Only fools and government bureaucrats rush in to save these tech start-ups

A growing number of budding e-commerce players ... have been on the hunt for fresh capital injections from their investors, only to find that the reception of venture capital funds has been lukewarm.

The results have been a rising number of start-ups, particularly those Internet related businesses, shutting shop after running out of funding before attracting enough customers to survive.

Business, July 23

Memories of past events in the digital technology business are like the memory chips on which the industry relies – erased at the push of a key never to be recalled again.

Just 16 years ago the tech sector of the stock market, here and almost everywhere else, burst like a party balloon over of little more than a few weeks, days really. We had created a special board for our version, the Growth Enterprise Market. The chart shows you how it fell and has remained fallen.

The big novelty in the run-up to this crash was the B2B e-commerce outsourcing solutions platform.

The jargon has since been shortened. It’s now called an app but it’s much the same thing – a sales pitch on the web. Apps are things you write. I write a column. I claim the greater talent. I have always said that investing in apps is a great way to lose money.

Take that bit about “running out of funding before attracting enough customers to survive”. The underlying fallacy here is the one of critical mass, the idea, adopted from the atom bomb business, that a certain concentration of market presence is required before a start-up can survive on its own.

From this it follows, to the followers of this school of thought, that government must involve itself in the push to critical mass. Private interests run to the exit too quickly.

Tell that to Steve Wozniak, the designer of the Apple 2 computer, the archetype of the beg, borrow and steal engineer. He had no critical mass. Tell that to the founders of Intel or to any one of hundreds of highly successful start-ups that learned the value of money when they learned their businesses.

The fact is that venture capitalists across the world have done a superb job of finding and funding that small proportion of start-ups that later succeed.

But they do best when they work with people who value their investment, who pinch every cent before they put it to work. This is not what we have in mainland start-ups who target market share and disregard a return on investment to their backers. It does not surprise me at all that these mainland tech start-ups are in trouble.

Next stop for them will be government, as it has already been in Hong Kong with “seed money” handouts to almost anyone who can write a grant application in the appropriate dialect of tech jargon.

It is just straight money down the drain and the sad thing is that where matching private funds are required, the private money will also be flushed needlessly away.

This is not an area in which bureaucrats have any expertise. They can only make fools of themselves, wasting public funds on ephemeral industrial fashions and distorting any worthwhile evolving trends in industry.

I am sure that the venture capital funds on the mainland have it right about these e-commerce start-ups who scorn their investors. They are not worth the money to put into them and it is time to stop throwing good money after bad.