“I have seen something else under the sun: The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favour to the learned; but time and chance happen to them all” – Ecclesiastes 9:11
The space available in last week’s column did not allow me to complete my thoughts on the subject. Also, there was considerable positive high quality feedback to the ideas espoused and indeed requests to further the dialogue outside of Barbados not surprisingly because the problems are common to all emerging nations. As a result my thinking has been further refined on the subject.
One thing I did learn from my deliberations in the last week was the informal use of the phrase “venture capital” to relate to two distinct and different needs. I shall therefore repeat three paragraphs in the last column.
Lest there be any ambiguity, I should distinguish between the terms “seed fund” and “venture capital fund” since they serve different but related purposes.
Quick Response Seed funding is required for the leg of the journey from business concept to the completion of the business plan. This process gives the conditions under which the business is viable as well as the investment capital required for its implementation. The purposes for which the seed capital is required are (1) Creating or Shaping Innovative Ideas, (2) Entrepreneurs’Living Expenses in this critical phase, (3) Product Development & Market Research, (4) Emergency Loans, (5) Strategic Visioning Retreats, (6) Business Plan Development and (7) Identification of Potential Investors.
Quick Response Venture capital funding is required as the primus inter pares among potential investors. An injection of capital from the quick response venture capital fund may engender confidence in other venture capitalists, angel investors, equity participants thus expediting the capitalisation process.”
This dichotomy is important. On the one hand, Quick Response Seed funding is required at the “high risk” end of the spectrum in a “Start-up” enterprise, whereas on the other hand Quick Response Venture capital funding comes into play after a significant part of the risk has been removed, because a viable business plan is now available.
A viable business plan is a necessary requirement to bring investors, led by the Quick Response venture capital fund, to the table to partner with the entrepreneur in the development of the enterprise. These equity investors must pay a premium for the removal of the risk occasioned by the entrepreneur’s ingenuity and the viability of the business plan. It is this premium that becomes the revenue source for the growth of the Quick Response revolving seed capital fund.
Another sensible policy initiative, in order to foster the development of Start-up enterprise is that the Government, on behalf of the people of Barbados, should be the sole participant in the “high risk” part of the spectrum. Some private investors may be risk averse and will not get involved in this high risk end, no matter how strong a case is made that the shepherding process will mitigate the risk of business failure. Hence the often repeated mantra, by financial institutions, that “we do not fund start-ups”.
This means that the start-ups which could prove to be winners never have the chance of seeing the light of day. The hypothesis that “shepherding will mitigate the risk of business failure” cannot be effectively tested until, to use a statistical term, we have enough “degrees of freedom”, that is we need to wait until there is enough experiential evidence to come to a definitive conclusion. Until then, it is a service function of the Government to come up to the plate at this high risk end of the spectrum. To suggest that this be grant funding belies the upholding of the hypothesis. The proposal of a revolving fund, itself upholds the spirit of enterprise development. We should therefore work to ensure that the Quick Response Seed capital fund is indeed a viable enterprise. The return to the pubic sector investors would be macro-economic benefits but this is not to deny that the Government’s capitalisation of the seed capital fund may one day be returned to the public coffers. A positive thought!
The funding of the Quick Response venture capital fund will be private investment “sweetened” by a number of government tax incentives. The extent to which a private investor takes advantage of the government incentive will be inversely proportional to the investors’ return from the enterprise, i.e. the more incentives that are claimed by the investor, the less the accrued benefits to that investor
The CEO of the Barbados Investment and Development Corporation was also quoted in the Barbados Business Authority on Monday March 24 2008 as follows: “The speed at which the younger generation would wish to go is unlike the older generation – you could put in the time to raise the capital. If the business idea is as great as you think it is, then it would still be valuable down the road”.
I believe that time is running out in terms of three percent growth rates – they have to be at least doubled if we are to serve our community well. We do need to find ways of accommodating the speed of the younger generation while at the same time we should guard against throwing out the “baby with the bath water”.