Investing in Inefficiency vs. Innovation

Huge sums of money were urgently summoned and used to bail out banks in many western countries. Especially in the UK and the USA. Most of you will know or guess where I sit on these issues. Governments acted quick to save these dinosaurs that would have been better off failing. This is the beginning of another whole long essay, but for starters, such action, while easing some pain in the short run (but not for the poor who couldn’t pay their mortgages and would have been better off with failed institutions and the mortgage paper in limbo for a while until the market cleared), in the long run, this action put a dent in the entrepreneurial surge and the spirit of entrepreneurship. It would have been better to have big, failed banks, eased some regulation and let entrepreneurs create new, innovative banks to serve the needs of the marketplace. I’ll stop this rant now — this didn’t happen. But the issue is that massive amounts of capital were quickly deployed to prop up inefficient institutions that made huge mistakes and took big risks that didn’t work. Such is life. Technology entrepreneurs do this all the time and no one bails them out. For now, though, we’ll take this huge investment of £60 million as a given.

So why can’t governments act swiftly and urgently in a big way to put money into the financial institutions of the innovation wave — venture capital firms?  In particular here I am talking about a SupraNational Fund-of-Funds that invests in 3rd party venture capital firms of various types.

In Scotland alone, the UK government “invested” 60 billion pounds — that’s right SIXTY BILLION POUNDS — to bailout such fumbling giants as the Royal Bank of Scotland (RBS) so it could sponsor more Rugby matches and force poor people who couldn’t pay their mortgages out of their houses.

See     http://www.forbes.com/2009/11/18/scotland-banking-finance-markets-equities-rbs-hbos.html

The state now owns 70% of RBS and 43% of Lloyds. Both of these institutions are still struggling and may fail yet.  The taxpayer may or may not get their money back, some of it maybe. OK some jobs were saved, but, these could have been recreated by the newly formed banks. At least. Keep reading.

Invest in Innovation

Instead of investing in inefficiency, what if the Government would have invested in innovation?  Let’s just take 10% of this amount used to bailout banks in Scotland — 10%, and put it into a SupraNational Venture Capital funds. 6 billion. After management fees of about 1% a year, this funding would have been enough to start 59 new venture capital companies in Scotland, assuming an average fund size of £100 million. Can you imagine 30 new, £100 million venture capital funds in the Country? Want to see an innovation economy happen in a hurry?  Entrepreneurs from all over the world would be flocking here, relocating and setting up their businesses. In Silicon Valley there are roughly 800-900 proper venture capital funds in a region with a population of 6 million or so. But the place is of the charts.  30 would be a huge number for any regon though. And what a contrarian strategy that would truly differentiate the Country on the world map.

R & D & T

And while we are at it, let’s take another 10% and invest it in the “R” side. £6 billion for reseasrch at higher institutions. This would be a huge influx of capital for research and further develop this core competency of the Country. Right now, folks are running scared that “R” is going to be cut back drastically.

Let’s not stop there — how about another 10% for education — the teaching (“T”) side. £6 billion for T for higher education. Again, now, this side is under great pressure, and may be cut back drastically. This is exactly what shouldn’t be happening.  Actually, this side should be invested in greatly, right now. Another contrarian strategy that will differentiate the Country, draw intelligent and creative minds in, and further push it down the path of the knowledge economy and an innovative region.

The “D” side can innovated as well, there are examples of a variety of programmes around the globe to help the development of research into an innovative technology. How much should we put into these programmes?

With massive investment in innovation, starting with the venture capital industry, and following up with R & D & T, a more efficient and longer term use of capital will be had.  We are talking about £18-£24 billion here, less than half of the investment made in the big banks.

Make it Happen

So what to do now? Sell the stock in RBS and Lloyds and invest in Innovation?  Good idea?  If so, how about tomorrow? Make it happen. “R” is in trouble, “T” is in trouble, and the innovation economy in the long term is especially endangered at this juncture. Time is of the essence.

Question

So the question is, why isn’t the innovation economy invested in like it should be? Is it the ambiguity and uncertaintly of what might happen?

Question 2

And the second question is, what would have happened had the US and UK not bailed out the banks. The talking heads say that it would have been dire. But why? No one is really asking the good questions here. What would have happened?

Question 3

And finally question three is, what will happen if the innovation economy is not invested in? What will the future bring with the scaling back of research and teaching, and the continued downsizing of risk capital in the economy?  My bet is that this long term danger is much larger than the short term danger of not bailing out the dinosaurs.

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