The report found little enthusiasm amongst successful, fast growing high-tech firms for the kinds of multi-partner research grants involving university-industry collaboration that are favoured by UK policy makers and, in contrast to the US, a dearth of R&D contracts with public sector customers. It argues that for decades UK Government policy has been based on three fundamental myths about how new hi-tech firms are created:

-       that university research is the key source of technology and innovation for new hi-tech firms

-       that venture capital is the primary source of finance

-       and that the best way for Government to support technology development in companies is by funding multi-partner research collaborations between universities and private sector firms

While the first two points may be true (to some extent) in Silicon Valley (at certain times),  countless billions have been frittered away trying to create new Silicon Valleys in various parts of the world.

The report also calls “for the establishment of “Intermediate R&D Institutes”, similar in some respects to the Fraunhofer Institutes in Germany, to provide a more mission orientated environment than is possible in universities to develop and commercialise technologies with long lead times.”

The results of a survey of over 1,000 VCs seem to indicate that it is, and the industry as a whole is in need of a ‘reset’ – both in terms of the number and type of companies involved, and in terms of their attitude to ‘innovation.’

Although in one conversation, one of the partners shared with me an ironic observation – he works in an industry that preaches innovation and it is all about creating new businesses and investing in new ideas, but the venture industry itself – doesn’t want to change! It is barely a 30 year old industry but slow to change, almost institutional in its view of itself as it relates to structure, fees, compensation, succession planning, etc.

Lets hope the "innovation economy" works better than the "knowledge economy"

The European Union is getting increasingly interested in innovation, and convened a Business Panel on EU Innovation Policy to help it. The report is here, and  a blogged summary by Diogo Vasconcelos is here.

While it’s all good stuff, and the recommendations about broadening the concept of innovation and creating new infrastructure and financing models are sensible, much of this, and other similar reports tend to ignore the elephant in the room, the question of whether governments can do anything at all abut innovation?

Of course chucking plenty of money around will result in some of it sticking to to something useful, but most of it won’t and of course if huge wads of money are available for innovation then there will be plenty of companies rebranded as innovative that were clean tech the week desperately sticking their paws in the honey pot.

A better suggestion from the Panel is to improve infrastructure, making sure that everyone has access to fast broadband is a step, but one has to wonder whether we are already approaching the stage where everyone who wants superfast broadband internet access already gas it, and piping it into households who have no need or interest in technology will only stimulate innovation in the online gambling and pornography industries.

Rather than building new institutions and putting in soon to be obsolete wiring, Europe should look at what it already has and try to make that more efficient. There s no shortage of decent universities, or of scientific talent. If I were to start throwing taxpayers money around chasing an nebulous concept like innovation, Universities would be a good place to start.

UK Announces £1Bn Innovation Fund and Outstanding Achievements at No.3 Tractor Factory in Hartlepool

The UK Government’s £1Bn Innovation Fund was announced for the fourth time this week (although I’m still waiting for the promised explanation from Lord Drayson). I wasn’t too impressed last time it was announced, or this time, and Mark Littlewood at Business Leaders Network is also sceptical

It may well be that the money will be raised and will be used to do something imaginative like backing successful angels and entrepreneurs through side-car funds or some similar mechanism. There are some interesting possibilities here that could make sure that the money is spent to ‘kick start British Technology investment’. But putting it into established funds, particularly ones without decent track records, will just create fund managers who are doing it for the management fees, won’t take the kind of risks that are needed and don’t have the experience to make success happen. Oh and it could create a false market.

It might be better if the government could wean itself off the addiction to announcing half baked ideas involving big numbers and actually implement something. It is hard to see the value in constantly re announcing something and the latest news about the fund rings as hollow as a set of Soviet era tractor production statistics.

I’ll be back in Dubai next week for what is describes as the “World’s Largest Brainstorming”

“Dallas is an entrepreneurial city, but it won’t be driven by venture capital going forward,” said Daniel T. Owen, a venture capitalist at the 16th-floor firm H02 Partners, which plans to wind down its venture business over the next few years. “The pure venture-capital model is really thriving in just Silicon Valley and Boston.”

The bottom line is, in this case the bottom line, as VCs who haven’t managed to make any money for their investors are left bemused by the unwillingness of anyone else to hand over cash. I’m bemused as to whether that’s an arrogant or stupid view of the world.

Toto, This isn’t 1997 any more!

This article misunderstands how this fund will work. I will blog on the BIS site to spell it out.

I’m looking forward to it.

There is no doubt about the commitment of the Lords Mandelson and Drayson to stimulating the UK economy though science and technology, they have been banging on about it for years. It’s rare to see one person in government who ‘gets it’ let alone two, but the devil is always in the details (cue another rerun of Yes Minister)

In fairness, I haven’t heard a squeak about science and innovation from the opposition Conservative party recently apart from a few general remarks to the Royal Society.

Perhaps a half baked plan is better than none at all?

The main worry is that the UK government has made a habit in recent years of announcing things and then forgetting about them. There was a a £750 million fund for innovation to “stimulate growth in the UK’s industries of the future” announced in April, and according to the Telegraph

This new ‘UK Innovation Investment Fund’ is not the first initiative launched this year. The much heralded £75m Capital for Enterprise fund, set up in January to take stakes in over-indebted companies, has still to announce its first investment. A women’s enterprise venture capital fund, launched almost a year ago, has also so far resisted the temptation to profile its progress.

One has to wonder whether the true purpose of these initiatives is simply to produce sound bites such as

“This fund will help build Britain’s future by investing in key sectors. It will provide crucial support for our most promising start-ups and existing small companies just when they need it most. Venture capital finance is the lifeblood of innovation and crucial to ensuring the commercialisation of the discoveries coming out of our research base. The fund will boost future UK competitiveness,” the Prime Minister said..

or headlines like this

Government Launches £1 Billion VC Fund!!!!

The fund hopes to make investments by the end of the year, but the maths does look a bit dodgy, even for the VC industry as discussed here

We’re obviously not in receipt of the facts (and this sort of addition might be responsible for MP allowances scandals). £150 million of public money plus equal participation from the private sector equals £300 million and not £1 billion. Now – we can make allowances that this is over 10 years so the revenue gained from licensing and exits of companies funded might contribute sufficient back to increase the value of the fund. Might.

Either way, the £150 million will barely cover the administration fees of the various private VC funds that will be needed to make up the other £850 million to make this into a £1 billion fund.

Given that the Lords Mandelsonand Drayson are passionate about the need for technology investment, I’d love to think that we are missing something and that there is a solid and well thought out initiative behind this announcement, but for the moment it does look somewhat half baked, especially in light of the fact the government doesn’t appear to have any money to pay for any of this!

Brian McConnel at Gigacom takes a look at ‘Class R’ stock, a possible investment model that is halfway between a conventional investment and a loan. Here’s how it works.

Let’s say for rough numbers that a group of angels invest $500,000 for a 10 percent stake in an early-stage company and 5 percent of gross revenues with a 5X cap (total payout: $2.5 million). The company does OK and turns into a nice small business with revenues of $2-$3 million dollars a year. Happy with that, the owners decide not to sell or try to grow much bigger. The investors in this situation will be receiving $100,000-$150,000 per year (off $2-$3 million/year in revenue), which is not a bad annual return, and will get up to $2.5 million over the life of the agreement. In other words, everyone wins — the entrepreneur is rewarded for creating a viable business, and the investors do well without having to force a sale. And they still have 5 percent equity so that if, 20 years later, the founder retires and the company gets bought, they are very happy vs. just merely happy.

Of course there is no downside protection, but then again there rarely is. However it does address one of the major problems with commercialising technology, that of what happens if the company is just a nice company, rather than a spectacular success. In some respects it’s not too different from paying a dividend, which most companies prefer not to do, certainly in the early stages, but it may be a way , combined with tax breaks, that would actively encourage much needed angel investment.

PS it’s worth looking at the comments for some other alternatives.

It’s a decline that hurts everybody, with cash starved companies taking whatever they can get, which is often a far cry from what was promised and according to the WSJ, existing investors are increasingly resorting to propping up valuations, something that is clearly only sustainable in the short term.

In the first quarter, 57% of all venture rounds in the U.S. were done by insiders only, according to VentureSource. The prevalence of such financings has raised concerns that venture firms are propping up valuations to avoid write downs that would affect fund performance. A new investor is more likely to question whether a company is over-valued.

No doubt everyone is hoping that a recovery will take place ans valuations will soar once again, but if we are in for a longer slump it;s a dangerous game to play and we will see more VCs becoming over exposed and undercapitalised.

1. Renewable energy interest tends to lag oil prices by 6-12 months and with oil almost back to 2006 levels a lot of transient interest will evaporate
2. Lot’s of clean tech companies based their business models on sustained high oil and commodity prices – so a recalculation will reveal that they don’t stand a cats chance in hell of being profitable
3. The stampede by Venture Capital into every clean tech deal going for the last two years has inflated valuations to levels that will never return any cash to investors – and that was before anyone took into account  recessions & pestilence
4. As a result, VCs would find themselves locked into very expensive deals and have trouble shaking down their limited partners for the funds necessary to keep in the hunt

Don’t say you weren’t warned. It must be getting serious when even VCs are getting contrite – according to the New York Times:

David J. Prend, managing general partner at RockPort Capital in Boston and Menlo Park, Calif., said that the promise of big returns prompted too much “me-too investing,” when venture capitalists put money into start-ups that do the same work as other companies.

“There was probably some stuff that shouldn’t have been funded,” he said. “It’s kind of good for some of that to get washed out.” For clean tech to be a viable industry, investment should not return to recent highs, he said.

Mr. Vassallo blamed the credit crunch for the decline in clean-tech investing. More than half of clean-tech investments have been in alternative energy like solar and biofuels, which typically require building big factories. These projects depend on capital like project finance loans as well as tax equity investments, whereby corporations back green energy projects and reap the tax credits. These have been “frozen or completely disintegrated,” he said.

This is weird & spooky. Didn’t the same folks say the same thing about dot com investing, about nanotech and now clean tech? Are these the people we see rooted to spot, continually banging their heads against a wall crying “I know there was an exit here somewhere!”

Mark G. Heesen, president of the National Venture Capital Association, prefers to call the clean-tech investment cycle “an education curve.”
Still, he said, “if the industry has gotten one criticism year after year, it’s that we have a lemming mentality, and solar probably represents that in the clean-tech space.”

I’ve seen this happen in a number of companies, and it’s not pretty. As a result, the founders often end up with next to nothing, even if there is an exit.

I spent a rather enlightening afternoon today at the UK Aware Ideas for Greener Living exhibition speaking on a panel hosted by Francis Sealy of 21st Century Network (@21stCN).

Francis had selected a panel consisting of a technology expert (myself) and a couple of people who were interested in living a more simple life. One of these, a chap called Duncan who had come all the way from Brixton on a recumbent bicycle was an expert on transition towns – listeners to The Archers will know about that idea – while Tracey Smith is the person behind International Downshifting Week and is full of bright ideas for things to do that don’t involve going out and spending money (staying at home and cooking naked pizzas seems to be the new going out).

Looking at the panel, and the exhibition as well, I detected two distinct strands emerging. One is the down shifting/simplicity type movement which involved sewing your own clothes out of bits of rag (I’ve seen people do this in the slums of Howrah as well) and living a simple life after the manner of a 17th century Hebridean crofter. The other solution seemed to involve shoving batteries in things, card, bucycles etc, or making things including, intriguingly, a bicycle  made out of compressed waste paper. So we have simplicity versus technology in a rather crude home made sort of way. Both have their attractions too – a lot of basic skills such as cooking or mending clothes have been lost to the current generation, so I can understand the thrill of discovering that you can do things for yourself. On the other hand driving a plastic battery powered car might make you feel good, but the bill for the new battery after five years and the life cycle carbon emissions will probably make you feel a but queasy.

The Brixton Transition Town project is based on building a local community with its own currency, independent of greedy/misguided central banks, and based on the premise that everything can be done locally. I can see how this would work in rural areas where you have plenty of agricultural produce to barter, and it worked pretty well in the iron age, but London is a big place and the only things you can raise here are pigeons and rats, and I don’t care how sustainable they are, I’m not eating those. A new Brixton Fruit & Nut (and two tomotoes) map may help broaden the diet, but I don;t think Tesco will be too worried. While I applaud the idea behind it, it is at best a very small scale project which not everyone will opt into, perhaps a kind of 21st century collective urban farm? I hope I’m proved wrong.

What shocked me the most was the views of my co panellists. I’ll spare the blushes, but after both had talked about the power of doing positive things for the benefit of the planet/humanity one of them said “The economic crisis is great – it will force people to change” while the other gleefully cried “Peak Oil and the Credit Crunch – Bring It On!!!!”  Come on, is it worth the misery and social deprivation, the homes reposessed, the families split up and the spike in violent crime caused by a recession just to set up a sustainable vegetable trading scheme in Brixton? And they called Margaret Thatcher heartless…

But the point that, hopefully I managed to make was that technology and living in harmony with the planet don’t have to be mutually exclusive. Technology has produced almost all the economic growth of the last three hundred years, and in answer to a question about why we need growth I suggested we contrast quality of life in London and Lagos. Given that everyone is aware of the green/sustainability/carbon/fossil fuel dependence agenda now, many businesses are seeing this as positive thing rather than a millstone, and there is a wonderful opportunity to use technology to make the world better – LED lighting, one of the things on display is a classic case of something where technology can make a huge difference at a low cost. I have a lot of LED lighting at home, it’s better than the dim low energy bulbs, and when mixed with halogen lighting it is possible to fiund an acceptable colour balance.

From the audience, if not from the panel, I took home a sense of frustration with the slow progress being made to reduce emission and tackle environmental issues. Pondering this as I walked across Hyde Park on my way home, a flock of geese flew low overhead, heading for the Serpentine, and I realise that we have already made a lot of progress. The Yorkshire I grew up in was one of black grime caked buildings, belching mills and slag heaps from the mines, it looked like Mordor in the Lord of the Rings movies. Most of our rivers were dead and filled with a chemical sludge and the only bird you ever saw in Bradford were starlings and the seagulls who lived on the rubbish tips. While there are bits of China that still look like that, the rate at which China is adopting clean technologies means that their industrial revolution will blight the landscape for a fraction of the time we had to put up with in the UK.So I suppose we are moving in the right direction already, we just need to pick up the pace.

Looking at the sustainable products in the exhibition, most of them seemed to both more expensive than the non eco versions you can buy and perform rather badly. My instinct is that by using technology rather than rejecting it, we should be able to produce some quite incredible products at a very low cost to both the environment and the consumer. Perhaps the real reason that the whole green economy isn’t quite working is that most of the products seem to have been designed by teepee dwellers with as much idea about economics as Gordon Brown? Swapping organic rats for Tibetan prayer beads won’t change the world no matter what that old hippy tells you.

But in the end, I think I’m a convert to the green cause. Not because of  people who think that riding around on a funny bicycle for the rest of your life and eating roadside weeds will save the planet, because compared to a couple of new power stations in China it won’t make any difference at all. What did it for me was realising that the vast majority of perfectly normal people at this event just want to ensure a nice future for their children, who are worried about running out of resources with no alternatives in sight, and who are less interested in smashing the global financial system than having a system that ensures some kind of sustainable and prosperous future.

An almost final question from the audience was “what would you do in the next twenty four hours to make a difference?” I think I’ve just done it, so let’s pick up the pace!

With lunatics like this running the asylum its hardly surprising the UK economy is in its present state.

Sir Roy Anderson, rector of Imperial College is being firmly diplomatic rather than hopping mad, and calling for a £1bn venture capital fund to support small high technology companies, an ideas as insane as Mervyn Kings. For all the whinging about the UK venture capital industry, it’s not too bad. It’s not Silicon Valley but it’s much better than most of the rest of the world. However, like their UK counterparts it doesn’t work too well, and shovelling yet more public money into another lame duck industry won’t do any good either.

It’s hard to believe that the finest minds in the country can’t come up with a better idea for an economic stimulus package than chucking loads of public money at things that don’t work. Putting their underpants on their heads and shouting at the traffic would   have as much effect and be a lot better value for taxpayers.

Despite its recent woes, there is enough liquidity in the VC industry to continue doing what it does, but what it doesn’t do is invest in early stage technology companies. In fact not many people do and that’s where the money really needs to go, to support early stage companies and get them to the stage where they can attract further capital from customers, banks or even VCs.

As I wrote in February, Let a Million Flowers Bloom!

Given that the returns on most asset classes are now negative, entrepreneurs are one of the few places where some wisely invested cash will give a decent return. Imagine what would have happened if governments had refused to bail out the banks and put the cash into technology, entrepreneurs and small businesses instead? We’d still be a few hundred billion in the hole, but at least there would be some chance of getting some of it back and stimulating the overdue reinvention of the economy.

Here’s why:

Start- ups today take a median 6.6 years to go public or get sold, up from 5.4 years in 2005, according to research firm VentureSource. Through the first nine months of 2008, venture funds lost 4.3%, according to Cambridge Associates. Those figures don’t take into account the severe decline in asset values since mid-September.

For limited partners, the investors in Venture Capital funds, this is proving a little worrying. One asset manager commented in the WSJ that “Traditional venture capitalists work with young private companies and they should stick to that niche.” It is a little odd that if a company with a platform technology wants to exploit it outside their initially defined area then their VCs will get rather shirty with them, but it seems perfectly OK for VCs to start dabbling in things outside their own core competence.

My feeling is that this is just the beginning, and the traditional dividing lines between venture capital, hedge funds and even banks will become increasingly blurred as a result of both the current financial meltdown and the impending new regulations on both sides of the Atlantic. Taking an existing structure such as a venture capital find and tacking a bit of distressed asset financing or PIPES (private investments in public equities) onto it is like fixing a broken windowpane with some masking tape and brown paper.

What is needed is a more joined up policy that can help unleash the technologies that we, as taxpayers, have already funded through the academic system, and get this out into the wider economy.