At the grande finale of this year’s Entrepreneurship Week, the award ceremony in Stockholm on May 26, Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, received the Global Award for Entrepreneurship Research 2010.
Since its inception in 1996 the Global Award for Entrepreneurship Research has become firmly established as the foremost global award for research on entrepreneurship. This Prize is awarded annually and has a Prize sum of 100,000 Euros. Anneli Sjögren, representing one of the three organizations behind the prize, Swedish Agency for Economic and Regional Growth, emphasized the need for new knowledge and the importance of the Global Award.
Josh Lerner receives the 2010 award for his pioneering research into venture capital (VC) and VC-backed entrepreneurship
Pontus Braunerhjelm and Ewa Björling
Presenting the award was Swedish minister for trade Ewa Björling and the president of the prize committee Pontus Braunerhjelm.
– The award is promoting an area of thought that is needed. It is important to listen and to learn about remaining obstacles in starting and growing new businesses. As politicians it is our duty to remove obstacles and to make it possible for individuals to realize their goals and dreams, said Ewa Björling, who also took the opportunity of mentioning the achievements of her government in promoting SMEs, innovations and exports.
In the prize ceremony Swedish entrepreneur Rune Andersson, who has also contributed financially towards the Global Award, explained his interest in research: We are losing jobs in the globalization process. To replace them we need entrepreneurs and new and growing SMEs. To reach that research is important. One important question raised by professor Lerner’s research is: is it a lack of demand or a lack of supply of capital? The answer is essential when it comes to policies!
Throughout his career, Josh Lerner has been widely engaged as advisor and consultant to governments and organizations, such as the World Economic Forum and the OECD. Professor Lerner has had a very productive career with articles and books that have had great impact. His latest book ”Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed and What to Do About It” has received worldwide attention.
Rune Andersson, Ewa Björling and Josh Lerner.
The awardee’s acceptance speech was based on his latest book and the topic of governments and the promotion of entrepreneurship and venture capital.
Thus, the professor started off by stating that, in dealing with the legacy of the crisis, the whole world is hungering for ”green shoots” and creating new ventures.
Lerner’s research show that returns of investment of venture capital has gone down since 1999. The amount of money going in is the same coming back and there are concerns of widespread disillusionment of investors. Only 0.1 percent of the companies in the US receive venture capital and the numbers for Europe are even lower.
The prize winner offered us a few clues to what has been going wrong. One reason is the challenges in financing young entrepreneurial companies. There is large amount of uncertainty, a lack of information on the venture capital side and the nature of the companies’ assets, with often virtually no hard assets, makes investments a risky business.
Lerner pointed to the fact that venture capital has had a profound impact on the economy, creating a lot of wealth for a lot of people. However, in success stories often too much credit is given to the venture capitalists. The impact on innovation is another important area.
– Venture capital seems to be much more powerful in creating innovations than investment in research and development. In fact, a dollar invested in VC is three to four times more effective than one invested in R&D.
According to Lerner there is a place for governments in venture capital, however such programs have a tendency to fail, not seldom because of incompetence.
– Often it is a loosing game but it is a more complicated story. A lot of government ventures were doomed from the start or badly designed and poorly executed.
That raises the question of why there is a need and a wish for the government to take an active part in the venture capital area at all?
– You can say that a pioneering entrepreneur is paving the way for entrepreneurs to follow. They are generating positive spill over effects.
– If you have this activity that generates innovation it seems like at powerful argument for governments to be involved. In these cases, government can frequently play a catalytic role.
According to Lerner one government role should be to set the stage for entrepreneurial activity and venture capital. Setting the stage through e g tax policies is an important factor.
– There is evidence that the difference between capital taxes and traditional income tax clearly affects the willingness to take the plunge in to a venture.
It is also fundamental to understand the market before setting up programs to promote ventures. Far too often governments are trying to stimulate entrepreneurial activity without considering if it makes sense or not.
– We need to listen to the market and there is always need for private investments. Money has to come from the private sector too, as a “reality check”, that the public money is realistic.
Finally governments need to get the details right. According to Lerner there is a temptation from governments to go big and run the risk of flooding local investors. Programs should avoid rules that go against what the markets need and last but not least there is need for evaluation.
– One of the crucial things about independent investors is that they are good at killing projects, whereas many public programs struggle with the problem of cutting things off when time is ripe to say no.
In his final remarks Lerner concluded that
– Venture capital is an important area. New companies and ventures can play an important role in the processes of innovation, and a lot can be gained from these.
Following Lerner’s presentation a group of commentators were invited to a panel discussion moderated by Anna Söderblom, researcher and teacher at Stockholm School of Economics. Participating was Claes de Neergard, Industrifonden, Pontus Braunerhjelm, Swedish Entrepreneurship Forum, Marie Reinius, Swedish Private Equity & Venture Capital Association, Rune Andersson, entrepreneur and donor, Per-Ove Engelbrecht, EU Commission, and Björn O Nilsson, IVA.
From left: Claes de Neergard, Pontus Braunerhjelm, Josh Lerner, Marie Reinius, Rune Andersson, Björn O Nilsson och Per-Over Engelbrecht.
Björn O Nilsson agreed with Josh Lerner in his view that there is a role to play for government .
– Lerner’s research shows there is justification for governments to care about the venture capital area. We should look into what we can do but in a careful way, said Björn O Nilsson
Pontus Braunerhjelm emphasized a more general role for government:
– Obviously there is a role for the government. First we must create a good environment for entrepreneurs who want to take risks. And I am happy that Josh Lerner mentions both taxes and labour market legislation, two taboos in Sweden. They certainly do have an impact on entrepreneurial activity, said Pontus Braunerhjelm.
Rune Andersson wanted to turn the focus away from the supply side of venture capital.
– In my own experience there is a lack of ideas and entrepreneurs, not of venture capital. The low return on investments in recent years proves that there is too much money, said Rune Andersson and continued,
– Over the last twenty years I have always had to compete for the good ideas, said Rune Andersson.
Research shows that Swedish companies don’t grow and it should be an area of interest for policy makers.
– It’s easy to start a company in Sweden, the problems start when you want it to grow, said Marie Reinius.
– Yes, but we have to grow all sorts of companies in Sweden, not only the so-called high-tech companies, said Claes de Neergard. Two of the major successes of fast growing companies, H&M in fashion and Ikea in furniture are not high tech at all! But they are innovative in their business models.
– A lot of the best, innovative and hight tech based Swedish projects are sold abroad, often because of lack of financing, said Björn O Nilsson, so we cannot leave out that aspect.
Pontus Braunerhjelm asked Josh Lerner if business angels become more important as traditional venture capital becomes institutionalised and consolidated.
– It is very hard to measure, but the dynamics between the two are important. Business angels can give the push needed and take the necessary risks at an early stage, replied Lerner, who saw the need for “echo systems” where both entprepreneurs and investors meet and thrive, building upon each others’ experience bases. This is the power of role models..
Policy demands are often focused on innovation and the creation of new products. But several members of the panel emphasized the importance of new companies getting out on the market at an early stage.
– It’s when you meet the customer that you learn what you actually are doing, said Lerner.
– 95 percent of the work in a company is marketing, to break through the noise. Many companies have died because they didn’t read the market right or didn’t reach it fast enough, said Rune Andersson.
– We have an untapped potential in wealthy people, who are not part of the traditional venture capital community, said Claes de Neergard.
– There are situations with promising markets that have reached a critical mass, when public money is desirable. But how do we know when that type of policy is needed? asked Pontus Braunerhjelm.
– If we knew that it would be easy, was Lerner’s comment.
It was mentioned from the panel that the taxation of capital gain must be lowered to international levels to promote the supply of venture capital.
– We shouldn’t have the highest capital tax. Sweden has average 30 percent capital tax when the OECD average is 17 percent, said Rune Andersson. But to create new government funds for capital and at the same time suggest that the wealth tax that drives billions out of the country should be reintroduced, like the opposition parties want to do, is just shear stupidity.
At the end, a very animated discussion broke out where the current suggestions for a new directive on hedge funds and equity funds in the EU was criticized from various viewpoints. Marie Reinius for one thought that the whole VC market would suffer if the directive is accepted.
Per-Ove Engelbrecht explained that negotiations were not concluded and that the Commission was trying to get through changes that would mitigate the bad effects on availability of venture capital, e g by excluding funds up to a certain size.
Clas de Nergaard was equally negative towards the idea of “tying rules to having a European passport”.
– Competition will be heavily affected.
In the final round from the moderator Anna Söderblom all panellists were asked to mention one measure that they would like the policy makers to carry out. The wealth of suggestions covered everything from reducing capital taxes to international levels, to putting entrepreneurship and innovation at the top of the political agenda in the election campaign. Pontus Braunerhjelm concluded that there is no quick fix and that all suggested measures probably all were needed if we want to see more innovative and growing firms.