NET RESULTS:Perhaps an early cash influx leads to a dulling of entrepreneurial drive and innovation within a company
HOW NECESSARY is the availability of early stage venture funding to technology start-ups and how much difference does it make to a company’s ultimate success – or failure?
The received wisdom has been that adequate early stage venture funding is critical, that innovation and successful entrepreneurship, especially serial entrepreneurship – where someone sets up successive companies after one or more initial successful exits – is directly linked to cash at the start.
An issue constantly highlighted in Ireland has been the lack of cash – that while there is some money for middle-stage companies, there’s a dearth of dosh for the early stage start-ups.
I would have fallen in line with this thinking, but an interesting guest post to the Techcrunch.com blog last week, and some reports it links to, have me wondering.
Entrepreneur turned Berkeley, Harvard and Duke University academic Vivek Wadhwa’s post on Techcrunch (http://short.ie/ ii6fjt) argues that venture capitalists and their funding not only are not that important to successful early stage technology companies, but are actively avoided by serial entrepreneurs.
He has just completed a research project on this subject (download it from http://short.ie/ see/7mh8hb). He states: “Guess what? Hardly 10 per cent of the serial entrepreneurs took venture money in their first start-ups.
“In their subsequent launches, the proportion who took venture money went up to a quarter. In other words, three-quarters of even the most experienced entrepreneurs didn’t rely on venture capital.”
He notes that research from the University of Wisconsin- Madison by Prof Masako Ueda, that looks at the correlation between capital investments and productivity growth, also discounts the importance of early stage venture funding.
Prof Ueda looked at a measure of innovation called total factor productivity (TFP) in a number of industries and concluded that venture funding actually slowed down innovation within companies and that, rather than VCs funding and hence fuelling innovation, they are by contrast following innovation.
Interestingly, Wadhwa’s study also found that companies with early VC funding also generated fewer patents. Read her study on http://short.ie/see/ 0zsc9k.
Wadhwa also notes that Paul Kedrosky, in a study on the US venture capital industry for the Kauffman Foundation, found that only 16 per cent of 900 successful firms in the Russell 2000 index of small-cap companies received early stage venture funding. You can download that report from http://short.ie/see/fgw2f9.
Such findings suggest that perhaps the taught model, that young companies should be in hot pursuit of a VC deal, needs to be re-examined. This isn’t to say that early stage funding of some sort isn’t important, particularly in some areas of technology where product or service development would be impossible without cash up front.
At the same time, many of the most successful international and Irish technology companies were founder or friend-and-family funded ventures.
If it is hard to get early seed and first stage VC funding now, it was exceptionally hard a decade or two ago. Just read about some of the software entrepreneurs in John Sterne’s excellent history of the Irish software industry, Adventures in Code.
Perhaps an early influx of cash leads to a dulling of entrepreneurial drive and innovation within a company.
Perhaps a chunk of early stage funding sets up a kind of holding pattern for many companies (where they work to reach an income plateau that keeps the company turning over) but doesn’t really drive further innovation and growth.
Maybe that steady turnover then contributes to small- and medium-sized Irish companies never growing beyond a lifestyle size and investors sitting tight, neither pulling funding nor finding much to demand a fresh round of venture capital.
The fact is, though, that Irish technology companies seem to go into early holding patterns and rarely grow beyond SME size and a modest profile. They are also quite elderly by US standards – many still drifting about for a decade or more, a point long past when Silicon Valley tech start-ups either fail, massively expand or are bought up, freeing up management and investors and driving further innovation.
People who have a broad, international view of entrepreneurship and innovation will always raise this concern about the Irish indigenous tech sector (see the interview with Stanford academic and investor Burton Lee today, who calls such companies “frozen SMEs”).
That holding pattern in turn contributes to a dry funding pipeline. The cash is locked into those holding-pattern SMEs.
So maybe bemoaning the lack of early stage funding isn’t the problem. Perhaps it is learning how to move innovation into high gear and push more companies out into the global market. How?
Well, those are excellent questions for consideration by the Government’s Innovation Taskforce and the Farmleigh diaspora, I should think.
klillington@irishtimes.com
Blog/podcasts: www. techno-culture. com
Twitter: twitter.com/klillington
