The Family and Public Subsidies

European Straits #51

Nicolas Colin

Dear all,

My firm The Family has always been very suspicious of money provided by governments to support tech startups.

When we founded The Family, Alice, Oussama and I briefly considered taking a chunk of money that the French government was then allocating to early stage venture capital firms and startup accelerators. We sat down with a junior analyst at the headquarters of Bpifrance (the mighty government-sponsored bank that finances everything related to small businesses and innovation). He basically asked us two questions:

  • Q: “What is your business model?” A: “We don’t know. We’ve just started. We’re discovering the market, as every early stage venture should do.”

  • Q: “Why has it been working so far?” A: ”We don’t know. We’ve been strategic and opportunistic at the same time, but we can’t make that crystal clear yet. Maybe we’re just doing something right?”

We decided to leave it at that. After all, each of us had had bad experiences with government money in the past: Alice as the head of Le Camping, a subsidized Paris-based accelerator; and Oussama and I as entrepreneurs trying to make the most of French government money, including the infamous R&D tax credit as well as various other subsidies targeted at innovative firms.

We even decided to advise our portfolio entrepreneurs not to take the money. If they decided to do it anyway, it would be without our practical support. Indeed we never designed anything within our infrastructure to help entrepreneurs attract the vast amounts of money that European governments quite liberally throw at tech startups (or at anything that resembles one).

The reason is that government money comes with too many strings attached. I won’t even detail the outrageous complexity of filling out the forms (which has given birth to a parasitic industry of consultants making a living off the back of startups—without adding a hint of value to the system). What’s even more problematic are the structural misunderstandings that have led most Western governments to design these systems.

The first concerns innovation itself. The 20th century Fordist economy’s natural state was stability. In that context, corporate managers were obsessed primarily with efficiency. Innovation was seen as an exceptional state through which companies had to occasionally pass, often reluctantly, before they could settle again and live off their rent for a few more years or decades. A nudge from the government was quite welcome to convince feeble corporate executives to give innovation a try.

In today’s digital economy, in which nothing can ever be taken for granted, innovation is not the exception anymore; rather, it has become a permanent state. All companies, whether large or small, have to innovate constantly if they want to remain competitive. For them, innovation is still not a guarantee of success, but the absence of innovation is very much a guarantee of failure. In this new world where innovation has been elevated to the highest levels of corporate strategy, is it still relevant for the government to incentivize executives to embrace innovation?

Another misunderstanding is related to the role of universities and public research in the day-to-day practice of innovation. A significant part of the money allocated by governments to innovative firms is based on the condition that they work with academic researchers. But that, too, is based on what existed in the past.

It’s true that following World War II, universities and other public research labs played a key role in supporting the growth of the Fordist economy. The reason was that those entities owned most of the intellectual resources and equipment to conduct advanced scientific work—which at the time was a critical part of corporate innovation.

But the context has radically changed. Today, the resources that innovators need are more widely distributed. It explains why innovation has become omnipresent in the world of competitive firms. It also explains why universities have been quite absent from the forefront of the most important innovation waves in recent years, like connected cars (where large tech companies have called the shots really, including by hiring the best academic researchers to have them work in-house) or crypto assets (which rose from the murky depths of developer communities).

Finally, there’s a third misunderstanding: the confusion between innovation and high technology. This one is very French in a way, but it’s also ingrained in European regulations based on the outdated waterfall model coming from the OECD’s Frascati Manual. For most Western governments, only technological assets that push the frontier further deserve to be named innovation—and to be subsidized by public money.

The consequence for European entrepreneurs is quite tragic. Most successful entrepreneurs outside of Europe innovate through direct interaction with their customers and constant adjustments to their business model. Meanwhile, European entrepreneurs who choose to play the game of government money are effectively incentivized to lock themselves in a laboratory for months, trying to tackle improbable scientific challenges. It’s as if, instead of going out and meeting potential mates, those entrepreneurs were incentivized by the government to stay at home and watch porn (not that I’m condemning that, but still—you get the idea).

So as you can see, it’s not that we’re too lazy to fill out the forms. It’s that we’ve dedicated a great deal of thinking to the matter and came out convinced that it was all ill-designed for tech startups and the world we live in. There are clearly ways for governments to support domestic tech companies in an effective way (Israel comes to mind, as does China). But the current systems that Western governments designed sometime between the 1970s and today would better off being shut down—or radically transformed to match the actual needs of today’s entrepreneurs.

Here are a few readings related to that matter:

Warm regards (from London, UK),

Nicolas