Government and venture capital

IT is often said that one way to spur innovation and boost entrepreneurship in domestic markets is for governments to provide funding to such enterprises. Across the world, there have been successful programmes along these lines.

But there are big risks in such ventures.

This is because government officials may not be the best assessors of the risks involved.

Privately run venture capitalist (VC) firms are extremely rigorous in their due diligence and their follow-up management of their investments.

Professionals working in these VC firms are held accountable for the investments they make.

Can the same be said of professionals working in government agencies making direct VC or seed investment decisions?

The topic has garnered relevance after the Finance Ministry revealed this week that Khazanah Nasional Bhd and Permodalan Nasional Bhd lost RM43.9mil from the sale of their minority investments in fashion eCommerce platform Fashion Valet Sdn Bhd.

The government funds had made the VC-type direct investment into Fashion Valet in 2018.

Government funds have been making direct investments into companies for a long time now, and there have been wins and losses like any other privately owned investment firms.

The good news is that today, the government is moving towards investing in VC and private equity funds, or making co-investments with those funds.

This approach mitigates risks as well as brings about more rigorous decision making to the investments.

This should be the way to go, preferably with the government funding portion being a smaller part of the investments, riding on the private funders to sniff out the good deals and ensuring returns on their investment.

Government funds should no longer be allowed to take risky VC or even private equity-type investments on their own.