Let a 1000 flowers boom - Using Income-Contigent Loans with Startups

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TechCrunch UK posted an open letter by Robin Klein of The Accelerator Group to the Chancellor of the Exchequer Alistair Darling and Lord Dryson Minster for Science and Innovation about what to do with purported stimulus funds. BVCA wants the money to go to large VC funds whereas Robin Klein wants to see the money channelled to supporting very early stage companies (amounts less than £100k).
Robin’s logic and reasoning is sound and I agree with them. But it is not a good use of the money for two reasons.

Tech (web) Focused
The idea is far too technology (read web) focused. There are lots of opportunities throughout theUK for entrepreneurs to create businesses; many, indeed most, outside the world of the web. Why shouldn’t someone starting a lawn-mowing business have access to early stage funding as a technology developer? Both create value. We in the technology sector tend to be myopic about start-ups, small businesses and entrepreneurs. Richard Branson can hardly be accused of creating a technology business and yet he is by most measures the UK’s most successful entrepreneur.

Yes, technology creates long term value and wealth, but the vast majority of wealth is created by companies outside of the technology sector using technology and not developing it. It is created by a lawn-moving business using twitter to alert their customers that their lawn is done and having a website where clients can go and book a visit using something like BookingBug to provide the functionality. The lawn-mowing business is creating value through better customer service and consequently generates wealth. Would a business angle or early seed stage fund invest in such a company? What about if it is located in the hinterlands of Wales?

Relying on Judgement
The mechanism for distributing funding relies on someone making a judgement call as to what is potentially a good opportunity. The act of making a judgement takes time and as many commentators pointed out in response to the open letter, time is very precious at the early stages of a business. Waiting more than a month for a response is a massive drag on very early stage businesses. They need responses fast.

More problematic is that a person can only make the judgement based on their experience and expertise. Many great opportunities will be bypassed as the judges’ focus on what they know. Now however is a time to fund companies that are moving into new areas and new ways. It is a time to let 1000 flowers bloom. In the end the only real judgement that matters is that of the market. It would be better to create a situation where those companies can be judged by the market rather than a limited individual. The market is crowd-sourced investment decisions.

Proposal
In place of co-investing or creating lots of seed funds, I propose that the UK government create a scheme of income-contingent loans. Under the scheme an entrepreneur can take out a loan that covers his previous salary up to a maximum of £50k to £60k. The loan is paid monthly like salary and is re-paid by the individual (not the company) through the tax system (similar to student loans). Other characteristics of the scheme are:

• The scheme would provide loans for up to 3 people per business in the first year, followed by another 2 new employees in the second year
• The loans are tied to the individual and are re-paid by the individual based on the individuals income
• An individual can only take out a loan under this scheme once every 5 years

An income-contingent loan scheme provides funding irrespective of industry or goods and services. It addresses the funding gap that is a barrier to entry for all entrepreneurs and has a lower administrative burden. The loan scheme can be administrated through the existing Government banks and through an online loan application system which are widely geographically diverse, scalable and most importantly can return a fast decision.

One big objection is the potential for fraud. Nothing involving money is without the potential for fraud and venture funding is not immune (witness Tiger Telematics). By putting the liability to re-pay the loan onto the individual reduces the avenues for fraud using this scheme. The other limitations are also designed to reduce the attractiveness of fraudulent behaviour.

Conclusion
Granted, the loan scheme is unlikely to produce the next Google but I would rather see the loan scheme generate 100,000 businesses all employing an average of 10 people. That would be far more valuable to the UK economy as a whole than 1 Google.

Ideally, you would run both an income-contingent loan scheme and co-invest in early stage investments. However, given the realities the loan scheme is more valuable. The co-investment scheme should follow. By the time the co-investment scheme is up and running many of the first lot of companies that have benefitted from the loan scheme will be ready for their first round of funding.

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• Wanted: £1bn to save economy (guardian.co.uk)

Use a Time Slot Method for Train Travel

News comes today about First Great Western agreeing to a remedial plan to, well, operate a dependable train service. Rail franchises create a government granted monopoly on a rail line in exchange for meeting certain conditions. It is how the UK government decide to privatise rail travel.

I think rail franchises are the wrong way to organise the delivery of train services. Instead rail lines should be divided into time slots that a company bid for. Obviously lucrative spots would be bid higher and less lucrative spots would be less expensive. The idea is to create system like landing slots at airports. This would allow various train companies to compete on the same line which would drive prices lower and also increase the number of services.

Part of rail franchises sometimes includes revamping railway stations. This could still be done using with time slots by directing the money from the auction of the slots into track and station improvements and/or also charge a "standing fee" for each train.

Monopolies are a bad way to deliver a service. Competition will do more to improve train service particularly if the slots are auction for periods of between 1 to 5 years and any single company cannot by two (three?) consecutive slots so that a user has a choice of waiting for the next train.

The main hurdle to slot base method is the management of arrivals. Systems will need to be in place for dealing with late trains - perhaps by moving them off into holding points until a slot is free.

Tags: Rail Franchise, Rail, UK, Transport

Meddling polies should focus on what matters

I understand the need for regulation and laws, but it annoys me when polies meddle in areas for the sake of being seen to do some thing. The UK government is threatening legislation to penalise ISPs for not blocking privacy. The really idiotic thing is the UK government has already said their idea falls afoul of UK and EU data privacy laws. So what's going to happen? The government will pass the law, the ISPs will challenge in the UK and EU and the law will be rule illegal. So back to drawing board with the only accomplished is a lot of money spent on lawyers and the government been seen to do something.

Beyond the technical hurdles, there is also the political fallout from the law being overturned plus the damage this will do to a government tettering on the brink. I wonder if this new push has arisen when someone pointed out wholesale kicking off of downloaders is likely to lose Labour votes.

To me, this is massive over-reaction to a relative minor problem. Stopping downloading of content is not going to be a saviour of society nor cure its ills. There are far more pressing problems in the economy that WILL do massive amount of damage to peoples lives - credit crisis, stagflation, deep recession - that the government should be worrying about. Protecting an outdated business model is NOT the governments job.

This legislation has the air of desperation. Of a government looking down a yawing canyon of irrelevance and trying deperately to be seen to be doing something, anything.

Fiddling while Rome(London) burns.

Tags: UK Government, UK, ISPs, Policy