Venture capital is an immensely risky asset class. It’s used to fund the unfundable: complex medical technology, hard engineering problems and internet startups, most of which tank – especially in Europe, where entrepreneurs have never really understood what it takes to put together sexy, viral apps and market-leading social software. So it might surprise you to learn that the taxpayer has become a venture capitalist.
But it’s true. Billions of pounds has been poured into the European venture capital industry in the last decade. Some funds really go to town, applying for money both from local governments and various divisions of the European Union. Software investors such as Notion Capital are raising funds comprised wholly or almost wholly of public money: a chunk of British taxpayer cash from the Enterprise Capital Fund, another chunk from the European Investment Fund… with so much state largesse, it’s hard to know when to stop asking.
Nice work, if you can get it – and you don’t mind doing a bit of paperwork. (Getting money from Europe isn’t hard, but it requires a lot of patience and a giant stack of forms.) But can there be any justification for so many hundreds of millions of pounds of hard-earned taxpayer cash being showered over rich kids in east London? Should the rest of us really be subsidising their MacBooks and skinny lattes?
Because it’s worth bearing in mind where this cash is going. It’s going to charming people like this. In many respects, the London startup scene, clustered around Old Street roundabout, is a sort of middle-class dole queue, financed by the state, producing nothing of value to the economy. A grateful bunch are the Nathan Barleys of London’s startup scene – provided, of course, that the money keeps flowing into their terrible, pointless “apps.”
Some venture capital firms, such as Amadeus Capital, based in Cambridge, have been rescued from death by taxpayer money: Amadeus would never have been able to raise a fund of its own after a decade of under-performance, goes industry talk, so it went begging to the government and was given tens of millions to play with. Any member of Amadeus’s portfolio performing so badly would have been shut down long ago.
The investors who staff these funds are the same people whose poor returns prompted wholesale abandonment from their own investors – the people who put money into venture capital. Pension funds and family offices, both of which operate slowly and strategically, are still in the process of moving away from VC. It will take a decade – more than the lifetime of a typical venture fund – for the pendulum to swing back, meaning that VCs have instead gone in search of taxpayer cash to fill the void.
There is little evidence that this is a good use of regular people’s cash, and much to suggest that it is akin to setting bundles of £20 notes on fire. Nine in ten startups fail; the figure is much higher for European internet startups, which is what Tech City is all about encouraging.)
When it comes to entrepreneurs, lean, cash-efficient and results-oriented is the name of the game. But investors hold themselves to very different standards. The aforesaid Notion Capital is only one of dozens of VC firms, traditionally bastions of red-in-tooth-and-claw, bleeding-edge capitalism, now clamped to the public teat. They operate with no accountability to the public and no consequences should they spunk public cash away on absurd startups.
This development has distorted what would otherwise have been a necessary and healthy contraction of the venture capital industry in Europe following a sustained period of moribundity. Underperformance, bad management and bad judgment are now being subsidised and maintained by public money.
The internet industry is so devoid of ideas that even its own people can’t tell reality from fantasy any more, so ludicrous are the ideas coming from beardy wankers in Shoreditch and elsewhere in Europe. Neither investors nor entrepreneurs could tell these fictional startups apart from real ones when I set them the challenge last month.
When questioned, VC firms usually decline to reveal how much of their fund is made up of taxpayer cash. But, the next time you fill out a self-assessment form, it’s worth remembering that somewhere there’s a failed banker who was just handed more money than you will ever make in your lifetime to make speculative punts on dating sites for lonely lesbians and women-only bitching forums.
And they wonder why people fiddle the books.