Why startups don't need government money

There’s a debate currently in Denmark about government support for innovation and research, particularly in small and medium businesses. The debate is centered around Højteknologifonden (The Hi-Tech Fund; page doesn’t work in Safari), which has impressed everyone by giving around US$ 2 million to Microsoft for developing an ERP system.



I have to agree with the critics such as Finn Helmer. This is no way to get more successful entrepreneurs, startups, innovators. And not just because it doesn’t work. Because it is downright hurting the goal.



Startups need to focus on one thing, and one thing only: The market. They need to develop a product and quickly get paying customers for it.



When you are doing true innovation, by definition you cannot know how the market is going to react in advance. And the details matter a lot—almost right can easily be as profitable as completely wrong. So you need to get out there before you’ve sunk too much money into it something that is almost guaranteed to be wrong in some respects.



The longer you wait hurts, not just because you will have wasted more money, but also because the more you have invested in something, financially and emotionally, the harder it is to change in response to the market.



For governments to throw in this kind of funding hurts in two ways. First, it allows entrepreneurs the luxury of waiting longer before they confront the market. But just as important, it diverts their attention away from the market, and into the rules and restrictions and processes surrounding the funding, something that is guaranteed not to contribute to market success. Now you have two masters, the funder and the market, and your goals are not likely to be aligned.



During my time as an entrepreneur (4 years so far), I’ve had countless offers from people wanting to do EU-funded projects. And they’ve always struck me as overly complicated, doomed to fail from the project definition alone, and generally suggested by people who weren’t all too busy serving a real market need.



I’m not sure what to do instead. A reading of Porter would suggest growing more sophisticated buyers. This might be what Finn Helmer is getting at when he suggests that we invest in high-speed internet like South Korea. It would also make distributed production and global selling cheaper. Then again, Porter may be too focused on the local market—it seems natural for startups in this age to sell to the global market from the get-go, like Skype.



I don’t know the answer, but I’m convinced that the notion that you can help people make it in the market by giving them support wheels is flawed. Throwing money at the problem doesn’t solve it.

8 comments

Excellent. Højteknologifonden is the result of a political game. The idea is that throwing money at something, makes it better. And that the government can improve the economy by central planning. What Mr. Helmer is suggesting, sounds like <a href="http://en.wikipedia.org/wiki/Rent_seeking">rent seeking</a>. His company is in the high speed network business - what a coincidence. A lot of Danes already have broadband internet access, that they bought in the marketplace. There is no need for the government to "help". 10Gigabit would be nice, but is it really worth the cost? Gigabit internet for homes probably will be worth it one day, and then the it will be available on the market and people will buy it. Until then, people will spend their money on what they really need and want. P.S. I wrote <a href="http://kritiskpresse.blogspot.com/2005/12/offentlig-hjteknologifond-giver.html">something about "Højteknologifonden" (in Danish)</a> a few days ago.
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I thought about Helmer's self-interest -- is he still involved with broadband, or is it just a matter of him having expertise in the field. Regardless, "broadband is still overpriced":http://pinds.com/articles/2005/08/03/broadbands-costs-24x-more-in-denmark-than-in-sweden in this country. Obviously, the solution isn't to pour more money into the monopolist. Ok, scratch the broadband idea. How about breaking up TDC, strengthening anti-monopoly enforcement, and cutting back on counter-productive intellectual property red tape?
By Lars Pind on Tue, Jan 03, 06 at 17:44 · Reply
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Amen, brother. Well spoken. The core of Helmer's argument is that the money should be spend on frameworks (rammebetingelser) - not specific product development. Throw them into the educationel system - for example giving each teacher 5.000 kr. more a month will probably long term be much better.
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The Danish governments/voters are all about throwing money at meaningless projects to prove that they are doing something. Just look at the leagues of people who are in constant "efteruddannelse" (continuing education) and the countless of ridiculous entrepreneurs schemes run by old social workers with zero business experience. The good thing is that despite all of that the entrepreneurial spirit does seem to be alive with the young creative classes as you can see by all the new shop fronts throughout Nørrebro and Vesterbro. As well by the chronic immigrant entrepreneurs in these same neighborhoods. One thing that worries me is the constant quest for safety by the tech elite here though. Way more than any other country I have seen in the world are they fixated by the permanent job, the 6 weeks vacation and unemployment insurance (A-kasse). I also think that putting this safety net under entrepreneurs creates a culture of risk adverse faux entrepreneurs. However it plays well in Danish culture, where you're not really supposed to be making money (unless the government gives it to you). I don't know what the solution is here as none of the voters want to change anything, but I do know that corporate welfare is just as much paid for by the daylight robbery of productive people as social welfare schemes are. To bad our current government is just as fixed on buying votes as everyone else has been here for the past many years.
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TDC is already heavily regulated. The state sold all of the infrastructure, and makes TDC sell access to the cobber to third parties. This means, there is less of an incentive for competing companies to build an alternative network with fiber or cobber. But fortunately new technologies are comming (broadband over powerlines, WiMax) and some places, alternative fiber networks are being set up.
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Right, it's regulated, but Denmark chose to sell the copper along with the business, and predictably, TDC raised the basic subscription cost to make competition unprofitable. Case in point: "Broadband is 24x more costly in Denmark than in Sweden":http://pinds.com/articles/2005/08/03/broadbands-costs-24x-more-in-denmark-than-in-sweden. Something clearly isn't working about the current market. I always wanted a structure like the privatisation of the Danish rail roads, where a separate company owns the rails. In practice, though, that hasn't turned out great, either -- the rails are in disarray, and competition is minimal.
By Lars Pind on Tue, Jan 03, 06 at 17:44 · Reply
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There should not have been a monopoly in the first place, but that's in the past. So how could the phone monoploy be privatized in the best way? (Well, I guess that's also in the past, but more the recent past.) The seperation of the infrastructure and operation, as with the Danish rail roads is a good idea, but it should be privatized. The ownership of the infrastructure/cables could be split up in small parts and the citizens could be given the ownership of the cables in their area. For instance the ownership of the cable from a house to the nearest hub, should be given exclusively to the owner of that house. The ownership of the hub and the connection to the nearest central could be split among those who are connected to that hub. The larger hubs would then be owned by more people, because they and so on. The company running and servicing everything could be split in to more companies or not. Either way the shares could have been given to the citizens instead of being sold to a foreign company. That way, there would still have been a smooth transition. But the structure would be less centralised, and more open to competition. If anyone in a particular area decides that they are unhappy about their current service, it is easier to let someone else be the operator. A neighborhood could decide to switch to another operator. And suppliers of alternative networks could more easily hook up the individual homes, since they own the cables from their homes and to the nearest hub. Today, this is happening on a smaller scale. Condo/appartment complexes in Copenhagen (and other places I'm sure) are already getting networks installed that they own themselves, and the internet connection provided by someone else than TDC. P.S. I don't agree with the 24x cost, see <a href="http://pinds.com/articles/2005/08/03/broadbands-costs-24x-more-in-denmark-than-in-sweden#comments">my comment</a>
By Lau Taarnskov on Tue, Jan 03, 06 at 17:44 · Reply
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Of course if the EU Member governments ratified the Lisbon Agenda that they agreed to, things might be heading in the right direction. You remember the Lisbon Agenda? In March 2000, the EU Heads of States and Governments agreed to make the EU "the most competitive and dynamic knowledge-driven economy by 2010" "countries were supposed to do more to support small businesses and reduce regulation and on liberalisation there was to be more competition in telecoms and liberalised gas and electricity markets." Of course that sentance includes at least one dichotomy. Reduced regulation doesn't help increase competition when you have a monopoly - oftentimes *more* government regulation is required to prevent an existing monopoly from sqashing new players. <a href="http://www.euractiv.com/Article?tcmuri=tcm:29-117510-16&type=LinksDossier">Lisbon Agenda</a> [www.euractiv.com]<br> <a href="http://news.bbc.co.uk/2/hi/business/4373485.stm"> Q&A: EU's Lisbon Agenda</a> [news.bbc.co.uk]
By Mark Aufflick on Tue, Jan 03, 06 at 17:44 · Reply
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