Home' Trinidad and Tobago Guardian : May 25th 2014 Contents MAY 25 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
THE ECONOMIST | SBG21
In a suburban office on the road to
Luxembourg's airport, a small
group of civil servants is busy pick-
ing the next generation of European
venture capitalists. Every year hun-
dreds of would-be financiers set
out their stalls at the European
Investment Fund, a body financed by the
European Union, hoping they will be given
money to create the next Facebook.
Europe never has been able to muster
nearly the same quantity or quality of ven-
ture capital as Silicon Valley. That is frus-
trating to its politicians, who see venture
capitalists as job-creating innovation
machines and love them nearly as much as
they loathe other financial types. However,
investors who put up such capital in other
parts of the world, such as pension funds,
banks and billionaires, are not especially
eager to funnel money to start-ups battling
to thrive in Europe's often-hostile business
By and large the politicians' solution has
not been to make the environment friendlier
to business, thus increasing entrepreneurs'
chances of luring private-sector backing.
Instead they have replaced the reticent fin-
anciers with state-funded bureaucrats.
Nearly 40 per cent of all the funds
pumped into European venture capital last
year came from state-backed sources, up
from only 14 per cent in 2007. The EIF alone
plowed US$800 million into venture-capital
funds last year, out of a Europe-wide total
of US$5.5 billion. On top of this, nearly every
country has its own pet program to back
chosen venture capitalists.
Despite taxpayers' generosity, few think
that Europe's venture-capital industry has
much chance of attracting American levels
of capital from private investors, given its
feeble record. Venture capital in Europe has
delivered returns of only 2.1 per cent a year
since 1990, according to Thomson Reuters,
making it perhaps the worst investment
class outside Japan. American venture capital
managed around 13 per cent.
The 2008 crash, which came along when
investors were beginning to get over the
fortunes they had lost in the Internet bubble,
sapped what little interest remained.
The public cash slushing around VC-land
may in fact be repelling private money.
Investors turn to venture capital hoping to
attain vast riches by nurturing the next
Google or Whatsapp, and are loth to invest
alongside governments whose interests lie
only partly in turning a profit.
State money always comes with strings
attached, be it an encouragement for venture
capitalists---or the companies they finance---
to create jobs in particular countries or to
focus on certain favored sectors. This is
anathema to private investors, who fear that
their money will be used to pursue political
"I understand why governments invest
in venture capital," an endowment-fund
boss says, "but they are spoiling it for the
rest of us."
Several studies of public venture-capital
schemes have suggested that, for every dollar
the public sector puts in, the private sector
pulls one out. The EIF says that it worries
about this, so it only matches funds that
venture-capital firms attract from private
"We are driven by a need and a wish to
address market gaps," EIF official John Hol-
Some think that the handouts from tax-
payers also impair the quality of European
venture capitalists' investments. The EIF
alone has sunk more than US$5.2 billion
into 260 venture funds, but provides no
data on how its investments have fared.
Ho-hum entrepreneurs whose firms launch
only because of government backing, and
dud firms that would have folded long ago
without it, drive down average returns.
Meanwhile, funds relying on private capital
have to pay more to outbid government-
European funds have poor returns in part
because they sell companies too early, miss-
ing out on the bumper returns that come
from placing longer-lasting bets. Govern-
ment money spurs such conservatism: It is
better for a fund to "bank" a good deal and
guarantee access to later dollops of govern-
ment cash than to roll the dice again. Such
thinking horrifies private investors.
Several European start-ups have success-
fully launched initial public offerings recently,
including King.com, which makes an addic-
tive game called Candy Crush Saga, and
Criteo, an advertising-technology firm. Both
had been backed by American as well as
European money, however, and have listed
their shares in America. They may soon be
joined by Spotify, a trendy music service
that has been European venture capital's
poster child. Many bright Europeans con-
tinue to flock to California before they even
start their businesses.
It is not that Europe has no need for inno-
vative start-ups and the jobs they bring --
quite the opposite. Entrepreneurs say, how-
ever, that there are better ways of boosting
their chances than dollops of taxpayers'
"We have labour laws designed for workers
in large corporations, they don't work for
start-ups," says Niklas Zennstrom, a founder
of Skype who now runs an EIF-backed ven-
Tax laws in several EU countries make it
hard to pay staff with stock options, a stan-
dard carrot for American start-ups. Rules
about procurement often favor established
firms. More broadly, Europe's staid business
culture is too slow to forgive failure, in con-
trast to America, where setbacks are cele-
brated as a necessary staging point to suc-
Josh Lerner of Harvard Business School,
in Cambridge, Massachusetts, compares
doling out public-sector cash, EIF-style, to
serving a main dish before the table is set.
Governments the world over long have
backed innovation, for example through
public funding of universities. Silicon Valley
thrived in part due to bloated defense spend-
ing from the 1940s onward.
That is altogether different, though, from
Europe's approach of picking the firms that
pick the winners. Better to make entrepre-
neurialism pay than to subsidise it.
@2014 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
Their reckless investments helped inflate the hous-
ing bubble. Their 2008 collapse triggered a government
takeover and a costly bailout. Many people would
like to see Fannie Mae and Freddie Mac, America's
twin mortgage giants, abolished.
Instead, however, their new regulator wants the
two firms, which guarantee 55 per cent of new Amer-
ican mortgages, to promote easier credit---again.
Mel Watt, formerly a Democratic congressman,
took over as boss of the Federal Housing Finance
Agency this year. He replaced Ed DeMarco, who had
focused on shrinking the twins and recovering the
bailout cash. On May 13 Watt signaled a break with
The maximal size of a loan backed by Fannie or
Freddie, rather than shrink, will stay the same:
$417,000 in most areas, and US$625,250 where hous-
ing is pricey. The fees the twins charge to guarantee
loans, rather than rise, for now will stay the same.
Most important, Watt clarified and narrowed the
conditions under which banks which sold Fannie and
Freddie bad mortgages would be forced to buy them
back. DeMarco had relentlessly pursued such "put-
backs," scaring banks into denying credit to all but
the best-qualified borrowers.
"I don't think it's FHFA's role to contract the foot-
print of Fannie and Freddie," Watt said.
Together these steps offer a modest fillip to home
sales and construction.
While in Congress, Watt pressed Fannie and Freddie
to funnel more credit to relatively poor families, a
well-meaning policy that did not end well for those
families. Now he has given the twins, and their mission
of boosting home ownership, a new lease on life.
He will not restore them to their former power,
however. He still wants private capital to replace the
public sort in the mortgage market, and has told the
twins to accelerate the transfer of default risk to
private investors. He has declined to write down
mortgages to prevent foreclosures, or to expand a
program to cut some borrowers' mortgage rates. He
stressed that he would stay out of the debate over
the final fate of the twins, which is up to President
Barack Obama and Congress.
Obama and Congressional Republicans agree that
the twins should be shuttered, but differ as to what
should replace them. A Senate bill would let private
investors bear most default risk, but also would create
a new federal guarantor of last resort. That thrills
neither liberals, who want more low-cost housing,
nor conservatives, who hate federal backstops. So
Fannie and Freddie will live on, at least for now.
@2014 The Economist Newspaper Ltd. Distrib-
uted by the New York Times Syndicate
How not to innovate
of the toxic
The maximal size of a loan
backed by Fannie or Freddie,
rather than shrink, will stay
the same: $417,000 in most
areas, and US$625,250
where housing is pricey.
The fees the twins charge
to guarantee loans,
rather than rise, for now
will stay the same
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