What really happens with most government run investment where funds are allocated to outside investment people or groups (ex. EU funds), is that the investors have limited incentives to actually/help create successful companies.
In fact, what often happens is that the investors manage to funnel a large portion of the funding back to their own pockets by requiring the startups to pay for bootcamps and trips that are run by the investor and mentors (i.e. investor's buddies) and pay for services and facilities that the state provides the investors for free.
On top of this, the investors get very generous salaries and reimbursed for many if not all expenses (i.e. a great opportunity to double dip, see above).
Finally, if the investor has any money at risk in the fund it is normally all but fully insured by the government and they get the lion's share of any returns, if there are any. All in all, it is a great deal for the investors with almost no accountability and little net benefit for the startups.
By your definition, most state venture-funds are born to die. What you are describing is a structural issue, which while plausible, is not definitive the structure that a state VC will wield. Some very good examples of state VCs that did not fall into this trip are Temasek/GIC from my country (Singapore), as well as that of Norway. And yes, Termasek have a VC that does tech fundings too. They recently funded Snapchat.
I would exclude from this explanation, state funded VCs or sovereign wealth funds that invest in later stages. They are most commonly investing for strategic reasons or just piling onto an already established leader.
I just wish they would stop attacking google products. I have a China legal enterprise, we pay China taxes, employ 15 people, expect to double size again this year. But since January 1st I had to scramble and buy VPN service for all our employees just to continue using our email. I've dealt with a lot of frustration to get started over here in Chinese system but right now is probably the most pissed off I've been, this is ridiculous.
I have the same frustration as you as someone who is also using Gmail (Apps version) in China. Even you can get through using VPN, but Gmail web is slow.
Sometimes I am even impulsed to make an email client that has all the Gmail features I love so that I can migrate to another IMAP-enabled email service like FastMail, but I know it's not easy even if I have already built http://ownmycopy.com which already does cloud-to-desktop backup for Gmail and has a viewer for Gmail labels and emails......
And sometimes I think, if I ever fight against the evil GOV, such a frustration is what make it happen. Well, this is just a thought, I'm putting me in danger if I wrote this in Chinese and on a Chinese website......
Yeah, it just seems to be getting ridiculous the last few months. I can watch streaming video from youku or iqiyi with no problems, but when I try to load anything outside of mainland, with or without VPN, it's like being back on 28k dialup again at best.
Government funding of start-ups is a bad idea for everyone. It is like using the taxed money of successful entrepreneurs to fund doomed to fail entrepreneurs. It might make more sense for the government to give similar tax incentives to say employees, VCs and founders on the potential windfall they might make from their success.
When government puts up such program, the people whose expertise in convincing government agents would end up getting such money. Convincing a VC and convincing a government agent are pretty much orthogonal because VCs are generally directly responsible for that money.
I think this is scary for Europeans and North Americans. We've had a free ride in the startup space, a real dearth of competition from China, even though China has exceptionally skilled people (most heavily talented in technology, although the marketing talent is obviously getting better with the home grown successes like Xiaomi.)
The one saving grace is that this is government run, which means it will likely be less efficient than privately run VCs. I've seen government run startup "accelerators" in action and it is usually pretty messy.
If by "startup space" you mean the set of problems in the world that can be solved by tech startups, this is clearly not a pie that is carved up, rather uniquely a pie that grows indefinitely. Startups, as a whole, benefit from other startups far more than they compete w/them. We in America or Europe can only benefit from an improved startup ecosystem around the world, as customers, investors and founders .. and most importantly as human beings.
Many successful startups, for example, were directly conceived as ways to fix the problems of other startups. Indirectly, a startup such as Uber was only possible due to the mass adoption of technology driven by Apple, Google (and Samsung, Xiaomi etc) and an app ecosystem invigorated by hundreds of other startups.
There is certainly competition within industries or niches, i.e. Uber vs Lyft. But the "startup space" is really about creating new (or at least re-configuring existing) niches in the "non-startup" world.
So while I doubt this particular initiative will work, or even get close to returning the investment, we certainly shouldn't fear its success. Rather we should celebrate successful startups regardless of where it comes from, as it means that a problem has been solved and the human condition improved in however small a way. The idea that our species is going to run out of problems that need fixing seems a bit paranoid.
What exactly makes privately run VCs more efficient than government run VCs exactly? They are both centrally managed and entirely top-down. There are plenty of examples of horribly run, crash-inevitable private VC.
I can think of two possible differences but perhaps there are more:
A) For independently wealthy VCs, the money comes directly from personal funds, so investment is presumed to made carefully
B) For VCs where a panel/firm decides how to invest capital provided from someone else's fund, commission on success and legal contract may provide incentive for firm members to be careful
In theory, similar leverage (bonuses, legal trouble) applied to those making analogous top down decisions in a governmental organization would produce like incentives and therefore competitive efficiency.
Theoretically the public/governmental investment model could have other benefits. For example projects like Wikipedia, which provide 'social' income rather than 'financial' income, can be invested in. Another benefit is that the VC is more free to ignore investment bubbles (hyperlink, ad space, 'social', big data). Finally, since private VC circumvents the IPO process and is able to capture the majority of growth value of new businesses, it highly concentrates wealth. This caustic side effect may be side stepped by public programs.
C.) That the possibility of the firm going out of business puts pressure on decision makers to be more careful
D.) That the firms who make bad bets (or get unlucky) may stop participating, in which case the VC industry becomes better "on average"
Or a combination of the two (or is it something else)?
C to me seems to be a generic rephrasing of A and B. D isn't all that simple since one has to make some nontrivial assumptions data hasn't really borne out (acknowledging here that data hasn't conclusively borne anything out): e.g. that investment is neither primarily chance or primarily networking effects, that predictive quality of firms is mostly invariant across changing technology, that turnover internal to firms moves slower than turnover in the market, that the damage done to the market by lost capital investment is outdone by better average performance, that firms moving in to replace losers don't 'undo' gains to average, and that there even exist (and that the market can support) enough potential big-payout startups to benefit more than a few lucky VC firms to begin with.
Certainly the point is taken that in cases where both harder work matters and where leverage exists (be it slavery, authoritarianism, competition, financial pressure, legal pressure, etc) to get people to work harder, better results are likely to be had. There is a question both to what degree harder work matters in capital investment and also to what degree leverage that exists in private top-down firms does not and can not exist in public top-down firms.
One can consider the internet itself as a product of public investment (where there was competition among researchers AND private firms for capital to develop and research packet switching) among countless other examples; namely public investment isn't devoid of its own very large successes.
In the discussion is also the subject of 'efficiency' for which reasonable arguments to include 'social income' exist. Counter to this in the public space there are dangers of conflicts of interest and cronyism (these exist, but less problematically, in private sectors).
Quite the opposite: it creates huge demand for local copies of foreign services that are unreachable from within it. It's the protectionist's dream.
Foreign websites are, as a rule, very badly reachable from within the country. I don't even want to use them personally, let alone build a business on them.
As an example, the rest of the world hasn't mass-adopted Baidu and isn't going to. The same has and will go for most of China's services.
Baidu is heavily shielded from external competition due to both nationalism and government controls (censorship etc). A protectionist's dream? No, a trapped nightmare, they can never compete properly with Google on a global scale. Seeing as China represents about 10-12% of global GDP, Baidu will never derive a meaningful business from perhaps 3/4 of the global economy accordingly.
Yeah but they may never have had a business to begin with without the protectionism. Case in point; where is all the other search engines from other countries that have no protectionist schemes?
I can access Baidu from the US... but they clearly aren't trying to get my traffic -- the site is in mandarin.
So I don't understand why you think they're trapped... if they wanted to, they're free to expand outside of China.. there are few countries that have similar censorship.
Frankly speaking, it's just "肥水不流外人田" in Chinese, which probably means keeping profitable things in one's own farmland in English. We always presume the higher orders have almost the same goals with the country. However, it is not the case every time. Also, state-run investment in such a large scale will simply lead to just another massive misallocation of the investment. For many officers, it's another opportunity to wash those money and put into personal accounts.
I'm not sure if we can all it a healthy ecosystem, but I guess most IT people here in China will agree with me that, while the Great Fire Wall's original purpose should be purely political censorship, it actually helped the growth of the Google-clone, the youtube-clone, the twitter-clone, and most other clones in this country, because the massive majority of the my fellow countrymen cannot access those original websites.
From what I can tell, people often assume private funding works better than public funding because they conveniently disregard when private funding is inaccessible.
I'm able to get something as basic as food stamps from the government (if I desired that) but I'm not aware of private small scale relief outside of religious organizations. I also benefitted from Pell grants and a first time home buyer grant with my girlfriend.
I think public venture funding is compelling and could lead us in all kinds of new directions because funds would be more easily obtained for the public good than sole profitability. I'd even go as far as to say that the reason so many ventures have a vacuous (if not suspect) goal is that currently we are in an era where most of the world's liquid wealth is held by private institutions rather than the people or the commons. For example I don’t see something like the moon landing happening today, or even large public works like Hoover dam (whose cost/benefit analysis can be left to a later discussion).
What scares me, in terms of technical competition, are things like Bunnie Huang's description of the differing and sometimes more flexible approaches to intellectual property, construction, and fulfillment.
Will the West end up fighting its own lawyers, while the East avoids such at times either through differing social structure or a top-down mandate to "get out of the way so it can get done"?
The flipside, perhaps: Your startup is yours, until the State decides it is important to the State. Thereafter, maybe not so much.
I'm no expert -- hardly. But these differences come to mind when I stew on the topic.
Part of this is in response to TRIPS obligations. But Western countries have been trying to get China on board for decades. What's changing now? What's changing is that Chinese companies have IP to protect now.
I think Westerners underestimate value in IP, it is extremely important and China is beginning to realize that they need to enforce protections. They have already begun to open up courts for IP.
We're all over-hyping China these days, as they get larger, they will become more like a Western country (unless they want to experience the riots of the middle class, like Turkey, Brazil, etc). I think people fail to realize that China's authoritarianism is incredibly unsustainable. As they open up their markets, country, etc., the channel of ideas and information becomes larger and much more harder to regulate. Just take a look at the comments Weibo, NetEase, etc. There are a lot eye opening anti-government comments before the sensors come in.
Even assuming that the govt fund behaves just like private Chinese VCs you'll see the bulk of the money going towards startups that try to replicate US/International innovation success stories domestically. Xiaomi is not a threat to startups. It's a threat to consumer electronics manufactures with higher cost bases that are slow at innovation. China is good at globalization plays, but still bad at innovation. Startups don't need to worry [yet].
There are already American companies in China which replicate all the ideas from the US and apply them within China. They've been doing so for 5+ years. Nothing wrong with a little home-grown competition. Certainly people in the US would be up in arms if the opposite was happening to them.
You mean like when Japanese automakers opened factories in the US to make their own style of fuel-efficient and compact cars? Short-term maybe, but I think most people appreciate job creation in the end.
Yasheng Huang writes that China's economic system is not "Socialism with Chinese Characteristics", as the CPC proclaims. It is in fact capitalism with Chinese characteristics, and this move offers further evidence.
I am going to China in a few weeks to meet about a fairly large tech project. China has grown an amazingly vibrant and potent culture of entrepreneurship that puts most nations in the world to shame.
In fact, what often happens is that the investors manage to funnel a large portion of the funding back to their own pockets by requiring the startups to pay for bootcamps and trips that are run by the investor and mentors (i.e. investor's buddies) and pay for services and facilities that the state provides the investors for free.
On top of this, the investors get very generous salaries and reimbursed for many if not all expenses (i.e. a great opportunity to double dip, see above).
Finally, if the investor has any money at risk in the fund it is normally all but fully insured by the government and they get the lion's share of any returns, if there are any. All in all, it is a great deal for the investors with almost no accountability and little net benefit for the startups.