Editorial: Why governments matter

Neelie Kroes's message in Eindhoven, Netherlands, was warmly received by the audience of nearly 300 government leaders, corporations, academics, entrepreneurs and venture capitalists.

Neelie Kroes, vice-president of the European Commission until November, in a keynote speech at the Global Government Venturing Summit this week powerfully connected why governments matter in the innovation ecosystem: youth unemployment.

That some countries in the European Union still have more than half of their young people unemployed more than seven years after the credit crisis started in 2007, according to the Economic Research Council, is a salutary reminder that many regions face a lost generation of people without access to meaningful, paid work.

But, as Kroes said, many of them are doing their best to start something themselves. Her achievements in office in charge of the digital agenda – a role now requiring three men to do it, as she pithily put it in her speech - provide the platform for many of them to tap into the global marketplace and find their niche.

Kroes has given herself 18 months in her new role as special envoy to the Dutch government’s Startup Delta project to continue fighting for meaningful changes. She was looking at changes to tax laws to boost entrepreneurialism and venture investing as well as convene the four largest pension funds to find ways for them to commit to the sector again.

Her message in Eindhoven, Netherlands, was warmly received by the audience of nearly 300 government leaders, corporations, academics, entrepreneurs and venture capitalists about the global, boundary-less innovation ecosystem and the different techniques and strategies they were employing to play their part in the system.

As Kroes, using a term coined by investor Peter Thiel in his book, Zero to One, said: “The only way to make a difference, to go from zero to one, is doing it together.”

This echoed the Summit’s opening keynote speech by Eindhoven’s mayor, Rob van Gijzel, who called for “co-creation” and a “collaboration ecosystem” to be developed.

As the mayor noted, a region can very quickly rise or fall in the innovation rankings but governments can convene and support this co-creation.

Andrew Romans, Silicon Valley-based founder of Rubicon Venture Capital, in a panel session argued for tax breaks to be a primary way for governments to boost entrepreneurialism and investment.

While Christian Claussen, partner at France-based VC firm Ventech, said if governments did decide to provide funding they could go down the route of a centralised or decentralised platform to commit to VCs and/or invest directly in startups. His preference was for decentralisation.

But whether or how governments can start supporting the innovation economy is one thing, learning when to stop is another.

Chris Wade, former director at the UK government’s venture capital unit, said, if a firm could raise $70m per year and there are more than 50 VC firms raising debut funds currently then is government support needed?

Arguably, less is needed now, given the success in VC funds, such as Holtzbrinck Ventures’ latest, being three-times oversubscribed.

In those circumstances, governments could wait until the next downturn to then increase their activity in a contra-cyclical way and support the industry that has to look for technologies to be developed over decades.

But a glance at the regional and sector focus of the firms and funds indicates the nature of the challenge still remains steep if half of young people remain locked out of the economy.

The problem also looks different when academic Thomas Piketty’s assumptions are factored in. As professor Piketty summarises, rates of returns - r - might be closer to pure returns in low-growth – g – societies. His examination of scenarios that affect how r - g might evolve in the 21st century include rising international tax competition, a growth slowdown, and differential access by the wealthy to higher returns on capital.

The last point is important. While co-creation and collaboration are necessary, there is a truism that the majority of returns often flow to the wealthy, whether university endowments, sovereign wealth funds or rich individuals, as they are the ones prepared to invest more and for the longer-term.

Innovation does not equal returns without investment and development. Governments have a responsibility to understand the risks of the innovation, open the tools to all parts of their societies but also make sure they can have a seat at the global table through being prepared to invest on their citizens’ behalf.

More analysis of the Eindhoven region and the Global Government Venturing Summit will be published in its March issue, while the conversation will also continue at our next event, 2-3 June in London.

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