Innovation Finance: Public or Private?
Professor Asa Lindholm Dahlstrand, Professor Peter Jelfs, Dr Iain Evans and Rebecca Todd interrogated the respective roles of public and private funding for innovation and entrepreneurship in this CIMR Debate in Public Policy.
What role do public and private institutions play in financing innovation and how do their goals and priorities differ?
Chaired by Professor Tim Vorley, Pro-Vice Chancellor and Dean of Oxford Brookes Business School, this Centre for Innovation Management Research Debate in Public Policy welcomed representatives from academia, government and venture capital to interrogate the role of public and private funding for innovation and entrepreneurship.
Vinnova: A case study from Sweden
While the direct effects of public innovation funding are well-documented, there is less evidence to show its indirect “spillover” effects. Asa’s research project examined the direct and indirect effects of public funding together.
Of the firms analysed in the study, the following direct effects were observed:
- 15% of the firms experienced very high growth and were often acquired
- 20% stagnated or saw negative growth and may not have survived without public funding
- 65% did not experience much change
In terms of indirect benefits, many SMEs had an impact on the growth of companies with whom they collaborated and created spin-off firms, suggesting wider-reaching benefit from public funding.
Asa raised some important questions on whether Vinnova funds were effective in financing innovation:
- Is acquisition a desirable outcome for publicly funded firms?
- Is it the role of public funding to prop up SMEs that do not have a viable business plan?
Department for International Trade: Perspectives from the UK government
Peter Jelfs,Professor (Professional Practice) – Accounting, Brunel University shared insight from his former role as Head of Tax Services within the Investment Directorate at the Department for International Trade (DIT).
The DIT was formed in 2016 after the UK’s Brexit vote in order to have a Ministry that would look after trade policy. Half of its work involves securing trade agreements and the other half is devoted to investment, in particular attracting foreign businesses to set up and grow in the UK.
Peter shared some of the selling points of the UK business environment for foreign investors:
- London’s reputation as a financial centre
- The UK tax system
- The reputation of UK universities
- The calibre of R&D activity undertaken by the public and private sector
The DTI develops incentives for international business, such as free ports and tax reliefs on R&D activity or enterprise investments. The department also works closely with the British Business Bank, which offers a range of financing options to encourage a long-term perspective on businesses that might seem a riskier investment.
Physical Sciences Innovations: Investing in deep science in Canada
As Investment Lead at Canada’s Digital Technology Supercluster, Iain Evans is well-placed to explore the complementarity of public and private funding.
Iain argued that public and private finance serve different purposes: public funding is useful for reducing the barriers to taking on innovation projects, while private capital tends to “have less strings attached” and allows companies to support innovation internally.
Iain cautioned against placing too much emphasis on venture capital, which has been idealised through shows such as Dragons’ Den and Shark Tank, as the need to do so suggests that a company’s business model does not work. He also questioned the effectiveness of companies “on government life support”.
Standout companies plan capital allocations that mix public and private sources of funding together. Alongside this portfolio approach, Iain stressed the importance of networking and building connections across the ecosystem. The supercluster creates a collision space that brings universities, industries and large corporates together in a multi-partner agreement, combining different forms of capital in collaboration.
Discussion and questions: Building a portfolio approach
Discussion was led by Rebecca Todd, Investor specialising in medical and healthcare technology for Longwall Ventures. As an early-stage investor, the role of Longwall Ventures is to get conviction around a few companies and support them as financial partners by investing early and continuing to back them as they develop.
Echoing comments from Asa and Iain, Rebecca questioned whether venture capital is the appropriate funding source for most SMEs, especially when looking to plug specific gaps in the ecosystem or for “frequent flyer” companies that move from grant to grant because they haven’t found a commercial business model yet. She praised accelerators for providing startups with the tools they need to develop business plans, especially if they reduce dependency on venture capital.
Further discussion explored how success should be measured for public and private funding. Sharing their final thoughts, the panellists highlighted the need for a long-term approach; networks made up of different sectors; help for startups to build a financial strategy involving a portfolio of funding sources; and an exploration of how growth is measured.
We would like to thank our panellists and audience members for a thought-provoking debate on the future of innovation finance.
The recording of the workshop is available here