Boosting seed investment: lessons from London
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Frank Boermeester Frank Boermeester - October 27 2014

City_of_London_skyline_at_dusk

What can government do to boost seed investment in (health) startups?

In a previous post we asked ourselves what would be needed to get the digital health engine in Europe revving up a few notches. We talked a bit about the role of accelerators, universities and healthcare providers. In a next set of articles, however, we’d like to share some thoughts on what government can do to help. This is an urgent question, we think, because some governments are clearly doing the right thing, while others aren’t. And the gap is widening. In this first article, let’s compare the UK and Belgium with regard to seed investment.

Where’s that foolish money?

Finding ‘foolish’ seed investment money in countries like Belgium is next to impossible. Yes, the government offers a spot of money here and there via R&D subsidies, semi-state incubators (an oxymoron in our eyes) and semi-state investment funds but that money isn’t ‘foolish’, it is still very hard to come by, it typically involves a very bureaucratic process, it mostly is geared to R&D and advancing specific policy objectives, and most important of all, it is absolutely puny, a drop in a ocean.

For our own sanity we didn’t try to compare the amount handed out annually to startups with the money needed to administer such handouts and the related ‘support’ services offered to entrepreneurs by our benevolent government. 

Take a recent initiative by the Flemish government to create a “Medical Valley” in the province of  Limburg. €23 million will be invested in four “pillars” of healthcare research, including one called “Digital Health Innovation”.  As far as we can tell, most if not all of that money will be spent on university-led research, creating interesting pilot projects in clinical settings, but will such projects help create new companies and boost economic growth? We doubt it. Some of the money will also be spent to support a policy objective of keeping elderly people at home “because this saves our healthcare system a lot of money”.  Is that the right approach, when,  the merits of that policy are increasingly debatable (since it creates a lot of very lonely elderly people, who  in turn are more vulnerable to depression and possibly even dementia)? 

But back to that drop in the ocean. It’s not that there isn’t any capital available in this little nation of ours. Ordinary Belgians have nearly 250 billion euro (equal to approx 60% of Belgian GDP) sitting on savings accounts that typically earn less than 1% in interest these days. Convincing Belgians to invest some of that capital in risky ventures will take some doing. But we suspect the UK’s approach would work wonders, as it has to boost London’s tech scene (the tech/info sector in the combined London-East-Southeast region is reportedly growing faster than California).

The UK has created probably the most generous tax breaks for seed investors in the world. For example, if you invest 10,000 pound in a UK-based company that meets the criteria for the Seed Enterprise Investment Scheme (SEIS) you can reclaim 50% in income tax relief. Then on profits you don’t pay capital gains tax, nor inheritance tax. And if you lose everything you can offset most of that loss through further tax relief.  No wonder the Coalition for a Digital Economy (a lobbying group of UK startups & investors) recommend that SEIS (and its older brother EIS) is kept firmly in place.  

It seems there are two approaches available to a government if it wants to boost seed investment.

The wrong way is to set up ‘innovation’ agencies tasked with supporting entrepreneurs. One, they’re not the right people to support entrepreneurs, two, the seed money that trickles out of such initiatives to entrepreneurial ventures is a tiny fraction of the total cost required to run such institutes, and three, the money that does end up being invested isn’t risk capital by any stretch of the imagination – too often, the administrators of such funds look for foolproof investment in a world where that simply does not exist.

The right way is to create tax incentives that unlock the billions currently stashed away in economically dead bank accounts. If policy makers really want to make an impact on the startup scene, they have to release real money, lots of it, and yes, it should be spent ‘foolishly’ – that’s the nature of the beast.

Comments

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    Rudiger Mees Rudiger Mees ( November 17 2014 15:19 )

    Great article!

    The question is always who will take the first step in the water?

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    Johan Goris Johan Goris ( November 18 2014 03:41 )

    … and how long will it take to swim?

    Great post indeed, let’s hope those ‘concerned’ wil read and act upon it too!

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    Bart Collet Bart Collet ( November 19 2014 09:14 )

    Another interesting view is to compare government subsidies/grants/funds with third world aid which is -despite the best intentions- not producing the desired outcome. Good read on the subject here: http://www.newrepublic.com/article/120178/problem-international-development-and-plan-fix-it

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