SA: Should the state support hi-tech start-ups?

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Writing in Business Day, UCT Professor of business-government relations David Kaplan argues that the demise of the Joule electric car is a clear indication that the government should rethink the support it offers to hi-tech start-ups.

“New-technology companies are critical to a vibrant business environment,” he says, “they are highly productive, introduce new skills and products and challenge market leaders, thus enhancing competition.” While the government needs to support new-technology companies, he says, commercially nonviable projects need to be identified much earlier – as shown by the fruitless spending on the Joule.

Kaplan lists three major factors constraining the development of new-technology companies in SA, namely – addressing skills shortage, which new-tech companies need to fund themselves, secondly: BEE. Technically and entrepreneurially skilled black people prefer established businesses, and thirdly – investors have access to secure, high-earning alternatives to new-technology companies. As a result, he says, “new-technology companies attract limited skills, entrepreneurial talent and external finance. They have few internal resources and cannot access credit.” And so, “the government has stepped into this funding breach.”

But how can private investors be attracted to new-technology companies in the presence of higher-yielding and more secure alternatives? According to Kaplan’s Business Day article, a recent World Bank study on SA proposed a structure whereby the government could provide limited funds as a special partner in a privately owned and managed venture capital fund, and decisions and management would vest with private investors. “The “gain” for the government is not in its equity but in the employment and taxes that come from commercial success,” Kaplan concludes.

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Republished with kind permission from Bizcommunity.com