Innovation Fund ‘should buy equity, not just offer loans’
THE Jersey Innovation Fund should be relaunched but used to buy stakes in start-up companies rather than providing them with loans, the head of Digital Jersey has said.
Tony Moretta said that the much-maligned fund for emerging businesses, which was frozen last year, was ‘not a failure’ but could have been operated better, including by States money being used to buy into businesses and reinvested when profits were made.
The Digital Jersey chief executive said while a failure rate of 40 per cent could be expected for start-up companies, this would be compensated for by cashing in on highly successful investments when the time is right.
The JIF was frozen last year after it was the subject of a highly critical report written by the Comptroller and Auditor General, which raised concerns about the set-up of the fund and its monitoring of companies to which it made loans.
The report was published after it emerged that one of the businesses JIF backed – Logfiller – had collapsed and another three were struggling, leading to questions over whether the more than £2 million it had paid out in loans was a worthwhile investment.
One of the success stories of JIF, however, has been the company BabyHub, which repaid its £60,000 loan last year and recently announced a deal to sell its SleepSpace cot in Mothercare stores.
Mr Moretta said that he believed that the failings of JIF had been exaggerated and was leading to a ‘risk-averse’ culture in Jersey.
‘JIF was not a failure, as so far only one of the six loan recipients has failed – a far better rate than other similar schemes around the world – albeit it could have worked much better,’ he said.
‘However, the massive over-reaction – not least by the media – to a Comptroller and Auditor-General report on deficiencies in management has led to an even more risk-averse culture than Jersey already had and has held back the implementation of a replacement scheme.
‘All around the world governments intervene where there is market failure in the financial support of a start-up culture and Jersey should be no different. Collectively as an Island we need to do more to support innovation to diversify the economy and create new jobs, and funding is a necessary component of that.’
After viewing how similar funds work in other jurisdictions, such as Estonia – the birthplace of Skype, Mr Moretta said that there are a number of ways a relaunched fund could be run better.
‘Any money invested by the fund should be matched with funding from private investors who could provide mentoring and support,’ he said.
‘Also, the government should take equity in the start-ups and not just provide loans. If you are just a loan provider it is all risk until the loans are paid back.
‘If you have an equity sum and a company does really well then the value of that equity will be higher than of the loan. And, if you have the right investment management at the right point, then profits will outweigh the losses of the fund.’
He added that he believed financial backing was the main factor holding back start-up businesses in Jersey at this time.