{"id":4706,"date":"2020-02-03T10:00:53","date_gmt":"2020-02-03T09:00:53","guid":{"rendered":"https:\/\/blog.startups.ch\/en\/?p=4706"},"modified":"2020-01-31T13:02:31","modified_gmt":"2020-01-31T12:02:31","slug":"how-to-foster-entrepreneurship-a-liberals-critique-of-the-status-quo-in-switzerland","status":"publish","type":"post","link":"https:\/\/blog.startups.ch\/en\/how-to-foster-entrepreneurship-a-liberals-critique-of-the-status-quo-in-switzerland\/","title":{"rendered":"How to foster entrepreneurship. A liberal’s critique of the status quo in Switzerland"},"content":{"rendered":"\n

Ever since Schumpeter’s gale (namely, the concept of creative\ndestruction<\/em>), liberalism has cultivated an intimate relationship to entrepreneurship\n\u2013 entrepreneurs embody the creative power of free markets, and conversely one\nassumes entrepreneurs to be inclined to a liberal social order. How does this\nreciprocal relationship come about? Different explanatory patterns exist. One\nof them runs as follows: Liberalism is based on the recognition of universal\nindividual rights. Freedom rights directly give rise to the possibility of\nentrepreneurial activity, and indeed the right not to be prevented from such\nactivity.<\/h2>\n\n\n\n
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Ever since Schumpeter’s gale (namely, the concept of creative\ndestruction<\/em>), liberalism has cultivated an intimate relationship to entrepreneurship\n\u2013 entrepreneurs embody the creative power of free markets, and conversely one\nassumes entrepreneurs to be inclined to a liberal social order. How does this\nreciprocal relationship come about? Different explanatory patterns exist. One\nof them runs as follows: Liberalism is based on the recognition of universal\nindividual rights. Freedom rights directly give rise to the possibility of\nentrepreneurial activity, and indeed the right not to be prevented from such\nactivity.<\/p>\n\n\n\n

According to the Economic Freedom in the World Index<\/a> co-published by the Liberal Institute<\/a>, Switzerland remains the country with the highest\neconomic freedom in Europe and the fourth-largest in the world in 2019. And\nalso with regard to entrepreneurship, Switzerland reaches record levels due to\nits highly attractive startup ecosystem<\/a>. So all good? Not quite. As always, the devil is in\nthe details.<\/p>\n\n\n\n

This author, who founded a Swiss startup (Syntherion)\nwhich was supported by a federal program (Innosuisse and SNF), who has served\nas startup coach and judge (Start Summit, Vroom, MassChallenge Switzerland,\nKickstart) and runs a startup community (Startup Grind Geneva), argues self-critically\nthat some state actors in the startup ecosystem play a harmful role in a dual\nsense when it comes to sparking improvements or making particularly early-stage\nstartups thrive. On the one hand, counterproductive programs to foster or\naccelerate startups are put in place since they impair the ecosystem in the longer\nrun by diminishing economic freedom which is key to prosperity \u2013 e.g. countries\nthat rank high in the Economic Freedom in the World Index are also well-off,\nand, vice versa, those that rank low suffer from a poor economic performance. On\nthe other hand, regulators such as the FINMA are encouraged to strike a balance\nbetween legal certainty and lean regulation.<\/p>\n\n\n\n

A general objection: Hayek\u2019s pretense of knowledge in\nSwiss entrepreneurship <\/strong><\/p>\n\n\n\n

A supposed strength of the Swiss startup ecosystem are the numerous industry academia collaborations and transfers which either provide direct sponsorship without taking equity (e.g., Bridge: Proof of Concept<\/a> by Innosuisse and SNF)[1]<\/a> or cash-free coaching and networking platforms (e.g., AIT<\/a>). By liberals, such programs to foster entrepreneurship using tax money at the end of the day must be considered a harmful intervention into the market undermining economic freedom, and thus slowing down the economic development in the long run. It amounts to a pretense of knowledge when politicians, bureaucrats or so-called experts that are appointed as judges by those programs claim to know which startups (reviewing their cases for a few minutes only without having skin in the game) and\/or markets have the highest potential. Even though professional or private investors might also do a poor job at assessing the quality of startups (see for example the tremendous waste of capital at WeWork<\/a>), the crucial difference is that they (in the example: Softbank) suffer the consequences of their decisions too (in lieu of transferring them to others that are not responsible).<\/p>\n\n\n\n

The bottom line for liberals is clear: The politically\nmandated allocation of resources in the form of start-up and innovation\npromotion replaces the market-based mobility of goods on the basis of prices.\nPrices that have been formed on free markets have the important function of carrying\nelementary information between market participants. They express the constantly\nchanging appreciation for certain goods and are therefore able to allocate\nscarce resources to those uses which are prioritized by a large number of\npeople, and not only by some politicians, bureaucrats or ill-informed experts.\nIn other words, in the undisturbed market process, the wrongly speculating\nentrepreneurs who spend too much on production factors are systematically\nsifted out in favor of more efficient entrepreneurs (who are more economical\nwith production factors). If politics (in the broad sense of the word) then interferes\nwith these free price formation mechanisms \u2013 even if this involves\nwell-intentioned promotions of entrepreneurship \u2013 it distorts relative prices\nand confuses the entire economic system. This gives politics an unnecessary high\namount of power: by exercising control over subsidy funds, they can make\nsubsidy recipients dependent on their goodwill and thus also secure their votes.<\/p>\n\n\n\n

A sound argument?<\/strong><\/p>\n\n\n\n

Wouldn\u2019t the liberal stance leave us with a too\nradical conclusion because it would provoke the question what other party will then\nenable the value-generating (and, thus, socially desirable) transition from\nresearch results to technology and solutions to business problems instead.\nFurthermore, critical economists such as Paul Collier (in his latest book \u201cthe\nfuture of capitalism\u201d) would strike a blow for pragmatism instead of indulging\nin a discourse on principles. In this vein, one could argue that supporting\nentrepreneurship (even financially with tax money) is in the public interest\nsince this measure contributes to economic and social progress \u2013 particularly\nby tackling the funding gap, known as the \u00abvalley of death\u00bb where the\ngrant-making chain breaks down for many innovative projects, no more research\nfunding is available and venture capital is not yet available. It further helps\nkeep the economy internationally competitive (which protects jobs) and creates\nnew jobs at startups which drive innovation, etc. On this basis, one could thus\nargue that such measures are legitimate since they have a positive return. Yet,\nsuch a counter-argument is difficult to buy, at least as long as it is not\nbacked up by evidence. And at least some known facts speak a different language:\nThe failure rate<\/a> among startups is high and Switzerland is no\nexception here. Besides, liberals don\u2019t have anything against fostering\nstartups (quite the opposite as we saw at the beginning of this article), the\npoint is just that the state is not the right actor as knowledge is\ndecentralized. Even if public spending is relatively low in the overall funding\nmix, it is sufficient to distort free markets (which becomes transparent once\nwe investigate the systemic consequences of interventions). Other stakeholders\nsuch as professional investors and, first and foremost, the (potential) clients\nof a startup know better if and how many resources should go to a company.<\/p>\n\n\n\n

For markets to work (and markets are the best tool we\nknow to generate prosperity), it\u2019s crucial that actors bear responsibility for\ntheir (investment) decisions, that they have skin in the game. If citizens or\ntaxpayers in Switzerland deem entrepreneurship and early-stage ventures\nimportant, they don\u2019t need or pay the state for that, but can become involved\nthemselves, e.g. by becoming co-founders, employees or investors. Even the\nlatter is more realistic and less elitist than it looks like at first glance\nsince initiatives (startups) such as investiere.ch<\/a> decrease the entry barriers by allowing common people\neasy and direct access to Swiss startups. <\/p>\n\n\n\n

The example of FinTechs: What the state ought to do\ninstead? <\/strong><\/p>\n\n\n\n

From the above, it does not\nfollow that the state becomes dispensable in the Swiss startup ecosystem. Just\nits role needs to be redefined, being aware that even in a liberal country like\nSwitzerland the crude libertarian view according to which there ought to be no\ngovernment at all (von Mises) is too far from practical relevance. In this\nlight, the state should be content with setting up general conditions and the\nregulatory framework, respectively. The plea is twofold and consists, on the\none hand, of striking a good balance between legal certainty and lean regulation when\nit comes to fintech and new technologies. An illustration is in order and given\nby the example of blockchain: A recent study by Avenir Suisse<\/a> spells out our plea by\nmaking the following statement: \u201cEssentially, the law should be changed only in\nareas where it is not yet DLT[2]<\/a>-compatible.\nBut these changes have to be made as soon as possible.\u201d The time to act is now\nbecause current regulation in Switzerland stunts innovation and technological\nprogress. An example where regulation does not accommodate new technology is\nfund regulation necessitating a central custodian which is not synchronized\nwith the nature of a decentralized environment promoted by blockchain. Yet,\nregulation which is currently in place prohibits fund transactions without\ncustodians, which in turn limits the advantages of blockchain. <\/p>\n\n\n\n

Therefore, regulation\nshould be made that is technology neutral. Wherever possible and reasonable,\nFINMA should be exploiting the potential of regtech more fully too by making\nmachine-readable regulation available.<\/p>\n\n\n\n

The second part of our\nplea aims at preventing overregulation which is a burden and concerning\nestablished financial firms and banks, in particular. Switzerland has been at\nthe forefront of regulation efforts and activities. International agreements\nsuch as Basel III are implemented rigidly whereas other parts of the world (the\nUS or China) are more reluctant or flexible (to put it nicely). This gives\ntheir banks a competitive advantage and distorts international competition.\nWhen viewed systemically, we come to the insight that this curtailment of\neconomic freedom heavily affects Swiss startups too. If regulatory costs are\nhigh for Swiss banks, then their ability to invest into innovation and partner\nup with startups is reduced. In a nutshell, preserve more economic freedom on\nall levels.<\/p>\n\n\n\n

The role of Swisspreneurs <\/strong><\/p>\n\n\n\n

Let\u2019s close this article by detailing some\nimplications for Swiss entrepreneurs. It\u2019s not their job to decline funding\noffers from public sources. Nor to rewrite regulation. However, a few lessons\ncan be learned, among them are the following:<\/p>\n\n\n\n