Another vote in Europe...

Startup Investor Manifesto aims to set the agenda

A group of Tech Entrepreneurs launched the Startup Investors Manifesto at the EBAN Conference in Dublin this week - you can find it here.... In the week of the Euro elections it is a pertinent reminder of the importance of entrepreneurship to all our futures.

The Manifesto is designed as a lobbying document and aimed solely and squarely at the various EU authorities. It follows on from the Startup Manifesto published a couple of years ago and like that document it is very much about startups in the tech sector. Initially it felt slightly odd reading it through. I am a startup investor and these people are lobbying on my behalf without me realising I was part of such a group. On the other hand, why shouldn’t the views of a vital and dynamic sector of the economy be strongly represented to Government and regulators?

One answer to this question might be that Government interference in highly competitive markets is not the best solution. I totally sympathise with this sentiment but it is not actually how free market economics operates. If you want to see a totally unregulated free market, go to Mogadishu ( which by the way is not quite as scary as you would think…) Free markets depend on an open but reliable and predictable regulatory framework to exist and grow. For example, the stock market changed utterly when joint stock companies became an authorised vehicle for business in the middle of the 19th century. It is therefore very important that Governments create the right platform for startups to thrive and for investors in those companies to deploy their capital. An important proviso. The market framework should keep distortion to an absolute minimum. 

Does this manifesto propose measures which would help achieve that objective? Perhaps predictably it is a bit of a mixed bag. Some ideas are excellent, some are questionable and a couple of the proposals sound quite dangerous. 

• The principle of the document is to broaden and deepen the investment pool to encompass the whole EU and its accession countries. This is clearly desirable as the main thrust. The total numbers are quite small - currently the authors believe that investment in tech startups is around €7.5 billion per annum and they would like to double this by 2017. In the context of EU capital markets and business investment this is still pretty small beer.
  
• I would prefer to have seen a more open and global attitude. There is quite a bit of from the EU for the EU first and maybe attract other later. US investment is seen as a competitive threat rather than taking the view that we should seek to have more funds from silicon valley invested into Europe.
  
• There are five major recommendations. Number 1 is to inspire a co-investment culture amongst various market participants from the public and private sectors. One of the most positive aspects of the Scottish investment scene is that this attitude is already well developed so I would absolutely support this goal. One interesting aspect is that funding from conventional banking is not mentioned at any stage. A greater concern is that there is also no space for new and creative ways of funding. Crowd funding is recognised but has a minor role but nothing for innovative mechanisms.
  
• There are further recommendations to improve liquidity in startup markets, to make the risk culture more favourable and to make the whole investment process easier and clearer for investors and investees. All of this would be very helpful in creating a more mature and efficient market. I am more sceptical about some of the detailed policy measures proposed. For example, liquidity in this case means making exits for investors easier but the manifesto only proposes options for better access to stock markets. This would be nice but will always be less significant than encouraging more trade sales and easier consolidation of similar businesses.
  
• One note of caution. Businesses should only be funded which stand up as viable on their own. Diverting public money because we want to create this or that type of business will be very dangerous. This temptation is especially strong in this area where the future for any business is almost by definition highly uncertain.  A similar risk exists in the proposals for beneficial tax regimes. As an investor, I obviously take advantage of these but create a climate where investment is purely for tax reasons is in no-one's long term interest. As far as I remember, tax policy is also a national not an EU jurisdiction.
  

Overall, the main recommendations make sense but there are a couple of things in the detail that are major concerns. Firstly, the manifesto recommends a standard common definition of a business angel. Indeed in section 5.2 it actually says that this should be imposed.  The whole point of angel investing is to encourage people with from every walk of life with the widest possible range of interests and agendas not to create a new defined (and no doubt regulated) class of investor. Secondly the detail goes quite a bit further than the broad agenda and starts to feel like quite a heavy hand and an element of protectionism ( the proposed transatlantic trade treaty is seen as a threat for example). Ultimately, if things go too far they risk strangling the very dynamism they are trying to encourage.

Enough of the negative. Broadly I would support this initiative. I would like to build on it and in the spirit of the entrepreneurial movement to see recommendations which encourage broader horizons in three main ways:

1. Tear down the fence and make this about Europe as part of the world. Specifically, open both the investment and liquidity recommendations to the world. Let's have Silicon Valley VCs hammering at our door to invest in the European scene. Why not create an environment where global corporations are scrambling to snap up great companies funded by our business angels.
   
2. We should also foster innovation in the financing side. Be much more ambitious about the growth of crowd funding. Set a goal which has a deliberate gap for new types of finance and start looking to encourage these now. For example, we could learn from the likes of Kopo Kopo in Kenya. This mobile money startup has just start to offer micro working capital finance for growing businesses.
   
3. Finally, be more inclusive in how we define investment. Most Startups that I meet are looking for experience, expertise and networks as well as money. Rather than define a business angel, I would like to see the community of business angels extended to include those who don't have money to invest but do have value and energy to bring. Let's have people from the charitable sector, teaching or the caring professions lending their expertise not just the business community.
   

I wish the promoters of the Startup Investors Manifesto well in their attempt and I hope they can find a way to include the ideas and the support of the whole community.

---