It is unreasonable to ask investors to risk their capital on start-up or research and development funding without offering them a return commensurate with that risk.

And yet, this is precisely how the current government framework for funding start-ups and research grants is structured.

As part of the 2013 Budget, the government announced it would commit $200 million over the next four years for science and innovation. That funding includes $31.3 million in repayable grants for start-up businesses and $75.2 million in non-repayable research grants (the remaining being reserved for the sciences).

The first problem is with the sum being reserved for start-up capital; $31.3 million is far too trifling a figure to affect the course of the New Zealand economy when it comes to providing preliminary funding. Given that the government funding stream is based on the Israeli incubator model, which invests around NZ$606,000-NZ$909,000 per start-up business, it is unlikely that $31.3 million over four years will make any real difference. (To put this in perspective, the government spent $36 million on the last America’s Cup alone.)

Secondly, why is the government providing seed capital when the private sector is well positioned to do so? New Zealand has an ample supply of business incubators – The ICEHOUSE, e-Centre, Creative HQ and Upstart to name a few, never mind a similarly impressive list of venture capital funds and angel investors.

The rules governing these start-up grants are still in development, but all indications suggest there is no mechanism for the taxpayer, whose capital is at risk, to be rewarded proportionally when one of these investments succeeds. The Israeli government, for example, receives upside benefits in the form of royalties, but policymakers here seem to have overlooked this.

With respect to the pre-Budget 2013 grants, the Technology Investment Network 100 report showed that $64 million in research grants has been given to local companies that are now foreign owned.

Even when the companies receiving research grants are entirely Kiwi owned, there is no mechanism to recoup these grants if the company succeeds. If the taxpayer has contributed to a company, of which a future sale (overseas or domestically) generates a considerable capital gain, should there not be an explicit obligation to repay the amount of the grant at a minimum?

If government is going to ‘invest’ taxpayers’ money in a part of the market notorious for failure, there should at least be some form of reward for that risk.