Why should entrepreneurs avoid public funding?

in Uncategorized | No Comments »

So let’s talk about public subsidies and entrepreneurship. It is a really mind-boggling subject for me because many founders that I meet here in Estonia are asking about it. Estonia is still a young country that is catching up old Europe in the game of economics. Our GDP per capita around 150% of the World’s average, but only 77% of the EU (European Union) average. There is plenty of room for the improvement and European Union together with Estonian state is constantly pouring money onto the “problem”.

I have not applied to any government subsidies myself, but my company is a member of an electronics industry association formed with EU subsidies. I also have a lot of entrepreneurial friends here in Estonia, who have screwed the subsidies systems themselves (or got screwed by the system). Now let’s dig a bit deeper into the Estonian state-funded entrepreneurship “support” system to understand better, how awful it can be.

I’m going to tell you a sarcastic fictional story about an aspiring entrepreneur navigation the public entrepreneurship funding system. The story is hypothetical, but it is based on real-life experiences from fellow Estonian entrepreneurs, who don’t want to publish their horror stories under their own name.

In Estonia’s case EU money goes through some bureaucratic pipelines and lands into a magical organization called Enterprise Estonia (shortened as EAS), but some of also goes to PRIA (funding for farmers and places in the middle of nowhere) and Archimedes Foundation (funding for everything related to research). EAS is offering safe employment for almost 300 pencil pushers who shuffle roughly 200M€ every year. It may seem like a small number to my U.S. friends, who are used to raising more money in a single venture round. Considering the size of Estonia, this sum is almost 1% of the country’s GDP! In addition to those 300 officials, EAS has consequentially created a whole industry of “EAS consultants”. The sole purpose of those consultants is to fabricate endless documents filled with latest buzzwords and bullshit learnt from business schools and TED talks to awe their fellow pencil-pushing peers (mostly people with economics, law or public administrations degrees) behind the EAS glass walls.

EAS offers plenty of different types of subsidies. You can ask for a few thousand euros to start a hair salon or 100k€ to design an innovative product. Whatever is your plan, you can be quite sure that you would not fit any of the predefined categories. Because you want to differentiate with your new business model, right? It’s all about finding the right consultant to twist your business plan until it fits one of the “EAS services”.

It’s so cute that they call them public “services” for companies (in English) to refer to their socialist nature. In the Estonian language, these same subsidies are called “meede”, which means something much more strict and actionable like “remedy”. In Estonian entrepreneurial circles, it’s common to say to a friend (who’s business is in trouble): “Maybe you should look for some EAS remedies”. It’s almost like recommending to take your dying business model to an EAS doctor to get some money injections and hope it will start pooping gold after that.

Anyways. Cool. We came together with some friends, got an awesome business plan and now want to hit a few lines of state money to get it all rolling. It’s easy! Find a dealer (consultant to roll some papers for you, twist some words and write a kickass project), get some serious dough and build an incredible business! Yey! Not so fast! Or the hangover will kill you!

If you happen to receive some funding of that sweet “free” money from Enterprise Estonia (and paid “success premium” for your consultant), the real twisting is just beginning. Now you have to start justifying your expenses. You have to take 3 offers for almost every service or product that you buy with that money. Doesn’t even matter, if it is even possible to find 3 competitors from such a tiny country like Estonia. Some money you can use only to travel and some only for equipment and some only to hire a consultant and some only to hire an employee. And sometimes you have to hire an intern through university (because university officials also want to get their cut of that sweet tasting European Union money). And you have to report your expenses down to a fraction of a penny because there’s always a pencil-pusher to penalize you.

As an EAS official, your KPI (key performance indicator) is tied to the amount of “complaints” that you can “process”. It all about processing. The more processing the better. Seems like a good way to build a strict and well-performing organization? Right? Not! Because the essence of organizations like Enterprise Estonia should be “providing services” that help entrepreneurs, not harassing them with “violation” or “performance” reports. It’s like saying that in software business the best support rep is the one who sends annoying emails the most. “How many WTFs from customers did you hit last quarter? Great job Timmy!” I understand that misspent 10k€ may be a problem, but officials should never spend their keystrokes to report 10€ or even 100€ violations. Who cares that you were allowed to pay for the crackers, but not for the coffee. It just does not matter! It’s bureaucratic noise. Happy processing!

Now, after 220 hours of emailing, calling and reporting, you are finally done with the project. You discovered that you have made expenses that ended up as violations and that you would have not done them in the first place, if you would have known that (a whining story “Thing that your consultant didn’t tell you!”). Finally, you pay again for the consultants to fix things up, because you are sick and tired of talking to the officials. Yey! You got 100k€ product development grant that forced you into unproductive co-operation with some public research institution because hiring an in-house engineer was not permitted by the “terms of service”. You paid 30% from your own pocket to get the money in the first place (because every well-educated pencil-pusher knows that “Skin in the Game” is a good book). Then you paid 5% for the consultant for being such a great pencil pusher, keeping your side through all that nonsense. Then the public research institution secretaries eat their overhead (about 20-30% probably covers that one). In the end, research engineers can probably spend around 60k€ (minus taxes and lab overheads) to actually offer you the service your company needed.

Few months into the project, you understand that they don’t perform, but you are tied into the contract. The pencil pusher tells you that not acting according to your plan might mean you have to pay back the whole sum. The whole f**king sum! You freak out, comply and ask the consultant to write “happy accomplishments” summary about the project. Whooh! If it would have been an ordinary private co-operation between you and an engineering consultant, then you would have pulled the plug after the initial 10-15k€ was spent. No results. No problem. We’ll try with another firm and another approach. But when public financier is tying the marriage, you better don’t!

After months of pointless irritating communication and 30k€ less in your pocket you look back onto that mess and think: “Wow! How did I get into this place?”. Just 6 months ago you sat at a free conference for entrepreneurs, sipping free coffee and eating free cookies. All you had to do, was to give a signature onto a white paper with a tiny EU flag on it. Then you got onto the treadmill. There was another seminar about “How to innovate now!” and then another “Grow or die!” You attended all of them, because, “Hell no! I don’t want my business to die!”. And then the well-dressed pencil pusher told you: “You really should use this opportunity! It’s exactly for the entrepreneurs like you!” And you felt enlightened, you felt like your last big idea (‘insert irony here’) might really become reality. You felt way better then you felt last week selling your old dirty product to potential (but very real) customers. Some customers that you cold called, hung up on you. Some even told you to “F**k off!”. Those nice pencil-pushers from EAS would never do that…

And that’s the story of a naive entrepreneur getting onto the self-feeding socialist nightmarish treadmill. He started his business to skip bureaucracy, to lead and to have the control and to offer the best possible products in the World. But without even noticing, he gave up some of his money, and worse, a huge amount of time and motivation. For free cookies and coffee…

I try to get across a really simple idea to all new and aspiring entrepreneurs. Public money (with the bureaucracy it creates) is mostly toxic to any entrepreneurial endeavor when it’s distributed by oxymoron state officials who have no idea what entrepreneurship and entrepreneurial risk-taking means. They don’t know the true value of money (because most of them live from payslip to payslip) and what’s worse, they also cannot value time. Not their own time nor the time of the people they suppose to help. I have worked with a number of successful private investors in my life and their attitude is the complete opposite. If you receive their money, it’s zero bullshit product and customer development. One even wired me cash right after an insightful dinner conversation just to get the business idea rolling. No formal agreements, no contracts, no paperwork. You just develop, market and sell. If you perform, you get more, if you fail, you’re out. Private investor maybe ask for a few Skype calls per month to check your progress and they are always there to listen (it’s their money at stake after all). Financial reporting and bureaucracy become important once there is something to actually distribute, which is fairly rare with EAS projects I have seen.

If too many private investors say no to your business plan? Then listen to their advice and improve and hustle to prove them wrong, but avoid public funding. Even if it gives you some extra cash in the short run, you will never get back the time it sucks from you. Instead, you should be frugal and spend your time on product development and sell sell sell! From day one! There is no sweeter money, then the customer’s money!

…and you can still grab some free coffee and cookies. It’s great to network with all sorts of people, but never let your guards down! Pencil-pushers are not inherently bad people. They are just trained to be well-functioning cogs in blunt 9-to-5 organizations. Yes, blunt. They actually use personality tests in their HR departments to hire conformity. Numb. Many of them have no reasonable employment opportunities outside of their glass tower, which favors the formation of close-minded and highly protectionist organization culture. You cannot expect much useful for entrepreneurs from this kind of ecosystem. That’s it. Seek advice (and funding) from fellow entrepreneurs and never from the pencil-pushers!

In general, I’m positive about the public funding trends in Estonia. We have more and more wealthy individuals who fund and tutor startups. Recent years more public money is distributed by accomplished entrepreneurs (partially publically financed funds like Superangel.io and UnitedAngels.vc) and less by the public officials. But still be careful approaching accelerators, especially local ones run by “experts”, who have never built anything successful themselves.

© 2024 Tanel Ainla – Engineering and Business Thoughts