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Analysis/Comment Last Updated: Jul 14, 2010 - 9:16:22 AM

Cowen's Innovation Fund Ireland, jobs, Irish start-ups and failed entrepreneurs
By Michael Hennigan, Founder and Editor of Finfacts
Jul 13, 2010 - 5:01:37 AM

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Taoiseach Brian Cowen, in New York, Monday, July 12, 2010, talks about the country's austerity measures and outlook for the banking system. Cowen, speaking with Margaret Brennan on Bloomberg Television's "InBusiness," also discusses a State-run venture capital fund, Ireland's growth strategy and the implementation of stress tests on the European banking system. Video

Taoiseach Brian Cowen's announcement of the new technology fund 'Innovation Fund Ireland' in New York on Monday, will enhance job creation policy tools but it's unlikely to spur the creation of the huge number of Irish start-up firms and consequent failed entrepreneurs, which is required to have a significant impact on unemployment.

Last week, the OECD, the Paris-based think-tank for 31 mainly developed country governments, said in its 2010 Employment Report that Ireland needed 318,000 new jobs to return employment to pre-crisis levels - - in the Irish boom years 1998-2008, there was virtually no growth in employment in the international tradable goods and services sectors (Irish Times article). Also last week, the Kauffman Foundation in the US published a study which shows that both on average and for all but seven years between 1977 and 2005, existing firms were net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms added an average of 3 million jobs.

In Ireland, employment in foreign-owned firms is back to the1998 level and while exports from the pharmaceutical/medical devices sectors, which account for more than 50 per cent of total merchandise exports, rose 25 per cent in the period 2004-2009, employment remained almost unchanged at about 40,000. The engine of growth has to be home-grown start-ups.

It is important to understand that over 90 per cent of the firms which survive are termed 'micro firms' and never exceed more than nine employees. High tech firms have a 25 per cent chance of getting beyond their seventh birthday and while the survival rate rises to about mid thirties for non-science sectors, the challenge of generating start-ups in new growth areas as well as in domestic market sectors, is enormous. Not only will bank credit availability not return to a reasonable level anytime soon, growth in developed economies will be hampered by high public debt for many years.

Last week, Enterprise Ireland, the State agency which supports Irish-owned firms with export potential, said it had invested in over 800 start-up companies over a 20 year period (1989 - 2009), which has yielded more than €1 billion in Irish exports and in excess of 14,000 jobs.

There were 35 spinout firms from university research in 2009. From data provided last year, staff numbers range from 2 to 10.

The agency doesn't track survival rates of its start-ups. Nevertheless, the low headline figure illustrates the extent of the challenge

The State grant awarding agency, Science Foundation Ireland, said in 2009 that it expected 30 'high-potential' start-ups from its research groups by 2013.

It is a common myth that most US entrepreneurs, in particular in the high tech and life science sectors, have easy access to venture capital.

Americans certainly have a greater propensity for entrepreneurship than Europeans and during the Irish boom, there was also a surge in new property-related firms in Ireland. 

The US also has the advantage of attracting foreign talent who are generally educated at US universities and in California’s Silicon Valley, an estimated 50 per cent of start-ups are either launched by an entrepreneur who was born overseas or one who is among the founding partners. The national average is 25 per cent.

As for funding, data published in 2009 challenges the traditional view, including likely that of Irish policymakers. The Kauffman Firm Survey (KFS) collects data on an annual basis on a panel of almost 4,000 new businesses founded in the US in 2004 and will track them up to 2011. Until now, results from the first four years (2004-2007) have been released and allow a unique glimpse at the financing patterns of very young firms.

Across the sample, new businesses started with a capital base of around $80,000 on average. Banks and credit-card companies provided almost $32,000 - -  the biggest part of the initial capital injection. Of this amount, more than 80 per cent comes from banks and the rest from credit card companies. The owners themselves held about $28,500 as owner equity. The family contributed debt and equity worth $6,000.

Scott Shane, a professor of Entrepreneurial Studies at Case Western Reserve University and author of Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, wrote recently in BusinessWeek magazine, that despite the hype surrounding equity capital, very few start-ups raise money from outside investors. The Census Bureau's most recent Survey of Business Owners shows that only 2.7 per cent of US companies obtained start-up financing from a venture capital firm, strategic investor, friend, or family member. Even raising external equity after the start-up stage is uncommon. Data from Angelsoft, a provider of angel investment tracking software, reveal that only 2.8 per cent of those seeking money from angel groups receive it. The share of successful requests for venture capital is even lower. The US government's Small Business Administration estimates that only 0.1 per cent to 0.2 per cent of funding requests made to VC (venture capital) firms result in an investment.

Prof. Shane says that estimates by several sources show that start-ups need to expect to generate at least $10 million in sales within six years of starting for most external investors to consider investing.

Investors are only interested in companies that have the potential for very high returns and only about 400 of the more than half a million new employer businesses founded annually achieve $100 million in sales within six years of starting.

Ideas Having Sex

How prosperity and innovation exceeded the expectations of John Stuart Mill and Adam Smith

Money is certainly important in driving innovation, but it is by no means paramount. Even in the most entrepreneurial economies, very little saving finds its way to innovators. Victorian British inventors lived under a regime that spent a large proportion of its outgoings on interest payments, sending a signal that the safest thing for rich folk to do with their money was to collect rent on it from taxes on trade. Today plenty of money is wasted on research that does not develop, and plenty of discoveries are made without the application of much money. When Mark Zuckerberg invented Facebook in 2004 as a Harvard student, he needed very little R&D funding. Even when he expanded it into a business, his first investment of $500,000 from PayPal founder Peter Thiel was tiny compared with what entrepreneurs needed in the age of steam or railways....

There is little evidence that patents really drive inventors to invent. In the second half of the 19th century, neither Holland nor Switzerland had a patent system, yet both countries flourished and attracted inventors. The list of significant 20th-century inventions that were never patented includes the automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors, and zippers. By contrast, the Wright brothers effectively grounded the nascent aircraft industry in the United States by enthusiastically defending their 1906 patent on powered flying machines....

A large 2003 study by the Organization for Economic Cooperation and Development concluded that government spending on R&D has no observable effect on economic growth. Indeed, it 'crowds out resources that could be alternatively used by the private sector, including private R&D.' Governments have almost completely ignored this rather astonishing conclusion....

Technologies emerge from the coming together of existing technologies into wholes that are greater than the sum of their parts. Henry Ford once candidly admitted that he had invented nothing new: He had 'simply assembled into a car the discoveries of other men behind whom were centuries of work.' Inventors like to deny their ancestors, exaggerating the unfathered nature of their breakthroughs, the better to claim the full glory (and sometimes the patents) for themselves. Thus Americans learn that Edison invented the incandescent light bulb out of thin air, when his less commercially slick forerunners, Joseph Swan in Britain and Alexander Lodygin in Russia, deserve at least to share the credit....

Matt Ridley (rationaloptimist.com) is the author of The Rational Optimist

The €500 million Innovation Fund Ireland will have half its capital provided by the State and the other half by VC companies. In addition, the National Pensions Reserve fund may make direct investments in companies. The Taoiseach said the "Innovation Fund – Ireland will result in the establishment of the European operations of a number of leading or ‘top quartile’ international VC Fund managers in Ireland. It is a key pillar in the Government’s strategy to make Ireland one of the most attractive places for entrepreneurial activity and job creation."

The new fund is modelled on the Yozma Program (Initiative in Hebrew), a State fund of funds launched in 1993 to promote venture capital funding with investments from US firms.

In the early 1990's, Israel had highly trained graduates in both its defence forces and the defense industries. At that time, in the aftermath of the collapse of the Soviet Union, and influx of close to one million people, Israel's overall population increased by 20 per cent. Nearly 40 per cent of these immigrants held academic degrees, many of whom were scientists, engineers and specialised technicians.

A thriving independent local VC industry, which began as growth of the US high-tech sector was accelerating, has been established comprising close to 80 VC funds with the total capital under management in excess of $10 billion.

Sixty-five Israeli companies with a total market capitalisation of over $50 billion are listed on the US Nasdaq Stock Market. These companies represent 90 per cent of the total number of Israeli companies listed on a US exchange.

The director of Israeli high-tech incubator programs told a committee of the Knesset (parliament) last January that two thirds of high-tech companies nurtured by Israel's technology incubators program had closed down; only 61 per cent managed to raise investment, and the firms were defaulting on state loans granted to them.

According to figures on the period between 1993 and 2009, 444 of 1,209 companies established through the program (37 per cent) are still in operation, 55 per cent continued to operate for less than three years, and just 26 per cent have managed to survive for at least ten years.

Ireland's innovation policy is focused on university research which is primarily not geared towards responding to market needs.

The international tradable goods and services sectors are dominated by foreign firms. Many of these firms do not have research or marketing functions in Ireland and there is limited local autonomy.

So the international Research and Development (R&D) spending target of 3 per cent of GDP (gross domestic product) is relevant for economies like Sweden and Finland but shouldn't be viewed as sacrosanct for Ireland.

The State would spend about two-thirds of R&D spending annually - - about €3 billion - - three times the current science budget if the target is to be met.

Everything would be banked on having the luck of developing high-growth firms, termed 'gazelles' by Americans. Even if that was to transpire, an Irish firm with great potential would likely be acquired by a US firm long before there would be any significant employment impact in Ireland.

We could alternatively focus on sectors like drink and food and work to establish international brands which would give high value added at home via employment and use of local resources. Is that crazy?

Israel and Silicon Valley are used as the templates but we have an example closer to home.

One of the first high tech clusters in Europe was in the UK county of Cambridgeshire, the location of Cambridge University. It is called Silicon Fen and has five times more research and development jobs than the UK average. There are more than 30 leading research institutions across the East of England, and the area is said to be characterised by a culture of science-based start-ups and university spin-outs.

However, a comparison between Cambridgeshire and Santa Clara County in California (the Silicon Fen and Silicon Valley) has shown that although they are the same geographic size, economic output in  Silicon Fen is six times smaller and average earnings less than a third of US counterparts. After 30 years, Cambridgeshire has about 30,000 jobs in technology companies and the majority of firms employ less than 10 people.

In the US, products with potential have one huge market in which to get traction.

Ireland needs to generate a lot more jobs and like entrepreneurs in the US, funding will have to come from the banks.

Brian Cowen's fund is for the few and while there could be a Nokia down the road, what happens if there isn't?

Exports from indigenous firms have hardly changed in real terms since 1990 and we expect to create about 120,000 jobs from research in the next 10 years while after 50 years we have just slightly above that level currently in foreign-owned firms.

There has been no dissent in the Oireachtas on the Government's approach and academics in research areas have cheered the bonanza coming their way.

The academics can become entrepreneurs without any personal risk and with one of the world's best public sector pension schemes, sink or swim, they have a meal ticket for life.

In Ireland, the most vocal advocates of entrepreneurialism are politicians, career policy makers, university presidents and research academics  -- all protected by a well-threaded safety net and with no experience of the business world.

Ireland won’t change in a decade and the best path to sustained riches is going to remain aspiring for the high pecking order in the rent-seeking professions.

It is however, surely time for a reality check on where the focus of job creation should be. All the Irish eggs shouldn't be in one basket!

SEE: Finfacts article, March 12, 2010; Innovation Ireland Taskforce's aspirational report

One crucial aspect that is ignored in the report is the market for the output of thousands of new high-tech and biotechnology firms.

Public sectors are often the biggest customers by far of the output of a country's IT industry.


A key aspect of the taskforce report, is using Silicon Valley as a template:

“It is instructive to consider the example of Silicon Valley. The Silicon Valley area has a population of approximately 2.5 million and an employment pool of 1.4 million (by way of comparison, total employment in Ireland is approximately 2.1 million out of a population of 4.5 million). It is estimated that 320,000 people are employed in 5,500 high technology firms.

Were Ireland to achieve levels of employment in high-tech firms comparable with Silicon Valley, the numbers would increase substantially. More realistically, Ireland might aspire to be a leader in Europe and aim to have 15% of employment concentrated in high-tech firms. This would result in almost 346,000 people being employed in high-tech firms by 2020 - - a net increase of 215,000 jobs over the period.”

Silicon Valley has a market of more than 300 million and consumers with a propensity to try new products!

SEE: Finfacts article, July02, 2010; Digital Economy Rankings 2010: Nordic countries excel; Asia's digital leaders outperform Europe/ North America in new broadband quality indicators

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