Anthony Hilton in the Evening Standard reviews William Janeway’s new book “”Doing Capitalism in the Innovation Economy: Markets, Speculation and the State“. Excerpt:
“[Janeway] says, and has done the research to prove it, that the venture capital industry of the past 20 years is not a superior asset class, but just a phenomenon of the bull market. He adds that with the exception of a few individual managers it is a myth to believe the industry has any particular expertise.
He also highlights another little-understood fact which is that most of the big American technological breakthroughs have been a result of state funded research, not private enterprise. It was blue-sky government funding which paid for the research which developed the algorithms which underpin Google. And it was federal government-funded research that first discovered the technologies which Steve Jobs brilliantly assembled into the iPhone. Janeway’s take on this is that “venture capital success only happens in sectors of research where the state invested at sufficient scale in the translation from scientific discovery to technological innovation.” In other words the state does all the risky hard work and only when it has got to the point to be a pretty safe bet does the venture capital industry get involved.
As a result he says four out of five VC investments are in either the ICT or the biomedical sectors because this is where the Government’s money also goes. There has been very little venturing outside these areas.
Most will struggle to believe Janeway’s claims — challenging firmly held beliefs often fails — but it does raise questions about whether the UK has drawn the wrong conclusion from Silicon Valley’s success as to the right way to funding business start-ups. It may well be that it is not money which drives the Californian industry so much as the presence of a vast pool of expertise and role models. There are so many people living in the area who have been there and done it that anyone new hoping to start up finds it easy to get the advice and mentoring they need.
So the important thing is not money but people, and the best thing Government can do is encourage the growth of clusters of experts and nurture those which already exist — as for example at Cambridge and possibly — though it is perhaps overhyped — at Silicon Roundabout in London’s Old Street.
It might well be that creating a more sympathetic planning regime in Cambridge, and improving the road, rail and internet links would do far more for UK growth than continuing to give generous tax breaks to underperforming venture capital funds.”