The politicians and civil servants are once again at the “support strategically important new industry” game. It is the idea of picking winners. As if they knew how. As if it is even possible.
If any of them talk about this within earshot, call them on it. Be aware of how real Venture Capital firms operate. They make their living on the picking winners idea.
You can find a great deal about it here. How Venture Capital Works.
Picking winners is difficult work even for highly skilled and experienced people. The trick seems to be eliminate the ones that probably can’t work and invest in the others. One VenCap firm funds about one of every two hundred projects that come their way. The elimination phase is quite ruthless.
Even then, the expectation that the project will pass through the five stages outlined in the Wikipedia article and eventually (as in years later) return a profit is about one in six.
Of twelve hundred projects presented, six are funded and one of those becomes a public company that allows the investors to get their money back with a profit. Not for the faint of heart.
There are two lessons here:
- If you plant many seeds, some will flourish but most will not. Nurture what grows.
- You cannot tell which of your 1200 seeds is “The One” until later. That is the flaw. People use hindsight to decide that is not that hard. Facebook, Google and others seem self-evident. It is a common thinking flaw for people to focus on what did happen and overlook what did not. 1,199 projects made no money and one did. Why would focusing on the success of the one and the exclusion of the others make logical sense?
I do not know who in government will be picking the projects, but I am willing to bet that the one chance in 1200 idea is not often discussed. I am further willing to bet, because I am cynical about government, that the projects funded will have some political connection to the government.
On another tack, there seems to be no shortage of venture capital for promising projects. Why then does the government wish to be involved? Again there are two possibilities:
- They have an ideological bias to fund industries when no one would use their own money to do so.
- They are impatient and while the industry may have merit, it is not mature enough to justify personal money.
The second may have merit. Sadly however, the loss ratio may be much higher than ones where the decision was based on objective evidence.
No one can be right every time when investing in startup businesses. There are too many variables and the time frame is long enough that the situation will change before completion.
Pay no attention to the pick winners idea. It is a self-indulgent delusion.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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