They say the road to hell is paved with good intentions. Similarly, the path to a failed startup, bankrupt business or – worse still – wasted entrepreneurial opportunity, is usually paved with EU funds.
I would even go as far as saying that it’s akin to sleeping with the enemy. Why? Simply because as it has been proven time and again, throwing EU money at problems rarely solves them. Nor is it effective in driving innovation and true entrepreneurship forward. In some horror story cases, it even exacerbates the issues.
False horizons
Take Greece for example. At the time of writing, Greece’s government is currently ‘celebrating’ the news of one fact. It has attracted an unprecedented number of applications for funding under the EU’s Horizon 2020 program.
A total of 2,426 proposals across eight industries have been submitted to the EU-sponsored ‘RESEARCH-CREATIVITY-INNOVATION’ fund. Greece’s funding package is 1.6 billion euros.
Great. The only thing is that ever since Greece joined the European family in 1981, huge sums of money have been provided with spectacularly negative results. Across all sectors of the economy. First there was the Mediterranean Integrated Programs. Then came the various community support frameworks (CSF’s) of the 1990s and early 2000s. Then, most recently, before H2020 there was the 4th CSF, which was rebranded as NSRF. Billions upon billions of euros to bolster the national economy.
And what was the result? For Greece, a new era of economic catastrophe is now reigning supreme. One of capital controls, high taxes and crippling austerity measures. Of course the EU’s aid policies are not to blame solely, but wasn’t the very point of the aid to prevent something like this from happening?
A European epidemic
A quick parenthesis. I mention Greece simply because our HQ is here and it has special relevance for us. The subsidy ‘disease’, however, is a proven European-wide epidemic. Apart from the economic strife which many European countries find themselves in, something much worse has happened. As well as the death of the productive fabric of many EU countries, the culture of creativity has been decimated. The EU taught business owners and would-be entrepreneurs that they could rely on handouts.
Back to Greece. From the 2,426 applications submitted, technology and agriculture are the two industries with the largest number of applications (953). Of course it’s understandable. Entrepreneurs and startups always need money. Especially in Greece.
True entrepreneurship starts in ‘survival mode’
On the other hand, the availability of public-funded money is the axe which brings down the entrepreneurship tree. That’s because true entrepreneurship begins in ‘survival mode’. That is, having just enough money to build your product or service without starving.
It remains to be seen how many of the applications are successful. Currently the success rate is a depressing 13-14%. More important, from our perspective, however, is how successful it will be in providing ROI. Our bet is virtually zero.
Sorry, but for want of a better expression, we’ve been there and done that. Objectively, the lessons of the past, and the numbers, unfortunately speak for themselves.
Such a program, whose goal is to link research and innovation to entrepreneurship and enhancing competitiveness, productivity and outsourcing of businesses to international markets, is an elusive fantasy. Why?
Hard cash alone is not enough
Because money cannot bridge the kind of gaps that exist between public and private institutions that these funds are created for. Instead, typically it encourages corruption to thrive. Aside from that, the main problem is companies, or wannabe companies, don’t want to cooperate with universities and colleges.
Fundamental changes in Greek and in European society at large are required for these kinds of programs to bear the rich fruit it’s intended for. That is, rather than the handful of dried raisins it will produce.
There are 6 main barriers that I can think of which hold these initiatives back:
- Red Tape – the amount of bureaucracy can be a nightmare
- Intellectual property issues – under regulations if you cooperate with an educational institution then you usually say goodbye to your IP
- Cost of collaboration – losing large percentages of the project equity to the often ridiculously high admin costs. This is how an entrepreneur can be massively out of pocket, despite doing most of the work
- Subsidy weighting – there’s usually more of an emphasis on the research than the development
- Inflexibility – when the need arises to pivot and change or redesign your solution after the research stage. If you do so there’s a real risk that the fund will disappear
- Demand anyone? – throwing money at creating innovative products and services is worth nothing, if there’s no demand created for them. Finding this balance is crucial
Interim report on Horizon 2020
An official mid-term report on Horizon 2020 will be released within the next couple of months. If, like me, you couldn’t wait to see some of the feedback already provided, you can check the 296 public submissions uploaded to the Commission website.
Science Business provide a rounded initial analysis and the results are as expected – i.e. mainly negative. Some highlights include a Belgian computer manufacturer Altreonic saying “Many people call the programme a lottery.” Edinburgh University complains about the quality and consistency of proposal feedback, stating: “Where a proposal which has taken many hundreds of hours’ work, costing tens of thousands of euro in time and effort from participants they should at the very least expect detailed feedback in their evaluation summary reports.”
Closer to home, Maria Kandyla, a researcher in the Theoretical and Physical Chemistry Institute at the National Hellenic Research Foundation in Athens, has this to say: “There are closed circles; consortia who know each other for a long time. An unnecessarily big amount of money is spent for trips and meetings between all the partners; this money would be better spent on salaries or equipment.”
So what’s the solution?
Firstly, a government must be brave and bold enough to stand up and say no. Subsidies must stop. Then, here are three ways of implementing policy aids that could continue to exist as tools for implementing economic strategies:
- Tax relief – this is the healthiest method of all. The G20 YEA (Young Entrepreneurs Alliance) are already banging the drum. Philosophy is simple and straightforward: It has created a viable, profitable company. And if you are moving into a strategic field then we will reduce your tax so that you can reinvest your profits to further enhance your growth.
- Soft loans – put simply, instead of giving money as a society to a business and then forgetting about it, push the company to consider it as a form of ‘revenue’. Giving the money in the form of a loan without some form of collateral, mortgages, etc. reaps impressive results, especially when combined with mentoring structures. Most, if not all, of the taxpayers’ money will be returned to the general public and can be reinvested.
- Capital aid – where public money can co-invest alongside private money in company capital increases. This method is the most complex. It should definitely be used only in very special cases. And always with special care that the money is ultimately invested in the enterprises themselves. Not used up in management costs and fees to VC funds.
Time to walk away
Sadly only a brave government would have the gumption to seek a divorce from current model of EU subsidies. But that’s exactly what’s needed. It’s time to get up and walk away. No more sleeping with the enemy. It is a one-way street for creativity and innovation to develop sustainable enterprises which can grow, develop and flourish. And bring real world value back to society in the process.
And this is not just a rallying cry for Greece. But for the whole of Europe. The time for a strategy pivot on EU aid has come. The time is now.
Dimitris Tsingos
Founder and Head of Entrepreneurship,
Starttech Ventures
