Public purpose technology: The state needs to move - but not too much

In order for public purpose technology (PPT) to achieve its full impact, there are a large variety of stakeholders that are needed to work together. While some would think the state is all that PPT is about, I made clear in my last piece in this series that this isn't the case. 

Defining public purpose tech as “technology that addresses big public needs, and the public policies, organizations, cultures, investments and business models around it” explicitly puts a variety of actors in a network of responsibility together​​; the state is just one of them. The argument, based on interviews with two dozen actors in the European VC/state ecosystem¹, is simple: the state needs to move, but in the right direction and also not too much. 

What is the general goal of a (European) state? 

In the European Constitution dating back to 2003, the objectives of the Union (and its member states) are wide-ranging - from prompting peace and sustainable economic development to an explicit focus on the ‘well-being of its people’ (Article 3.1), ‘social justice and protection’ as well as ‘solidarity’ (Article 3.3). In other words, the EU and its member states are supposed to promote citizen wellbeing and a certain kind of (economic) stability and order; on top of the welfare state established with the 19th Century social security contracts derived as a result of the industrial revolution, the EU even has a focus on ‘scientific and technological advance’ (Article 3.3) in its original constitution. 

Obviously, more recently austerity and what is widely called the general neo-liberalisation of the state (particularly strong in Britain but also expressed across other European states) have challenged this view of the state to a certain extent. However, given the enormous obstacles we are continuing to face - from Covid-19 and climate change to rising (economic) inequality - innovation and technology are direly needed and the state has a crucial role to play in this push for PPT.  

People like Bill Janeway, Mariana Mazzucato, and specifically from her historic perspective on the U.S., Margaret O’Mara, have been focused on making the role of the state in the innovation ecosystem transparent. State input is quintessential for a thriving tech ecosystem; it comes in the form of infrastructure (from streets to the internet), research investments (from basic to applied research in universities and beyond), creating a stable regulatory environment, and making direct and indirect (by investing in VC and other funds) investments into startups. This is true for innovation and technology generally and possibly even more so for public purpose tech given its specific focus on solving big public problems that aren’t as easily incentives just financially. 

Now, I want to be more specific about where I think the role of the state lies in particular for PPT and also where I believe we need to see ‘more state’ or ‘less state’ to accelerate the developments. I propose three different possible roles for the state to set incentives and ‘guard rails’ to enable more PPT:

State as investor 

Most basically, we need the state to double-down on research funding; it took the American state (through various agencies such as the Department of Defense)  trillions of dollars to lay the basis for what turned into Silicon Valley (which is why it isn’t easy to achieve this level of activity and innovation quickly in Miami or elsewhere…). In Europe, there is definitely some room for improvement when it comes to levels of research funding despite ambitious targets. 

A second important area for the state to invest in is more directly related to the startup ecosystem; in fact, Europe and many of its member states have a strong track record when it comes to investing in venture capital funds. The EIF is the most active (by the number of fund investments) LP in the world; Tesi in Finland, the APs in Sweden and KfW capital in Europe are also pushing the VC ecosystem forward in their geographies. Many of these LPs also already have a strong strategy when it comes to ESG and a focus on impact - directly related to PPT (see the recent KfW Capital White Paper). 

With the European Investment Council (EIC), another step was taken only last year: in 2022 alone, the EIC will invest more than €1.7 billion into commercialising research and directly into startup companies. With one exception (see below), all of these programmes are laudable (while obviously too small for some commentators), I would argue they are not stringent enough from a PPT perspective. What we need are clear rules attached to the state money; state investment can be conditioned on fostering more investment in certain sectors (e.g. healthcare, green tech), putting more money in the hands of certain groups (e.g. female founders and even more importantly other overlooked groups) and on being within strict ESG-requirements. 

State as regulator

European states and institutions have already shown their strength with setting global regulatory standards in the tech ecosystem; the GDPR privacy regulation has certainly already done so. We might be seeing the sustainability regulation SFDR do something similar over the coming years. What European states haven’t focused enough energy on, however, are startup specific ‘infrastructure bills’, such as unifying employee stock option legislation and startup creation standards. Fortunately, initiatives such as the EU Startup Nations Standard, are pushing in this direction. 

Questions remain, however, how long this standardisation, which is so direly needed to enable a unified market and ecosystem, will actually take to be effective. PPT might benefit particularly from the right (e.g. sustainability-focused) regulation in place as it could set more specific incentives to shift investment (and founders’ attention) in this direction. 

State as customer

As O’Mara (and Janewaty) have argued in their respective books, the U.S.’ DARPA was particularly successful not just because of the (quasi-unlimited) research funding it provided but also because it took the ‘market risk’ away as the innovators first (secure) customer. In a recent EU startup summit (producing the working paper Action Plan to make EU the new Global Powerhouse for Startups), public procurement (which is 18% of the EU’s GDP) was singled out as an important lever to enable the market for EU startups. 

This procurement power of states is possibly its most underestimated weapon; but so far, often, new businesses don’t qualify easily - requirements are too rigid, lead times too long - that needs to change. 

Again, PPT would need this push in particular as many of the problems PPT tackles - healthtech, infrastructure, security - are directly related to public spending. In StateUp’s recent States Regenerate report, Cambridge economist Cristina Peñasco argues that the state’s ‘green procurement’ power is indeed one of the key components that could move the greentech agenda forward; startup competitiveness will be strengthened - to eventually lead to quicker green (tech) development. 

While all three of these state functions are important, we need to be careful to not overdo them. 

Overregulation can obviously lead to the stifling of a young and new ecosystem and sector. Similarly, trying to pick startup-winners (which is at least partly what the European Innovation Council is doing) might also set weird economic incentives vis-a-vis the ‘private (VC) professionals’. 

Overall, however, Europe is well-known for being a regulatory stronghold; and for once this might be an ideal starting point to enable something as important as more PPT. As long as European regulators are pushing hard enough in some areas - e.g. being strict about investment euros reaching the right sectors - and being flexible in others - e.g. procurement - the state has a crucial role to play. 

The state in its different functions is needed to put in place the baseline for tech innovation generally and PPT specifically. It is also key to define the limits of state influence, however, and step aside when other players are better-equipped to jump in. Who are these other players? 

In next week’s installment, we’ll discuss what role venture capitalists play in pushing the PPT frontier forward.

Lead Image: Nick Fewings on Unsplash

¹ Together with Leo Rees I conducted interviews with European VCs, regulators, policy makers and industry representatives; an academic paper based on our findings will appear later this year in an edited volume as Lenhard, J., Rees, L.  (2022) ‘Towards European Venture Capital - A proposal for the strengthening of the state / innovation finance nexus to foster inclusive and green growth and European community’, in: Gimigliano, G. (2022) Money, Law, Capital and the Changing Identity of the European Union, London: Hart.