly hope VC firms do in fact succeed in picking a few winners in Ireland.
EUR 50m a year, plus some sort of multiplier effect from attracting foreign capital isn’t a lot in the context of the economy as a whole, but it is a good bit of investment in growth. 0.6 percent of GDP has to be seen in the context of forecast growth.
I think it’s the right idea – but does it need to be such a half-measure? I do wish these people would do things properly.
As for VC … I ran a start-up backed by VC for a couple of years. Apart from selling it too early because they could see a book profit in lean times, they only seemed to have one real objective and that was to get the original investors and founders out as quickly as possible (or quicker than that if possible).
I’ve met some ‘sharks in suits’ in the financial services industy in my time, particularly in the credit card space, but these boys really took the biscuit (and they wore braces too!!).
I think we need to look beyond the raw figure of €250m and look to see what kind of structures are being put in place to stimulate investment. An idea doesn’t have to be expensive to be a good idea.
The amount of money invested by the Irish Government is not the full measure of stimulus where outside money is being attracted in. Ultimately, bringing wealth into the country is the name of the game!
Can you explain how the fund will help stimulate people to invest risk capital in Ireland? Or perhaps link to the relevant section of the task-force report or smart economy framework?
Research from Harvard Business School professor Norm Wasserman shows that the goals of being in control and getting rich are largely incompatible.
The author’s studies indicate that a founder who gives up more equity to attract cofounders, new hires, and investors builds a more valuable company than one who parts with less equity. More often than not, however, those superior returns come from replacing the founder.
“When I analyzed 212 American start-ups that sprang up in the late 1990s and early 2000s, I discovered that most founders surrendered management control long before their companies went public. By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings.”
We are tantalisingly close to moving the Irish tech cluster to the point where it is capable of being a jobs engine.
Some gaping holes in the VC industry are one of the key things holding this back. If this innovation fund is well designed it may yield good results on jobs over time, ‘though the effect is unlikely to be quick. It’s in the nature of even successful innovation initiatives, that they start slow, and build up over time.
In the meantime, we desperately need more new inward investment, and to succeed better at holding on to existing FDI. The innovation stuff is central to to IDA Ireland’s pitch, and perception is at least as important as reality. Many of the inward investors targeted by IDA want to feel they are investing in a location that is home to an innovative cluster that may bring them some advantages. This is where we should be looking for a short to medium term jobs pay-off.
Even if the Innovation Fund turns out to be fairly ineffective in meeting its stated goals, it’s probably not going to end up costing us much. We are talking about public investment of €50m a year, €25m of which seems to be already earmarked for enterprise development. But even if things don’t go very well we should get a lot of this back, and there’s good chance that we will make a decent profit. The best guarantee of this is commercial participation in the investments.
Enterprise Ireland has a lot of experience with this sort of thing. While it has not yet given us the VC industry we would like, it has at produced something far better than what we had before. It’s not very long since most professional funding of Irish technology companies came from just one man.
From the EI Annual Report for 2009:
“Seed and venture capital funds
As well as investing directly in client companies, Enterprise Ireland enters into partnership with seed and venture capital funds to provide equity finance to Irish companies. A €26 million Bank of Ireland Seed and Early Stage Equity Fund was launched in the last quarter of 2009, and an additional €23 million was invested in the AIB Seed Fund to bring its
total value to a53 million. Since 2007, eight funds have been established,
raising approximately €525 million. These investments represent a significant broadening of access to funding for the start-ups and entrepreneurs who will be the employers of the future.
In 2009, 38 co-investments with Irish seed and venture capital funds valued at €29.8 million were completed. In addition, Enterprise Ireland is actively involved in matching international venture capital funds with Irish
companies. There were 14 international venture capital investments in Enterprise Ireland client companies during the year.”
“We are tantalisingly close to moving the Irish tech cluster to the point where it is capable of being a jobs engine”
Any proof whatsoever of that would be welcomed.
Sorry, just an economics reality check here:
Where is the identified market failure in VC for new start-ups in Ireland?
How are we going to convince investors to choose Irish start ups over 6% euro zone bonds?
Wait I got it … “Business Plan for Celtic Chocolates: Our fudge is better than the Greek government’s!”
Many of the inward investors targeted by IDA want to feel they are investing in a location that is home to an innovative cluster that may bring them some advantages.
My impression is that the IDA tries to put an R&D angle on most projects when many of them are plain call centers.
Have a look at the Dept of Ent.’s job announcements in 2010.
It helps for example HP to have a tech support center treated as an R&D project because of the related tax credit.
We are tantalisingly close to moving the Irish tech cluster to the point where it is capable of being a jobs engine.
Silicon Valley clones have been established in many countries and Nikita Khrushchev had a Silicon Valley type cluster established in Russia in the late ’50s. The results are very mixed.
At the diaspora forum last year, Cowen asked for help in establishing a ‘European Silicon Valley.’
Isn’t this putting the cart before the horse?
We want to have the same banjaxed governance system and expect to outrank well-run countries like Denmark?
We want to have a tech cluster but we don’t even know the survival rate of existing high-tech/bio companies.
In the US the bio-tech industry made its first profit in 2008 after 42 years, but only because of its biggest 3 firms.
One of my criticisms of policymakers is that there is apparently nothing learned from experience.
Cognotec was the most recent once great hope to go bust; there was Xsil, winner of the Fast 50 in 2006; Iona was sold to to a US company in 2008.
It appears to be official policy to welcome early sales such as the University of Limerick spinout, Stokes Bio to US firm Life Technologies.
Commenting on the ‘landmark deal,’ Dr. Ruth Freeman, Science Foundation Ireland’s director of enterprise and international affairs said: “The acquisition of Stokes Bio by Life Technologies is a personal triumph for the researchers involved and a ringing endorsement of strategic investment by SFI in high potential research activity in this country. Success stories such as this are brought about by ingenuity, perseverance and, crucially, a commitment to funding research on a sustained basis through those critical initial stages of development.”
“How are we going to convince investors to choose Irish start ups over 6% euro zone bonds?”
Do you think there is competition between Irish start-ups and bonds???
That is a pretty facetious point to make in your eagerness to knock efforts to create more jobs.
There seems to be something close to unanimity that we in Ireland can only sustain our western lifestyles if we can get a foothold in the markets for high value knowledge-based products and services. If that is correct and/or feasible and/or worth aiming for then we should be welcoming these innovations as Karl Whelan said. People who feel a need to knock everything need to take a look in the mirror.
As for looking for the hard statistics to back up this approach, not everything can be directly measures in statistics. Not every seed capital program works the same. Not all frameworks are equal. The quality of individual efforts does make a difference.
Few valuable innovations can be statistially proven to be guaranteed to be successful in advance of implementation. We need to look at the usefulness and the limits of usefulness of prior research and stats in analysing innovations like this.
We’ve become accustomed to figures with a few more 0’s at the end but 50M a year is huge money if its targeted correctly and invested wisely.
It’s in the nature of things that it’s difficult to prove that a threshold such as that is close to being crossed, so I can’t offer proof. I can summarise why I believe it to be the case.
In the latter half of the 1990s, the Irish tech cluster – most specifically the Dublin software cluster – was a jobs engine. It grew rapidly, far out of proportion to the rate of growth in market opportunity. It also moved upmarket from a strong focus on hiring out Irish technology skills to developing and selling software products and services on its own account.
The growth came to a juddering halt around 2001, and there have been ups and downs in job numbers since then. Clearly, this is partly due to less positive market conditions, and to increased competition from other locations, but my belief is that the industry was being strangled by construction/ property and the growth of the public service, in at least four ways:
1) Interest in studying relevant disciplines never (at least until very recently) recovered because of competition from civil engineering and healthcare disciplines.
2) People who would otherwise have been serial technology entrepreneurs blew their talent and money on property investment instead.
3) Irish business costs increased excessively.
4) Irish investors put their money into property.
While the size of the cluster stagnated in jobs terms, it improved in other ways. It kept moving with the market – the sector’s profile now is very different to the way it was ten years ago. It also earns significantly more per employee. There is a flow of new companies getting venture capital investment. There is also more entrepreneurial activity in other tech sectors, such as medical devices.
There is also now a fairly clear policy commitment to tackling problems in areas including VC, and to overcoming the barriers to converting research spending into businesses.
As I see it, the collapse of construction and the contraction of the public service are taking the brakes off an engine that is essentially quite healthy. It’s worth some effort to help it get moving again.
I can’t offer you a guarantee that this is how it will work out, but we are very short of options, this one offers some fast payback through FDI, and it probably will not ultimately cost us much money even if it fails in its stated objective.
I agree that there is a certain amount of mislabelling of R&D. There is also genuine R&D. And there is plenty of evidence that inward investors like the idea of having a base in an innovative technology cluster. See, for example, Iulia Siedschlag’s post from last year: http://www.irisheconomy.ie/index.php/2009/10/19/what-determines-the-location-choice-of-foreign-investment-in-rd/
The difference between some other random location and Ireland wanting to build another Silicon Valley is that we already have a pretty decent technology cluster. I don’t think we should get hung up on the Silicon Valley label ‘though. We can do very well out of something smaller in scale.
It’s a feature of successful technology clusters that they have a high level of turnover among companies. There’s no point complaining about it.
When you use the term ‘Irish tech cluster,’ I assume you are referring to indigenous firms and not including the likes of Microsoft, Google etc makes the concept meaningless?
There is a lot of woolly thinking on what the strategy should be as we have so little useful data on the past 20 years.
Iona co-founder Seán Baker last year criticised the State’s current approach to driving innovation. “We don’t have a good handle on a strategy for RD. You can’t point to one place and find someone who owns the strategy.”
Speaking at an event to foster links between university-based emerging technologies and the entrepreneurial resources of industry and business, Dr Baker was critical of the “waterfall model” whereby money is poured into early-stage research in the hope that something commercial will come out downstream. “I just don’t think it works,” he said. “It’s inefficient. For me, to commercialise research, you have to have commercial input from the start.”
One of the biggest barriers to commercialisation, the difficult journey from laboratory to marketplace, centres on the ownership and value of intellectual property (IP), he said. Universities are often over-protective of their ideas and expect too much for them.
“The value of the initial IP in the software world is very small,” said Baker. “The real value doesn’t come from code, it comes from the business. The vision [for a university] should not be to make lots of money from a few commercialisations, but to have many, and take a small amount from each.”
In fairness to Enterprise Ireland, they are focussed on the business side of things and try to train up tech people with ideas.
However, putting a start-up in touch with a lawyer and an accountant is no substitute for creating a framework whereby you don’t need a lawyer or accountant.
I wholy agree with the property bubble sucking all available funds away from investment in startups. With (at the time) low risk IRR of 20% plus being achieved it proved very difficult for startups to obtain funding in Ireland given high relatively risk free returns being achieved elsewhere.
The announcement although relatively small is better than nothing – at some stage we are going to have to move on from benchmarking everything v the supertankers of Euro being poured into the Banking sector.
I’m 95% certain it will be a waste of money. Given all the tax incentives to R&D in Ireland, it would take a phenomenal amount of R&D to raise 250 million in taxation from this industry. Further, we are pretty much at full capacity in these sectors, with growing skills shortages in pharmaceuticals and IT. I don’t see how this will possibly return this money to the State.
Furthermore, I am always sceptical of spending money to raise money. Sometimes a little seed investment will return a slightly greater return, but in general, the history of such schemes is poor. Spending should be for things we want, the State has never been good at spending speculatively to make a profit.
The thing that keeps bugging me about this government is that they are completely ignoring all the cost-free ways to boost our competitiveness. The Competition Authority has identified dozens of virtually costless administrative steps that could be taken to make us more competitive globally, but instead we have opted for crude, brutal wage deflation -and now this; a fiscal splurge on a relatively prosperous sector.
There just doesn’t seem to be any sense or reason to any of it.
The state already has too big a role in the economy. This is a fundamental problem. The government has poured money into R&D over many years and in the process created thousands of jobs at third level. Every EU country is playing the same ball here – using state funds (taxes) to kick start commercial R&D. However the results as measured by increased stimulation of business expenditure on R&D and employment are poor. It is worthwhile remembering, in a cautionary sense, that Iceland and Ireland scored very well in the OECD’s Education at a Glance series in recent years.
The country has had a practical knowledge engine for decades one that effected real transfers that had commercial outcomes. It is called Teagasc. The Irish food industry has been pretty successful down the years. While I appreciate all the gadgets and gizmos, the genetic discoveries and so forth that arise through R&D, Ireland really should be doing more on the food front in my opinion. It is not an either/or situation but I have a suspicion that anything to do with agriculture and food is considered backward, old hat among the academic and political elites. Yet with BRIC growing in consumer wealth, one wonders whether the government shouldn’t direct more money into food R&D than other eclectica.
“It is not an either/or situation but I have a suspicion that anything to do with agriculture and food is considered backward, old hat among the academic and political elites.”
You obviously haven’t been listening to Micheál Martin and his 101 examples of new jobs through science innovation. Food is big.
Where did I imply anything about a start-up and lawyer/accountant?
The issue discussed has been on public policy strategy.
1. Seán Baker’s point was in relation to university research.
2. Read the Innovation Taskforce report and you will see very little hard data on experience thus far. Extrapolating from the US experience to Ireland is not a very credible way to support a big public funding commitment.
3. We don’t know if PhD output is to meet FDI demand or local firm research etc.
4. Public funding/bank credit will continue to be the main sources for Irish start-ups.
No serious reform and with even a tepid recovery, it will be back to business-as-usual.
What we could be if we had a well-run, accountable system where the bubble costs were out of the system?
It isn’t of course going to happen.
@ The Alchemist
Who would have thought that Irish farmers would be delivering milk to a gin maker?
There is great potential in the food and drinks sector but when the largest milk processor
Glanbia tried to ditch its local operation because there is more money to be made buying cheese factories in the US – – it did not raise a response from politicians.
Irish dairy companies have been focusing on low margin products while Sweden has been producing more cheese than us.
No, that part of my post was supposed to be serious. My point was that it is difficult to attract investment into the productive sector if bonds are paying such a high return.
It’s called ‘crowding out’, something we forgot existed when Krugman & co convinced us to transfer a manly chunk of the world’s GDP into a sovereign bubble.
This effect creates risks that state stimulus to VC will be isolated, hence wasted.
It’s not necessarily the fault of Irish policymakers, but the policy advice remains the same either way: Keep the state sector as trim as possible and focus public investment on identified market failures.
The problem with starting businesses is not lack of seed capital. There are many potential investors out there searching actively for profitable projects to invest in. The most successful projects are not always the most capital intensive. The key problems are as follows:
1) The culture of corruption this country tolerates makes investing in businesses you are not directly in control of an extremely high risk activity. You get promoters overpaying themselves, and taking slices off revenue in the most unexpected places. You are faced with complex corporate structures in the simplest businesses which mean the large parts of potential wealth (e.g. intellectual property) may not be attributable to the investors. You receive periodical compliance-oriented reports that serve only to deceive and misinform, highlighting and spinning the positive while ignoring the negative. Until this changes, investors will steer clear of startup businesses.
2) The state imposes so much bureaucracy in applying for and maintaining its grants and investments that they are often not worth the effort and distraction. This of course is a consequence of the previous point. They know they will be ripped off if they loosen criteria and expose the various schemes to the possibility of loopholes.
3) Valuations sought by start-ups have been totally out of line with the risks and potential rewards available.
4) Tax incentives have been skewed towards property and away from financing businesses. BES, while valuable, has traditionally not been applied as pure equity investment, but as a type of quasi-loan taking all the equity risk but with a capped return. Only a fool would undertake such an investment.
Incidentally, a fund of €100 million is not six tenths of 1% of GDP, but six hundredths of 1%. Miniscule it may be, but if properly respected and applied it has potential to make a difference.
Full capacity sector + a cash injection + Bubble.
The R&D sector is still pretty much at full capacity, so the most that this will do is spur another bubble. It’s a bit like giving tax incentives to construction when we were already building as fast as possible. It only caused inflationary growth at the expense of the public purse.
apologies, i meant
Full capacity sector + a cash injection = Bubble.
“Where did I imply anything about a start-up and lawyer/accountant?”
You didn’t. I was making the point off my own bat.
It was related to the Sean Baker quote “For me, to commercialise research, you have to have commercial input from the start”.
I wasn’t commenting on your core point about universities.
It’s not hard to see why the Competition Authority recommendations have been so carefully ignored.
Doctors, Barristers, Vets, Architects, Publicans -It’s almost a who’s who of the political untouchables. God forbid that they might have to compete like the oinks in the rest of the economy.
I hear what you are saying: (i) Venture capitalists compare start-ups with high yielding Government bonds, and (ii) this will cause a failure in the VC market, but the Government shouldn’t intervene becasue they should only intervene where there is a market failure….
I’m afraid I mean a bit of both. Quantitatively, what I’m talking about is indigenous firms, but there is a fair amount of cross-fertilisation between them and the Microsofts/Googles/…, and the value to inward investors is in the cross-fertilisation.
We have not been doing university research on a serious scale for long, and we do not have a strong history of commercialising it, so it’s not surprising that we are seeing problems now, as has been highlighted by Sean Baker and many others. I think that policymakers are facing up to the problems, so, while I expect that they will take time to fix, I’m optimistic for the future.
Ha! Very clever! You are, after all, a brilliant Chinese leader, zhou, even though you are long dead.
But ‘clever’ is not necessarily ‘right’.
Market failures which come about through government intervention get us into the kind of messy territory politicians love, and economists hate. Suffice it to say when government does something silly to correct something else it did that was silly, the two wrong generally end up making a bigger wrong.
For how long more can this country continue to educate graduates and supply them free to industry when we are practically broke? Meanwhile has anyone noticed the record sales and record profits posted by many of the multi-nationals recently? How can this be when we are in the midst of a serious recession/depression? Is it time to do the decent thing and start charging industry for graduates. Say €30000 for a primary degree, €50000 for a master’s and €70000 for a PhD? Then this money could be recycled and used to upskill those without qualifications, train more postgraduates, upgrade facilities, fund startups etc etc.
@ Michael Hennigan
“It appears to be official policy to welcome early sales such as the University of Limerick spinout, Stokes Bio to US firm Life Technologies.”
I have to agree here and perhaps expand on what you are saying.
I can remember the favourable media coverage the university of Limerick Spin off got. But when we think about it, it is actually awful news in my opinion.
One thing that we have to learn from the Ireali’s is that when you do make a breakthrough with developing a truely innovative product or service, the last thing we should be doing is selling it off.
The chances of Ireland ever being lucky enough to get a start up that creat huge numbers of Jobs from indiginous industry is very small. Small goes to zero when any time we do make any innovative breakthrough’s we then see them sold off to large multinationals. The state can and should take a roll here.
No one can blame the innovator for taking the money offered and heading off to Barbados or start again but how about using a large part of this innovation fund to allow for potential acquisitions of innovative Irish products and services?
Perhaps Irish innovators would be willng to sell at reasonable levels without creating a bidding war in the national interest?
Wheather it is nationalised or not is not that important to me. What would be important is that if we show we have the capacity to acquire something with potential an using good business practice and management develop it into a succesfull Irish company.
That would give us the confidence to do it again.
It seems to me that larger more targeted investments further up the value chain may give more favourable results that the current stratagy.
“We’ve become accustomed to figures with a few more 0’s at the end but 50M a year is huge money if its targeted correctly and invested wisely.”
50m is roughly the amount of annual interest we’ll have to pay on the interest that will have to be paid to finance the bale out of Anglo (20 bn X 5% x 5%). Unfortunately, this particular money is not being targeted correctly and invested wisely!
@not-an-economist – “For how long more can this country continue to educate graduates and supply them free to industry when we are practically broke?”
Speaking to a large number of students recently, most of them are thinking of going abroad as soon as they can. I wonder how many of them already gone, or going over the next couple of years, might have been company starters and job creators in Ireland at some point in the future? My guess is most of this 250 million will end up in a few pockets of people who already know how to milk these systems.
As for supplying them (graduates) for free – most I’ve spoken to that currently have any sort of work are on non-paying internships. That’s supplying them free alright. After the internship ends, the intern asks if there’s any chance of a job and are told ‘no’, intern leaves then finds out a week or two later that the employer has picked up another free intern to keep doing the work. These are real jobs that need doing but the employers have worked out that there is an endless stream of graduates out there all desperate for work and they don’t even need to contribute to their bus fare to and from work. Wonderful country Ireland.
@Michael Hennigan – thanks. Interesting research.
In his budget speech the UK Chancellor stated that government expenditure was close to accounting for 60% of economic activity and it had to stop. When I look at NAMA and state investment in banks plus ‘normal’ public service expenditure, what is the percentage figure for Ireland please economists?
The Taoiseach announced recently that another €3bn in cuts were required and it may not stop there. The innovation fund seems pretty big in comparison. The country has 30-odd enterprise boards will they also need a slice of innovation fund to keep their mission warm?
@ Joseph. The graduate on the internship is probably getting the dole and is gaining from the experience. If a company can get somebody to work for free fair dues to them – besides, it’s unofficially taking part in the govt scheme to get graduates experience. I, as a recent graduate haven’t been able to get work for free even though I’ve offered.
@ all. Y combinator is an interesting way of going about VC [http://ycombinator.com/ – also an interesting chat with Paul Graham on Econtalk] Graduates of their programme have been responsible for Dropbox and Justin.tv amoungst other things.
You say in the link provided to your excellent blog: “Europe does not yet have a strong hub for commercial exploitation of innovative R&D: there is a vacuum in Europe”. That is an interesting statement, thinking about Lund, Delft, Cambridge and Stuttgart – all places I know and where effective networks exists that do precisely that!
The simple fact is that Francophone and Germanic Europe not to mention the Nordic countries have a far stronger track record at building innovative business with a strong technology dimension than Ireland has. Not to mention substantial service-based businesses where technology is less prominent.
It is also worth pointing out that “innovative R&D” is only one of the four basic things that need to be understood and reconciled for successful innovation. Failures in delivery of the other three ingredients are every bit as mortal: failure to understand customer attitudes and behaviour; failure to understand and predict the regulatory and legal environment and failure to deal with the ambitions and capabilities of the innovating organisation itself.
VC, tech-push, R&D and financial engineering are important but not the dominating elements in the sort of innovation that builds the kind of strong sustainable ‘mittelstand’ companies in which ‘old Europe’ abounds.
The innovation fund is fine – one small piece in the myriad of structural, behavioural and attitudinal changes needed in Ireland to make it more than a Eurozone-based US client state. Far more than this is needed and cheerleading is not appropriate.
I do not see a substantial direct role for the state in the increased focus on building small sustainable businesses that is now taking hold. Perhaps the best thing the state can do is leave entrepreneurs alone-stop competing with them through its agencies, tone down the endless content-free utterances about hubs, green collars and smart economies, and let them get on with their work.
Sean Baker’s point on IP is a key one. I spoke to one start up recently looking for funding – there is some sort of scheme available to them (there are many actually) but the quango in question (some sort of National Digital thingy) wants control of the IP. Since that’s where the value is, the start up isn’t interested – why would they sell the IP now? So they are looking for private angel funding instead.
This innovation fund won’t work if they are too greedy. Its success will depend on NOT making too much money out of their investment. That will reduce its “success” on the balance sheet, but if the process results in a few decent companies being created, then the state will benefit, but indirectly. I think that’s the bit the economists generally can’t handle.
The model here is Stanford, which earns a tiny amount of its revenue from its campus companies because of its simple licensing system, but earns big through reputation and donations in the long term.
One other factor _ I spoke to a Tier 1 VC in Silicon Valley recently about government investments alongside VCs (e.g from pension funds) and he said that VCs generally aren’t interested because the public element requires too much oversight and control.
I think the real need is not, as an earlier commenter suggested, to invest later in the process, but rather at the earliest stage. It means higher risk and lower returns but that’s when companies need the money. Remember, VCs only get involved when a concept is proven. The Angels/Y combinator guys get in much earlier – once you guys are prepared to accept the higher risk.
One other point re selling too early – yes I’ve heard more than one anecdote of Irish VCs exiting too early. In the Valley, the VCs are complaining about the founders getting too impatient and exiting – taking the acquisition instead of hanging on for the IPO. So I guess it works both ways.
Anyway, my point is:
1. public money should be in very early, commercialisation of research stage
2. it has to accept low returns. Greed doesn’t work.
Oh finally – don’t diss that property bubble money too much – I’ve also heard a lot of anecdotes about property guys investing 100k here and there with friends of friends working in start ups. The disappearance of that source has generated a need for fresh seed capital.
Interesting edit Karl.
What happened to Gates, Jobs, Ford etc?
Is it because they innovated without State aid?
Or is it that they found “university” a little slow?
You could throw in the ‘national competence centres’ as well. These were marketed by government agencies as vital (as is every state initiative) to growth, the Smart Economy, supporting multinationals and the whatever you’re having yourself. However, the costs of these vital appendages are not borne by the multinational sector. Instead, the taxpayer again picks up the subsidy tab. Curiously the US Bureau for Economic Analysis has identified Ireland as consistently topping the list of best sites for US multinational profitability. It surprises me that the multinationals aren’t underwriting the entire cost of the competence centres. The silence from politicians suggests this is a minority opinion, or perhaps they are afraid to voice their own.
By and large only those privileged enough to work in the third level sector will have access to emerging new streams of business funding. This seems to be government policy. As more seed funding falls under the control of state agencies, the criteria are bound to favour the academically credentialed. People in tenured positions are expected to drive economic growth through significant transfers of public resources into R&D and commercialsiation and all at no risk or cost to themselves or their careers. Anecdotal evidence suggests that the winners in this lottery are likely to cash in early, secure the nest egg and return to what they do well which is research. My difficulties with this are that it cements state capitalism as a major market shaper, transfers risk onto taxpayers rather than innovators, and favours one elite class of worker (in the public sector) over others (in the private sector). An employee of a private company is handicapped in such a system even though the latter is likely to be close to customers.
There is a message in the success of Microsoft, Apple, Google and Facebook.
The winners are often those who improve on an existing concept.
Most people think Thomas Edison invented the light bulb!
Who developed Visicalc? — the first PC spreadsheet, or maybe it wasn’t!
The Israelis provide 85% funding to companies in its incubation program.
25% of firms survive 10 years.
As most Irish start-ups will have to depend on bank credit to get going unless they are being promoted by academics on a public salaries, there needs to be some answer to funding other than VCs.
The biggest problem I see is that policymakers are running a constant PR campaign; State enterprise agency heads dose on the same vacuous superlatives while in the past Leo Varadkar had nothing of substance to say on innovation policy while I assume Deirdre Cloone is currently in her villa swotting up on the Innovation Taskforce report.
The danger is that these people have already drank the Kool-Aid of the academics who are banking on having a eureka moment and will ignore the potential outside of university research.
For example, an Irish company, Glen Dimplex, has become a world leader in the manufacture and distribution of electric heating appliances.
@ Chris Horn
Chris, we’ve sent an SOS out for ya!
Re Israelis etc. Does that mean you are in favour of the Irish government providing similar funding? Whatever the Israelis are doing clearly works so, shouldn’t we copy it?
May be of interest to soem readers: The video surveillance system on the 30km perimeter of the Vatican city is provided by an Israeli company – automatic intruder detection, etc.
Where did you get the figure of 85% as a contribution to start-ups in Israel? IDF affiliated research programs have certainly underwritten some interesting technology but 85% for stand alone ventures?
@Sarah This innovation fund won’t work if they are too greedy. Its success will depend on NOT making too much money out of their investment.
I see the point but its but its getting dangerous…
This fund should be managed as a commercial entity and targeted at companies with commercial potential. Whether these companies are spin offs of academics or otherwise is irrelevant in my opinion, the only criteria should be… If it was your own personal money, would you invest.
Anything else, potential jobs, where in Ireland the company locates, whose office it rents etc should not be part of the criteria…
The fund should be measured on net return over X years. Ideally, as the investment is over 5 years, with some target in year 4 or earlier where a decision could be made to kill it if its not performing.
This should be treated as an investment. Money from the fund that is not directly invested in companies but otherwise spent should be listed in its results.
There is an ‘entrepreneur industry’ in Ireland like the ‘poverty industry’. It eats up scarce resources in administrative overheads. There are plenty of people in both ‘industries’ making a very good living talking bollocks. 80+% of people in employment in both these ‘industries’ are charlatans, the figure is much worse for the entrepreneur industry than the poverty industry.
Though I have a small business and might be interested in this in the future, I cant support calling for stringent standards in somewhere like NAMA and something else in ‘innovation’.
Both are investments of scarce taxpayer resources. All such investments need to be accountable, transparent and ran on a commercial basis.
That doesn’t mean those managing the fund must shy away from risk. They should be empowered like VC’s to make their decisions, and maximize their investments using whatever strategy they deem best… e.g. if they have 2 companies on the books with synergies then they should be empowered to take advantage of that.
But on no account must talk of long term value or other bullshit be allowed to cloud investment decisions. Pretend its your money.
@ Sarah/The Alchemist/Greg
I believe a lot could be achieved if we had a credible governance system and competent people were involved in makeing desisions — again as with Financial Regulation, outsiders who are not likely to be in conflict of interest situations.
Niall O’Dowd as the cherleader in today’s Irish Times, reminds me of the Bertie Ahern years.
How dare anyone question the spoofers?
I have heard of academics putting pressure on PhD students to do research that suits them.
We should use the Israeli template over say a 5-year period — at least there would be a sytem that would be understood and projects would be selected for support according to understood criteria.
The total Israeli budget for the two year term ranges between US $350,000 to US $600,000. Budget for Biotech incubators (under directive 8.4) may be up to $1,800,000 for three years.
85% of the approved budget provided as a grant or a soft loan.
For Biotech incubators: 80% of approved budget provided as a soft loan.
A Singapore scheme aims to provide up to 85% co-funding in each startup in the incubator’s portfolio up to a maximum of SG$500,000. However, the incubator is required to invest the remaining amount of at least 15 percent, although there is an option for the incubator to buy out NRF’s share in the start-up within three years of investment.
The scheme is part of the S$360 million National Framework for Innovation and Enterprise (NFIE) announced in March 2008 to strengthen innovation and entrepreneurship in Singapore, and the Singapore National Research Foundation says it’s actually modelled after Israel’s successful Technological Incubator Programme.
@ Sarah Carey
“This innovation fund won’t work if they are too greedy. Its success will depend on NOT making too much money out of their investment. That will reduce its “success” on the balance sheet, but if the process results in a few decent companies being created, then the state will benefit, but indirectly. I think that’s the bit the economists generally can’t handle.
The model here is Stanford, which earns a tiny amount of its revenue from its campus companies because of its simple licensing system, but earns big through reputation and donations in the long term.”
The main reason that Ireland is different to the US and why the Stanford experience does not transfer is that you are missing a key point.
When the US invest Public money to Rand D and then allow Private enterprise to pick up the genuine innovations it does as you say have a long term indirect benefit. The reason it does it this way is more ideological than anything else. But the reason for that is Simple.
They are American owned companies and pay taxes and create Jobs in the US. You are suggesting that Ireland use the same policy but the problem is that it is not Irish companies who pick up the IP and innovations. Its usually the foreign multinationals.
I think the state should be looking for a % of any value in the IP. If a start up with a bright idea are receiving investment it is the least any Angel/Venture capitalist would require. Or am I wrong?
Israeli academic salaries are much lower than those in Ireland – Israeli universities often complain about a hemorrhage of young staff to the US and even the UK. Despite this VC inwards in Israel in the 08/09 period was exceptional. You can grab a an official VC and technology report from the web. Wearing a different hat some time back I drew both Lenihan’s and Varadkar’s attention to Israeli achievements not as a model but as heuristic.
But that problem is simply solved by making it a condition that the companies are Irish owned. Now many Irish software companies will officially headquarter in the US and keep a sales force etc out there. The Israelis do the same thing. Register the companies in the US (usually Delaware) and open a big office in the Valley, but the high value jobs (R&D) are kept in Israel.
Of course, as the company develops you can’t dictate who they sell it to, but take Iona as an example Fair enough it ended up a subsidiary of Progress (who have now closed the office here ) but for 15 years there was a really good engineering base here in Dublin.
btw, the US doesn’t fund research so that it creates jobs – they do it so the US gov can buy the technology – its the technology they are after. So the Military funds computer science, The Depart of Energy funds Physics, Department of Health biotech etc.
As for owning the IP, why not just own shares? I’ll go check with my Angel/VC contacts about the exact ownership structure…..back in a jiffy…
This is what irishecomony.ie like to edit.
That would be “edit out” of debate.
Is it because the university is being “bought off” with €500,000,000?
Well obviously not.
But what if the “university” got 5% of that?
What if the “innovation” could pay for, oh let’s say, some unfunded pension scheme?
That would be nice wouldn’t it?
How do Governments buy universities?
Who is bought with the scraps from the table?
What is a “Universe” “City”?
Would that be a “one word” place?
This is what irishecomony.ie like to edit.
I’m sure they have reason, or if not, at least self interest (which of course is reason itself).
From here to …………………….
“It’s hard to believe that the richest man in the world doesn’t have a college degree, but that’s soon going to change. Bill Gates, co-founder and chairman of Microsoft, will receive his honorary degree from Harvard University after speaking at their commencement ceremony in June.”
Some people didn’t even bother to waste their time with “University”.
Bill Gates didn’t get €500,000,000 to “innovate”.
He just did it.
“In 1972, Jobs graduated from high school and enrolled in Reed College in Portland, Oregon. Although he dropped out after only one semester, he continued auditing classes at Reed, such as one in calligraphy. Jobs later stated, “If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts”, he said.”
And not €500,000,000 in sight.
Thank God Eamon Ryan has yet another opinion on “innovation”.
Otherwise we’d all be tilting at windmills.
There are some who didn’t drop out.
“Edwin Howard Armstrong (December 18, 1890 – January 31, 1954) was an American electrical engineer and inventor. Armstrong was the inventor of modern frequency modulation (FM) radio.
Edwin Howard Armstrong was born in New York City, New York, in 1890. He studied at Columbia University and later became a professor there. He invented the regenerative circuit while he was an undergraduate and patented it in 1914, the super-regenerative circuit (patented 1922), and the superheterodyne receiver (patented 1918).”
Edwin Howard Armstrong invented the regenerative circuit while he was an undergraduate and patented it in 1914.
But the Irish, God bless’em. They need Government soup to “innovate”.
This guy didn’t need to take the Government soup.
He did it on his “days off”.
“Gary attended the University of Washington hoping to become a mathematics teacher, but became increasingly interested in computer technology. After receiving his degree, he fulfilled a draft obligation to the United States Navy by teaching at the Naval Postgraduate School in Monterey, California. Being within a few hours’ drive of Silicon Valley, Kildall heard about the first commercially available microprocessor, the Intel 4004. He bought one of the processors and began writing experimental programs for it. To learn more about the processors, he worked at Intel as a consultant on his days off.”
“It was during this time that Henry met Clara Bryant. When they married in 1888, Henry’s father gave him a large piece of land on which Henry built a small house, a sawmill, and a shop to tinker in.”
Are we allowed use the word “tinker”?
Good job his father gave him a “large piece of land” on which he built a small house, a sawmill, and a shop to tinker in.
If only Henry’s dad had known that the Irish Government would one day spend €500,000,000 on “innovation” he could have grown vegetables on that land.
A long holiday weekend.
Apparently there’s no need to tax 400,000 people for €1,250 per head to “innovate”.
All you need is a long weekend.
“Omidyar was 28 when he sat down over a long holiday weekend to write the original computer code for what eventually became an internet superbrand — the auction site eBay.”
Maybe with twelve weeks off the Government can come up with the next eBay, Apple, Microsoft, or Ford rather than resorting to the last refuge of the incompetent. Taxation.
to …….. here
What is irisheconomy.ie?
Just another mouthpiece for Fianna Fail?
The Irish Independent reports today that the government is committing €360 million to a few dozen research schemes under the next phase of the PRTLI. This initiative is apparently a side order to the €500 million Innovation Fund. Including, at a guess, SFI funding and EI funding for this year in the calculations, the government is committed to spending another billion on R&D support. No doubt this will create another tranche of academic jobs – and perhaps the aim is to mop up idle cohorts of PhDs and post-docs – with further long term commitments to public sector pay and pensions, but how many jobs in spin-out private companies are necessary to justify this level of investment? I have long ago given up trying to work out who is driving this agenda and whether any real cost/benefit analysis, rather than mere propaganda, has been completed. Would a smaller more focused initiative not be better in a time of contraction? Ireland is not under an obligation to answer each and any research question that arises in globalized academia, yet sometimes I can’t help wondering whether the kind of arrogance that puffed up the Celtic Tiger is a national character flaw.
So, I’m staying out of the academic/dropout debate. I don’t think its major league important.
But back to IP.
If any investor insists on owning IP then there is nothing in it for the founders. They’ll just walk away. This is not the standard model. The founders will always want to be in control of their commercial destiny. The standard model is that investors take a %, but not controlling %.
In the case of state investment and particularly as the companies that need investing will be at incubation stage, then a 10-15% stake is appropriate. The only people who’d sell a controlling interest or the IP are fools.
For what it’s worth, I do sometimes decide to delete long rambling comments that are way off point.
I’m also not fond of people posting seven or eight comments in a row making the same point again and again. Or consistent use of an arrogant carping tone.
Somehow I don’t think that makes me a “mouthpiece for Fianna Fail”.
VC funding is not for start-ups, it’s for scaling when a project is up and running. So it’s not about throwing good money into something at the idea stage. Funding a fledgling working business is not an easy task when the only means is through a retail bank. Retail Banks, as we all know, require collateral and in Ireland that equates to property. In our recent past, using this basic standard, they discovered a form of perpetual motion where collateral in property could generate more collateral in what is was a classic regenerative closed loop system, until, of course it gained so much momentum that it eventually blew up.
So much for our retail banks then, they’re simply not suited to funding the type of complex businesses that we now need to generate sustainable employment and so, the government has little option but to go down the VC road.
This fund is welcome, depending on how it’s spent:
This is a good example of the money going into the wrong pockets in America:
“Unfortunately, healthcare in the USA (and many other countries) is *extremely* entrenched in Microsoft products (trust me, I know) and closed source software. The whole “giving out money for EMR’s” has been a disaster. Special interest groups have pretty much ensured that all the money will go only to “approved” or “certified” systems, which are all closed-source, commercial packages (and almost all also running on MS-Windows).
And guess what those companies did? They RAISED THEIR PRICES for that software by the same amount of money that is being pumped into handouts to hospitals and physician groups!”
In other words, you have to trace where the money’s going and how much of it ACTUALLY goes where it is needed and supposed to go.