In his second article on Finland, COLIN JAMES reports on how that country's Government helps provide venture capital.
Jenny Morel is up to date, entrepreneurial and forward-looking. But her choice of No 8 Ventures as the name for her venture capital fund, which recently announced its first investment, sends some contrary nostalgic signals.
The No 8 fencing wire "she'll be right" myth harks back to when necessity mothered invention in a colony at the end of an empire's supply lines. But the frontier at which the knowledge economy is to be found is the brain-powered one of bright ideas. In that light, the remarkable thing about No 8 Ventures is that its existence is seen as remarkable.
Finland, with only a slightly larger population (5.2 million) than ours, boasts 30 venture capital firms. And this industry has been partly stimulated, horror of horrors, by the state. The New Zealand cabinet has begun to take note. The state stimulant is SITRA (the National Fund for Research and Development), a stand-alone agency, though with an entirely political and bureaucratic board which wouldn't fit the New Zealand ethos.
SITRA has a research arm which aims to identify pressures on Finnish society and, having identified them, passes management of them on to other Government agencies. One current project is examining the impact of and potential responses to globalisation.
An "innovative operations" division looks for new business opportunities. A "barrier-free world" project aims to create new internationally competitive businesses focusing on the special needs of the aged and disabled, another wants to "improve the information society capabilities of people in scarcely populated areas" and a third aims at a "comprehensive service to facilitate and support the life of the elderly living at home".
SITRA went into venture capital in the late 1980s. In its early years it funded some projects by mature companies. It has also been involved in financing some non-technology companies. That sounds pretty much like a state bank. But during the 1990s, SITRA has increasingly focused on financing the two earliest stages of development of a technological idea - what it calls the seed and start-up stages, in which, it has found, only one-fifth of private financiers are willing to invest.
SITRA takes only a minority stake (between 10 per cent and 40 per cent), mainly in the form of shares, though it also makes loans and issues bonds. With capital of $265 million, it has a stake in $700 million worth of investments. At the end of 1998, it held shares in 102 companies. The top five sectors, in order, were medical, industrial production, electronics and biotechnology.
Its failure rate has been about 15 per cent, which director Anu Nokso-Koivisto regards as evidence SITRA has been too conservative. Her ideal rate would be 10 per cent highly successful investments and 20-30 per cent failures, with the rest breaking even. Ms Nokso-Koivisto would also like a higher exit rate than the one-third achieved so far of the total 170 companies invested in.
Nevertheless, private venture capital is increasingly available. Ms Nokso-Koivisto says that in 1993, 70 per cent of all venture capital was from public sources, but now only 30 per cent is.
The private growth is partly SITRA's doing. It has minority stakes in a number of private venture capital funds and in 12 international funds from which it gains expertise and through which it can encourage funds into Finnish projects, including syndicated arrangements. SITRA has also privatised three funds it developed.
Since 1996, SITRA has also provided a "matching service" between private investors and entrepreneurs. From the end of 1998 it has been developing a technology transfer service, using expertise and resources of its part-owned companies to develop new ventures, license promising technologies and catalyse the development of commercialising consortiums. It also has begun a training course for venture capital fund managers.
But SITRA is not satisfied. In a report earlier this year, SITRA described as "not very well coordinated" the system of science parks for seed-stage projects, mainly funded by TEKES (the Technology Development Centre) and the Ministry of Trade and Industry with some input from SITRA. Moreover, SITRA reported, "we found that most of the graduates of the programme were not noticeably closer to getting the critical mass necessary to expand than when they began the programme".
So SITRA examined Israel's system of "incubators", the idea that excited Maurice Williamson on his visit to Finland in May. Israel set up a state-owned venture capital agency, YOZMA, in 1991, with capital of around $200 million. It was privatised in 1995 when the market failure it was designed to rectify - an oversupply of highly trained scientist and technologist refugees who had fled the collapsing Soviet Union - was overcome.
There is now a strong Israeli private venture capital industry. In 1997, 81 Israeli companies with a combined market value of around $26 billion were listed on NASDAQ. Around 40 per cent of venture capital invested in Israel is foreign.
A book-length report on Israel's incubators and other options for venture capital SITRA published earlier this year described Israel's incubators as small non-profit agencies, often linked with universities and research institutes and overseen by a steering committee, headed by a government chief scientist.
Incubators' objective, SITRA said, is "to create a network of professionals from the private sector, preferably a combination of industrial executives, research and development managers in high-technology enterprises, professors, heads of research institutes and other public figures".
Each accommodates 10 to 15 projects. Does it work? SITRA concluded: "The lesson from Israel's incubator system is that a Government in a small country can develop and implement high-powered, market-based initiatives that appear to have made a long-term impact." Another lesson SITRA drew was "the importance of designing a system that uses market mechanisms".
But there is a caveat. Even amid success, neither Israel nor Finland think they have got their venture capital policies right and are reviewing them. If there is a lesson from that it is that policymakers have to keep on their toes.
* Tommorow: Clusters.
Finland: When the state can be mother of invention
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