On Sunday, U.K. newspaper The Guardian reported that officials there are planning to spend 1 billion pounds to establish an emergency venture capital fund for struggling tech start-ups. The fear, apparently, is that the country's innovators are at risk of dying before adolescence, thanks to an increasingly global credit crunch.
I get the logic, but disagree with the action. Entrepreneurship isn't for the faint of heart. Failure is common. Here in the United States, only 31% of small businesses survive seven years, reports the Small Business Administration's Office of Advocacy.
And yet conditions have deteriorated. Venture capitalist Charles Harris, founder of tiny-tech investor Harris & Harris (Nasdaq: TINY ) , put it best in his firm's third-quarter letter to shareholders:
A continuing lack of IPO opportunities for venture capital-backed companies could lead to companies staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available funding for early stage companies in particular as, in general, venture capital firms are being forced to provide additional financing to late-stage companies that cannot IPO.
Nor should it be; VC investing is risky. If that means we, as a nation, suffer through a tougher climate for venture financing as a consequence, so be it. We'll see fewer start-ups, sure, but those we do see will be real innovators. And if they still need financing? A broad-scale bailout isn't the answer. Let the SBA do its job and fill some of the gap with low-interest loan guarantees.
U.K. science and innovation minister Lord Drayson is advocating what he believes is right for his country's tech industry. That's commendable. But if there's a litmus test for a bailout, it should be for (a) industries where the economic costs of failure are too great or (b) whose risk profile has abnormally and dramatically deteriorated due to unforeseen and uncontrollable events.
Start-ups fail both tests. All a bailout would do is subsidize their inherent risk, and thereby encourage would-be entrepreneurs to compete for a heaping helping of giveaway pie.
Does that really sound like a plan to spur innovation? Not to this Fool.
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