Opinion: Why the announced multi-billion euro tech fund is a bad idea
February 9, 2022
On Feb 7, France's finance minister Bruno Le Maire announced the creation of a publicly funded multi-billion euro fund. In addition, the German finance ministry announced that it will commit one billion euros to the fund. According to Le Maire, the core objective of this fund is to ‘have 10 technology companies worth more than 100 billion euros each by 2030’. In my opinion, this new fund is a bad idea for multiple reasons:
- Let’s go back to the basics and ask ourselves: ‘Why should public institutions intervene in the market.’ The answer that scholars typically provide is: ‘Governments should intervene when there is a market failure’. Market failure, is a situation defined by an inefficient distribution of goods and services in the free market, creating an imbalance between demand and supply. Looking at the domain of tech financing, it is difficult to see what the current market failure is. The tech market is flooded by money from private investors. Instead of highlighting a lack of funding, there is an overall sentiment that funding nowadays is abundant, even triggering some questionable valuations for tech startups. This triggers the question: ‘Why should we pump additional tax payer money into this system?’
- Playing the Venture Capital game is like going to the casino. You need to place many bets on a wide variety of options and you need to accept that most of them will fail. In the end, a limited number of hits will generate a positive return on investments. Public institutions, however, tend to be bad casino players for good reasons. As European citizens, we might feel uncomfortable when the European Union goes to the casino with our taxpayer money. Moreover, it is questionable whether a public fund will have the stomach to play casino in a hard-core way. Before we will see the aimed for 100 billion euro companies, we first are likely to encounter numerous companies that fail despite the support of the fund. In such circumstances, public decision makers are likely to get cold feet and go for safer options, which will actually decrease the likelihood of hitting the jackpot in the end.
- When tech funds are created by politicians, they will be (ab)used for political reasons. It is not a coincidence that exactly the French minister of finance, who is facing national elections in April, got the honor to announce this plan. Moreover, it is unavoidable that, when decisions need to be taken about who is actually getting the money, a lot of political considerations will be taken into account. For instance, it is clear that the German finance ministry will carefully check that German companies receive a fair share of the funding, even when companies from other countries look more promising. In this way, funding is less likely to be allocated to the best candidates, further decreasing the likelihood of hitting the jackpot.
In sum, I believe is quite unlikely that this new fund will trigger a shiny cohort of 100 billion euro companies. Instead, the fund is likely to become a battlefield for political infighting that will mainly contribute to mediocracy. Instead of entering the VC game, I would recommend that the European Commission focuses on its actual tasks as a public institution. First, it should make sure that Europe really functions as a digitally integrated market where European tech companies can easily expand. Second, it should provide European tech companies a regulatory framework that stimulates instead of discourages risk taking. These topics might be less sexy and flashy than playing the VC investor game, but they might actually help European tech companies in their ambitious growth objectives.