Oh boy. French Minister Eric Besson just announced that the French government will start a VC fund with $575 million euros, to invest directly in internet startups.
Your writer generally tries to boost France as a startup hub and with good reason, but this is just silly.
The evidence that governments do a terrible job at picking winners and losers in industry is overwhelming, and particularly in high technology businesses.
There is a case for governments investing in venture capital as limited partners to jump-start an innovation ecosystem. It was a tremendous success for Israel (and failed everywhere else, but at least there’s a case for the benefit of the doubt). The government already does this all the time in Europe, by the way. Investors we speak to tell us that many VC firms in France and Europe are “zombies” who couldn’t raise money from private sector institutional investors but get money from government funds (either France or the EU) and stick around.
An investor active in France told us that another problem with the government pouring money in VC funds is that they invest in existing funds, even if they’ve underperformed, who are often staffed by banker-types who are better at raising government money and tweaking spreadsheets than doing the work thattop VCs do. (To be fair, this is also a problem with private sector LPs, although they have less patience with poor returns.) If the government wants to put money in VC funds, this person argued, they should invest in new funds, not existing ones. Considering the overall upheaval in the venture industry and in the equity lifecycle of startups, this seems like a great idea. But government bureaucrats have every disincentive to take a chance on “unproven” investors.
Pouring hundreds of millions of dumb money into the ecosystem seems guaranteed to unreasonably pump up valuations and divert resources to white elephant projects of little value.
Recently at eG8 Forum French President Nicolas Sarkozy took a pledge to “first do no harm” when it comes to the internet. But a wall of dumb money can be as harmful as a lack of money. But pigs will fly when the French government understands that leaving things alone can be one of the hardest and smartest things to do.
But then again, despite the fact that we’re bubble skeptics, the government of France investing heavily into the internet looks like as good a sell signal as we can think of.
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