The subsistence diet of government — and some VC — funding

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By Francis Moran

Former Canadian Olympic gold medalist and chef de mission Mark Tewksbury gave a keynote address at the National Angel Capital Organization‘s summit in Halifax in late October. In urging that Canadian business adopt the Olympic movement’s Own the Podium approach that sees athlete funding going disproportionately to those who show the best promise of winning a medal, Tewksbury said we have to move away from the old Canadian funding model. That approach, he said, sees government spread its limited funds across too many recipients, ensuring that nobody starves but also that nobody gets the resources they really need to succeed. As Tewksbury put it, funding before Own the Podium was “one for me, one for you,” ensuring “one for me-diocrity.”

The same sentiment came up during a conversation last week with Didier Leconte, head of MSBi Valorisation and, also now, Valeo Management. The two organisations are part of the value chain bringing to market innovations developed by researchers at a handful of universities in Quebec. Leconte has been a regular contributor to this blog, mainly as a source of good commentary and a sounding post for some of my questions. We got into a discussion about venture capital in general, the federal government’s pending deployment of $400-million into the VC sector, and this overall trend of spreading available funds too thinly.

I maintain that brilliant ideas will almost always attract the necessary levels of investment, even here in Canada where the common lament is that the capital pools aren’t big enough. And while Canada has structural issues that most certainly need to be addressed to make this a more attractive environment for risk capital, the reality is that most companies that don’t get funding simply don’t deserve to get funding. I may be a socialist, but when it comes to allocating scarce capital in the private sector, I am an unsentimental Darwinian advocating for survival of the fittest.

And both Leconte and I agreed that the same unsentimental approach ought to hold true for government funding because current approaches, as with Olympic athlete funding before Own the Podium, are unlikely to create many gold-medal-winning performers.

“One can look at it like a spray-and-pray approach,” Leconte told me, with little bits of money doled out to too many companies in the hopes that some of them will gain traction. “That has certainly been the approach in technology transfer as well in the past.”  The reality is that without focus and efforts, failure is not just an option, it’s inevitable. “The rising of groups like TandemLaunch headed by Helge Seeltzen shows that focus pays-off and attracts industry backing” Leconte said.

The traditional subsistence diet is designed to make sure nobody starves but also guaranteed to make sure nobody has enough to really make a difference. Certainly, it is far too miserly for what Leconte calls “hard-tech” ventures, companies working in capital-intensive sectors in general with lengthy and complicated development cycles.

And lest you think this Fagin-like approach to treating companies like waifs is limited to government, it is not unheard of even amongst private-sector venture capitalists. Whether it’s in the name of spreading risk around a well-populated portfolio or just a case of not having sufficient risk tolerance to make really large bets, too many VCs dole out just enough money to keep their companies from going under but not nearly enough to allow them to truly thrive.

The downside, one that both Leconte and I can see clearly, is that backing the winners means starving out those with less promise and the more we do this, whether with Olympic athletes or with companies, the greater will be the number of unfunded complainers. I don’t know if politically directed public funds have the bottle to withstand the inevitable criticism; I sure hope private-sector VCs do.

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