It’s taken me a while, but I wanted to give my thoughts on the NDRC’s response to my previous post regarding the level of Return on Investment the state seemed to be getting on its investments with public money made though the agency.
I’ll quote most of the NDRC’s response and then reply to each bit. Like one of those ancient Greek discussions but without all the wine.
You’re right; the ‘1.2x return on investment’ deserves a bit of explanation, and so we will prepare a more detailed statement to publish on our website. I’ll also provide some detail here which I hope makes clear our ‘return on investment’ figure.
Great! Clarity is excellent.
NDRC’s 1.2x return refers to the amount of commercial, return-seeking investment in the outputs of NDRC projects compared with the NDRC input investment in those collaborative translational research projects.
Does this mean that the NDRC “investment” isn’t seeking a return for the NDRC? In contrast to the commercial, return-seeking sort of investment? When you put money into a company or business project but don’t expect or seek any form of return, is that still called an investment? I think the cause of clarity would be better served by referring to that money as a ‘grant’.
Of the projects that have reached completion by August this year, committed commercial follow-on investment was 1.2x the amount that NDRC invested into those projects (this figure includes attrition costs – costs incurred by those projects we have stopped early where we have identified that they will not accrue a return on investment).
So the 1.2x Return on Investment, cited in the Annual Report for 2010 doesn’t measure the NDRC’s return on its investment at all. In fact, it doesn’t seem to measure Return on Investment by any known standard. Instead it just seems to be intended to reassure us that the NDRC hasn’t been backing complete no-hopers with public funds. For every €1 of public money put into these companies, some private investor has committed (though not necessarily, actually handed over) €1.20 to the same companies. Of course, even those private companies haven’t necessarily seen a return on their investments yet, but at least they presumably have taken some equity or other shareholding or lien in these projects that will ensure that they can do so when the happy day of going to market comes.
Unless that figure includes loans from financial institutions. Which could fall within the definition of “commercial follow-on investment” if the NDRC were to be very elastic in its use of words. But that seems unlikely, as it would be more than a little misleading.
The 2.6x return that you quote is a return on commercial, return-seeking angel investment for commercial investments made, which is a different type of investing to that which NDRC is making.
Fair enough. I am far, far away from my areas of expertise here. I know nothing of the terminology for the different classes of investors in technology businesses. From what I’ve been able to make out from an utterly superficial amount of Googling, angel investors are usually the second layer of investors after the FFF grouping. FFF here standing for “Family, Friends and Fools”. State involvement at this early stage is an admirable move to bridge a possible funding gap. But, unlike the usual Family, Friends and Fools, the public money doesn’t appear to lead to any equity or shareholding. And certainly, FFFs, when you meet them over the Christmas Dinner table, would be dissatisfied with being told how much other people had put into your company as an alternative to getting their money back and then some.
Even Aunty Doris would expect some return on her investment. If it was an investment, and not a gift.
We are committed to using the term ‘investment’ to describe financial support we make into projects because we expect projects to be focused on making a return from the outset, unlike other pure research funders.
That’s great! Projects intended to make money ought to make money. Who could disagree? But giving money still isn’t an ‘investment’ unless something is coming back to the investor, sometime. That doesn’t change regardless of how committed the organisation is to the misuse of words. What you get back depends on what you received in return for your investment. But, as far as I can see from the NDRC’s CRO-filed financial statement, they haven’t booked any assets in exchange for their grants.
While the overall goal of NDRC is to create market capital, follow-on investment from third-party commercial sources is the immediate return sought by NDRC investments.
It is this follow-on investment that the State/Economy gets in the short terms in return for the investments NDRC is making with the taxpayer funds. This follow-on investment goes towards building sustainable businesses and creating sustainable jobs.
That is all a reasonable position for a grant-agency (particularly one involved in unusually early-stage grants) to take. After all, if successful, the state will benefit from high technology companies which might otherwise not have come into being. And the description from the NDRC up to this of the form of return they expect from their money is largely consistant with the return being in the nature of a better national economy rather than actual cash money flowing back to their coffers.
But, and my excuses if this sounds familiar from earlier comment, if that is the case why the qualification that this is just the sort of thing we can expect in the short term? What could change in the longer term?
We are only 3 years from our initial investments into projects. It will take quite a few years to realise an income returning exit which explains why there is no income return recognised in our accounts. As a young organisation follow on investment into technologies and ventures is an important indicator for us, and goes further than simply stating number of companies forms/ number of technologies patented.
I’m sorry, but I find this inexplicable. Either there are actual investments being made- which is what a reference to “an income returning exit” would have suggested to me- or there are non-recoverable grants being handed out for the good of the nation’s economic future. Either could be a perfectly legitimate use of public funds.
But what are we to make of a financial statement which shows no shareholdings? And how does it jib with talk of income returning exits? And if we are expecting a return but it hasn’t appeared yet, would citing a figure in the meantime in the organisations’s Annual Report of 1.2x as a current Return on Investment not be rather misleading?
My final point: I am not an accountant. I am not even numerate in any meaningful way. It is possible I have simply misread or misunderstood the NDRC’s Financial Statement. Please let me know if you can see something I’ve missed.
UPDATE: I asked Dr. Neale from the NDRC a question on Thursday last by email : “What shareholding, lien or other instrument does the NDRC hold in the companies it has given money to which would generate such a potential return?”
Dr. Neale expects to be able to get back to me some time this week with a reply, work permitting, which is very responsive of her.
In the meantime, I noticed that Mr. Gary Leyden of the NDRC’s LaunchPad programme gave an interview to The New Tech Post in April of 2011 setting out the relationship between the NDRC and the companies it gives money to.
The initial investment and any prize money awarded “is actually an investment in the company”, but Gary stresses that the NDRC does not claim any intellectual property rights from LaunchPad participants. “We just become a shareholder in their company. It’s a very clean, straightforward arrangement”.