Is Government investment in businesses that subsequently fail a waste of taxpayers’ money, or can failure be virtuous?
A common economic development strategy of governments is to provide direct financial assistance to technology-based businesses to support their start-up and growth. This intervention is justified by the need to address market failure that results in the scarcity of finance for such firms. The objectives are to enhance innovation, create high-value jobs, and grow the tax base. But because of the high failure rate of entrepreneurial businesses – even amongst those raising finance from business angels and venture capital funds – this strategy is high risk. The failure of government-supported firms attracts criticism that it has been “a waste of money” and governments should not be trying “to pick winners”. But is this narrative correct? A firm’s repository of skills and knowledge, embodied in its employees, does not disappear when it closes but is likely to be recycled, benefiting other businesses in the ecosystem. The value of government’s investment, therefore, is not dependent on the commercial success of the firm receiving the funding.
Emeritus Professor Colin Mason
This is illustrated by the case of Consilient Technologies, based in St John’s, in the Canadian province of Newfoundland and Labrador – the country’s most geographically remote and economically underdeveloped province. The company, incorporated in 2000, had developed innovative software to deliver email directly to mobile devices to solve email and phone system compatibility issues in the emerging global wireless handheld device market. One of its key partners was BlackBerry. It was the recipient of several million dollars in direct financial support from government, which was keen to diversify the province’s economy from its dependence on natural resources. Consilient subsequently failed, attracting criticism in the subsequent post-mortem that the public money it received to support its growth had been wasted.
Consilient quickly grew to around 100 employees. It recruited young, inexperienced, technology-trained graduates – who would, in all probability, have left the province – and attracted others back. They were attracted by the “cool” and “state-of-the-art” technology, the global reach of the company and its work environment, and the opportunity to acquire new expertise, knowledge and competencies.
Following its closure, most of its employees moved to other technology firms in the emerging local ecosystem that were keen to hire them for their skills and know-how. Many went to Verafin, the most significant technology company to have emerged from Newfoundland’s entrepreneurial ecosystem. It was acquired by Nasdaq in 2020 for US $2.75 billion. At the time of Consilient’s exit from the local ecosystem, Verafin had 35 employees. Some Consilient employees started their own businesses. The company also had significant demonstration effects for aspiring technology entrepreneurs, showing what was possible. In short, it soon became apparent that the financial support that Consilient received from government had not been wasted: its failure helped to seed the ecosystem.
This case study has two implications for government. First, if government is going to provide direct funding for innovative companies, then it must have a tolerance for failure: such programmes will not have a 100% success rate. Second, businesses that subsequently fail nevertheless generate positive economic outcomes: the funding that Consilient received was invested in the skills and competencies of its employees who subsequently moved to other companies in the ecosystem, contributing to their success.
So, while not easily quantifiable, the returns from the government’s investment in Consilient were positive. However, there is a critical caveat. It is not a carte blanche for government to provide indiscriminate support for businesses. The positive impact that Consilient’s failure had on the Newfoundland ecosystem arose because it was a “born global” technology-intensive company that provided rich learning experiences for its employees. Governments, therefore, must be selective in the types of companies they do support, basing their investment decisions on the attributes of companies that, should they fail, will nevertheless have positive effects on the ecosystem.
Colin Mason is an Emeritus Professor at the Adam Smith Business School, University of Glasgow, Scotland. He was a Visiting Scholar at the University of Auckland Business School in May 2024. This article is a synopsis of the lecture he gave to the Dean’s Distinguished Speaker Series on 21 May 2024. The research was undertaken jointly with Dr Blair Winsor and Dr Jacqueline Bartlett of Memorial University of Newfoundland.
