Financing innovation: venture capital

The availability or lack of venture capital is a recurring theme in discus-sions of innovation in Norway. As in many other OECD countries, the topic tends to trigger a debate between entrepreneurs who cannot find money to

support their ideas and venture capitalists who cannot find enough attractive ideas in which to invest. The strong social legitimacy of researchers means their voices are especially likely to be heard in these matters and there is therefore a widespread perception of capital shortage.

TheOECD Economic Survey: Norway (OECD, 2007a) argues that the Norwegian equity market is comparatively underdeveloped, owing to the large role of state ownership, but that the venture capital market is larger than in many OECD countries, though well below the leading countries (Figure 2.19). The Norwegian Venture Capital Association’s 2006 survey indicated that half of the capital under management was free for investment, and that this was as true in the seed capital funds as in the start-up, expan-sion and buyout funds. Oil and energy and ICT, as well as life sciences, finance and aqua/agricultural, receive significant amounts of funds, but generalist sectors attract most of the investment. In 2006 there were 56 management companies and 85 funds or portfolios holding a total of NOK 45 billion in capital under management. In the aggregate, therefore, there appears to be no evidence of a shortage of venture capital.

Figure 2.19. Venture capital investment flows, 2000-2003 As a percentage of GDP

1. The asset class of venture capital or private equity (or buyout) funds dedicated to invest from funds raised by third parties into growth or restructuring cases.

2. 2000-02 for Iceland; 1998-2001 for Australia, Japan, Korea and New Zealand.

Source: European venture capital associations, World Bank Financial Development and Structure Database and OECD venture capital database.

That there is no shortage is due partly to the actions of the state.

Argentum was established in 2001 with a capital base of NOK 2.45 billion, and it is a government-owned investment company that participates with minority stakes in specialised investment funds for active ownership, so-called private equity funds. A further NOK 200 million was subsequently contributed to the company. Its mission is to develop management resources for such funds and indirectly bring businesses into the private equity phase, create enhanced competitiveness in Norwegian business, and achieve a high yield on the capital invested as well as creating networks involving owners, fund managers and R&D centres. Argentum supplements the role of the national seed fund, which co-invests with the private sector at the seed, start-up and other early stage, and the more routine development banking services provided by Innovation Norway.

In total 16 seed capital funds have been authorised since 1997. Six were established from 1997 to 2000, and ten more were authorised between 2003 and 2005. The latest funds are of two types: six regional funds were authorised following budget negotiations in 2003 and 2004, and four national funds following negotiations in 2005. These funds are based on co-operation between the government and private capital, and will amount to about NOK 2.4 billion when fully capitalised. Both types offer incentives for private investors, in the form of maximum limits on the yield to the state and subsidies to cover losses on individual investments. The incentives are somewhat better for private players under the regional scheme. The funds invest in the early phases of innovative businesses with growth potential and ambition.

Policy therefore addresses a mix of national and regional policy con-cerns, with seed funds seen as necessary for regional autonomy. Individual, necessarily small, regional funds are preferred to a smaller number of national funds with regional distribution, something that Innovation Norway could alternatively provide easily through its network of district offices or that SIVA could offer via its extensive national network of science and industry parks, in addition to the venture funds that SIVA supports.

The tension between the need to build scale in venture funds (to build big enough portfolios for risk taking and to afford good-quality investment analysis) and the pressures of regional policy is not new. STEP’s 2000 evaluation of SIVA investigated four of its funds and found that they mainly invested in rather mature companies making established products, though with a scattering of more technology-based ventures. The scale of the funds limited their ability to take risks. Ernst & Young’s evaluation (1998) of the Venture and SIVA seed funds was deeply sceptical about the return of the funds, and pointed out that the state – as minority owner – was not in a position to steer their policy or development. The current and planned

multiplication of small funds, many of them regional, risks renewing these problems.⁴⁴ SIVA has a very small role in the seed and venture markets, and has not entered new funds since 2004.

The problems which arise when small regional funds simply try to operate below critical mass –in terms both of analytical capacity and the absolute amount of money in the funds – have been experienced in other countries, notably Finland. In Finland the approach has been to leave management of regional fund collections to private sector managers, effectively raising the analytical critical mass.

2.7. Human resources for S&T and innovation: the flight from science