Corporate finance is gradually becoming not the only option of institutional financing for cash-starved technology start-ups. Increasingly, government finance is a viable option, with states launching specialist programmes and funds that are aimed at both raising solid future returns to bulk up the treasury and help nurture local entrepreneurial spirit. Business transfer agents are therefore building links with local states and committees in order to offer all options for their VC-searching clients.
States that take this forward-thinking approach are typically fairly advanced economies with bustling tech segments. Providing public finance to private business in a poverty-stricken economy is not common. The most recent case is Singapore, who this week selected six start-ups to each receive $7.9 million in taxpayer money through the country’s Early Stage Venture Fund. The fund focuses on Series A financing and is the second time the country has initiated it, having done so in 2008.
Other countries that take an active approach in local technology start-ups include the USA, where individual states choose to invest in firms, with Maryland having focused on its local start-ups recently and California with a long tradition of involvement at all levels. Finland, meanwhile, has been especially active in supporting its cleantech segment, financing ventures and offering early funding in projects it believes can bolster exports. While many governments offer incentives, such as tax breaks, specialised start-up incubators and research grants, few have chosen to invest directly into firms until recently.
However, the successful blueprint offered up by Israel is inspiring more countries to follow the public venture capital route. The country has been a pioneer in nurturing the tech segment and financing it through to maturity. Having recognised the presence of considerable digital expertise locally, Israel took a pragmatic approach to the start-up business. Israel developed a strategy whereby through heavy state financing at the early stages of development it could kick-start a healthy start-up scene over the longer term, eventually attracting more investors to its shores and gradually scaling down its own participation. The plan has certainly succeeded, with Israel one of the world’s most productive technology hubs today, attracting regular investments from Silicon Valley.
Developing countries could especially benefit from a government more inclined to support local start-ups, both to improve the local business environment and create higher skilled workers in specialist tech fields. However, there are major challenges to state investment funds in fledgling economies that do not hold the same accountability that can often be found in transparent states. Corruption could see preference given to state-associated start-ups, while institutional investments could also function as money laundering or kickback operations. Therefore, the state VC model is not yet ready to go worldwide, but it is providing more options for start-ups and alternatives for sell businesses in helping their clients.
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