Last week we covered how Finnish tax payers were forced to give publicly listed companies more than 40 million euros through Tekes. The argument from Tekes’ side is that these larger companies are important drivers of innovation and projects. The President of Tekes Veli-Pekka Saarnivaara has stated that this year, growth companies were the focus of their financing. In 2010 Tekes approved more than 100 million euros in funding for younger companies, less than 6 years old. This is exactly the direction we should see the financing go – or even better, tie it completely to private funding.
Funding larger, publicly listed companies is just wrong
I have to disagree strongly with the fact that it is beneficial to fund large, publicly listed companies in their R&D efforts even though most of this money is trickled down to smaller, privately owned companies. I’ll explain this in a bit, but first we need to understand the scale of this.
In the last three years, Tekes has funded companies employing over 500 people on average with 59 million euros annually. According to Tekes, 58 million of this money has been further channeled to smaller companies and research institutes. So the effectiveness metric here is that only 1 million has been used by the large companies to finance their own needs. This is all wrong.
The metric we should be looking at is, is with how little public support we are able to run our current growth company ecosystem. When 58 million euros of tax payer money is infused into the finances of growth companies – we really can’t say this would be the case on the markets. We need to grow our growth companies with market support – ie. they must answer or create a demand that they cater to. Running as many companies as possible and in doing so employing as many people as possible on tax payer money simply can’t be a metric of success.
What’s my suggestion then?
While my answer is far from being academically researched and backed by huge sets of data, I’m willing to bet it would be a lot better than the current system. My suggestion is to do two larger changes to the current Finnish innovation ecosystem:
1. Put a cap on the age, companies must be under to receive financing.
2. Tie 80% of the funding Tekes gives out to private funding.
Let’s look at these more closely. A cap on on the age of companies is pretty easy to argue. If you’ve been crunching away at the same business model unsuccessfully for over 10 years, constantly leveraging tax payer support to break even – it’s unlikely you’ll make it big next year either. Sorry, that’s just the way it goes. Companies must grow independent and it’s very much in the interest of tax payers to enforce this too.
Younger companies can be given funding on slighly looser terms as they need to build up their presence fast to be able to support their existence on market terms.
Secondly, I know this is something Tekes is already moving towards with their YIC (Young Innovative Companies) project. However, we should really make this more of a rule instead of an exception. Why? We need to create an environment where foreign investors and other early stage investors understand that Finnish tax payers are willing to share the risk they’re taking if they decide to invest into Finnish registered companies.
There are two main reasons behind my second point. The first one is clearly the fact that markets are able to better decide on what terms and to which companies should money be flowing into. The incentives to invest are completely different for a government organisation compared to a private investor.
Also, this would dramatically be able to reduce the amount of bureaucracy Tekes needs to handle to keep its paperwork in order. Making the markets do the investment decisions enables Tekes to cut down on their overhead costs for handling all those investments. It would make the whole organisation a lot more efficient.
However, the second point regarding the tying of tax payer support to private money is more of a move towards the tax payers becoming investors and wanting a return on their investment. This is dramatically different from the current situation where the money is blindly supporting companies without returns (or at least those are very hard to put into figures). The way in which companies are forced use the money they receive from Tekes, should be relaxed. When there are private investors on board, they have an interest how the money is used and they’ll be the guardians of tax payer money.
Furthermore, the support payed through Tekes should be considered more of an investment into the company. Tekes, and ultimately the tax payers, should become passive share holders through private investors into young growth companies. Once there’s a positive liquidity event, the tax payers would be thanked financially for their support. Which is something completely opposite what we have in our current situation.
With this model in mind, Tekes would be able to calculate a more accurate return on investment instead of simply guessing the employment effects of this money. Would this compete with Finnvera’s investment model? Yes. Would this mean that the two entities should be merged? Probably yes.
Supporting the markets is the only way to go
What I’m aiming here towards is that the Finnish innovation ecosystem with all its players and entities must move towards supporting the actions the market is willing to take. There’s no point in trying to artificially support the ecosystem in a manner that the market won’t. The only way to go about is to start leveraging the market actions with the tax payers money. All these moves would send a clear signal to investors – you’re money is able to do a lot more in Finland than elsewhere as we’re also willing to share the risk.
This would be one of the best ways to attract much needed foreign capital in the form of early stage investments into the future of Finland.