A Stimulus Plan For Venture Capital? No Thanks.
Tom Friedman, who I admire in many ways, has an op-ed piece in today's NY Times where he suggests that the US government take the bailout money they are thinking of giving to the auto industry and instead give it to the top venture capital firms.
Call up the top 20 venture capital firms in America, which are short of
cash today because their partners — university endowments and pension
funds — are tapped out, and make them this offer: The U.S. Treasury
will give you each up to $1 billion to fund the best venture capital
ideas that have come your way. If they go bust, we all lose. If any of
them turns out to be the next Microsoft or Intel, taxpayers will give
you 20 percent of the investors’ upside and keep 80 percent for
themselves.
I understand the point Tom is making – that we ought to be investing in the future instead of the past. And for that, I applaud him.
But the venture capital business, thankfully, does not need any more capital. It's got too much money in it, not too little. Just ask the limited partners who have been overfunding the venture capital business for the past 15-20 years what they think. You don't even need to ask them. They are taking money out of the sector because the returns have been weak.
And the top 20 firms in the venture capital business are the least in need of a bailout of any group I've ever thought about. These firms, the Sequoias and Benchmarks and Accels and Kleiner Perkins etc etc can raise a fund anytime they want. Accel raised a ton of money last fall in the midst of the worst global financial meltdown in my lifetime.
The venture capital business is an asset class where the top 10-20 percent of the firms make 80%+ of the returns. That's how its always been and that's how it will likely always be. It's because the best entrepreneurs want to work with firms with reputations for making money, making connections, recruting top talent, and getting the right exit at the right time. And those are the top 10-20 percent of the firms.
So Tom's idea, while it looks good on paper, is a dream. The top venture firms don't want, don't need, and are never going to take government money. The same is true of the top entrepreneurs.
The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the "innovation sector". That money will go to bad investors and weak entrepreneurs and management teams for the most part. It's a problem of adverse selection.
If you take a look at all of the economically targeted investment programs that have been built and managed over the past twenty years in the venture capital industry, you'll see this plain and clearly.
There are some good ideas out there. My friend Brad Feld told me about a new legislative effort in Colorado to give angel investors a 50% tax credit for making investments in early stage companies. That makes better sense to me. Let the market work but lubricate it a bit with tax credits, particularly for the angel sector which has been the most hurt in this downturn.
But please leave the venture business alone. It's working pretty well as it is and it certainly doesn't need more money or some kind of stimulus plan.
Comments (Archived):
amen.i like tom too, but he is not an expert in everything.
I broadly think you are right. One potential use would be for funds for funds such as SeedCamp, Y Combinator, TechStars etc. Although, dumping $1bn for these types of funds would probably create a massive distortion. Tax credit for early stage angel investors sounds interesting.Might preference would focus spending in new businesses into some of income contingent loans for new companies to pay for labour costs in the first 1 to 2 years of the businesses life. The main advantage is that this would support a wider range of business types not just technology based businesses. As much as tech investment can lead to the next Microsoft, Genetech or Google, with the current crisis you want to encourage business creation across the whole spectrum of the economy.
If the YC type funds had $1bn they would have no clue what to do with it. $1bn/$20k per company = 50,000 startups… I know this math is wrong but it gives a general idea.
I agree with you here and disagree heartily with Tom Friedman. But do you think that perhaps if the funding process were easier (partly through an increased tendency to lend) then more entrepreneurs would come out of the woodwork – knowing that their biggest struggle was no longer getting funding, but instead building their business?
If entrepreneurs aren’t doing what they’re passionate about because they can’t get someone to fund them, then they aren’t passionate enough. That’s like asking a girl out only if you know she’ll say yes.I threw myself at the girl I wanted to be with for over two years–almost made it work, too. At the end of it, say what you will, but you couldn’t say I didn’t try.I feel the same about my business. Even if the money runs out, I’ll get a job on the side and move the business forward by sheer force of will, sweat, and duct tape. If the biggest struggle you have is getting funding, try building a business…
You’re completely misguided. Maybe because your idea of “business” is building software or something with ridiculously low barriers to entry. The world doesn’t need more software. We need new energy, food, water and governance systems. None of these can be built on a shoestring budget or under moonlight.If your business is solving such a low-value problem that one man can keep pushing it on a part-time basis, IT DOESN’T DESERVE TO EXIST.
I love Disqus. It allows me to see a history of how repeatedly negative you are on just about all your comments. I’m sure you’re building a heck of a professional network and you must be a pleasure to work for. Smile, buddy. Compliment someone today. It will make you feel good, I promise.Anyway, yes, I was more focused on software, web technologies, and given the fact that companies still can’t do basic things like find the right people to recruit or that schools are still bound by the brick and mortar education system whose costs are spiraling out of control, I disagree that the world doesn’t need more software.So, the only things worth building are things that cost a lot of money to put up?Have you ever heard of Ashoka? They’re helping social entrepreneurs solve these “real” social problems like food and water on serious shoestring budgets in developing nations–solutions that, like web ideas, are often too small for big venture capital funds to care about.Not every good solution to a big problem is an expensive one.
I’m glad you agree with me that water and food are the next big problem we will face. When rainfall becomes largely unpredictable and renders traditional farmlands useless on a very large scale, how can you keep producing enough crops to feed the world? Do you really think that the uncoordinated efforts of low-budget social entrepreneurs can solve this problem? And are you willing to bet your own life on it?I’m not.Agriculture as we know it is very near its limits, at the very top of its “S” curve. When a system reaches that stage, no amount of incremental improvement can save it. Our best strategy is to be working on replacement systems off to the side. Synthetic biology is one of these efforts that I’m aware of. Very capital intensive as you might suspect but very promising. Imagine being able to grow crops with no land. That’s the kind of breakthrough we need.
I agree…the worst that could happen to venture capitalists is the acceptance of taxpayer money.Receivers of taxpayer money can take reckless risk with the dough….after all it’s not theirs….and they are not responsible to the taxpayers if they lose it.Venture Capitalist in a private market setting must scrutinize their investments with care…because the capital is theirs, or they are responsible to their shareholders.Stimulus packages….bailouts….they’re a perfect prescription for more economic pain.
Not quite. VCs don’t manage their own money; they manage OTHER PEOPLE’S MONEY. And they are very good at squandering it too. I don’t entirely agree with Friedman, but I really wish he could get equal time with our wimp of a president on national media to wake up America. Without bold transformation now, this country is headed straight for a soviet-style collapse
There are areas where government money works really well and, for my two cents, it should stay there. Basic research is one great example. It’s just too early stage for VCs to invest, but so critical for investments later on down the road (and for our nation’s competitiveness). Another is in areas where returns take too long and therefore make it hard to invest, even if there is big money potential. An example is education, where it takes years to gain traction but the potential is huge.
I agree about R&D for sure. Education is an area we are looking hard at. I think there are some disruptive changes afoot that could make education very investable as a venture deal
I spent 5 years in education, working on mobile math ed and then web-based math ed from about 2003-2007. We came very close to breaking through. If a bad break would have gone our way, it would be a different story today. Whatever the case, I had a key advisor who had been involved with math ed tech for a couple of decades. He once told me that education is like two mating elephants: there’s a lot of stomping and hollering and two years later something happens. Hope you are willing to wait it out!
Great line. We’ll be careful and patient!
for distance e-learning combined with a.i. follow @ullrich who is doing this in shanghai, china, for the 300 million students there .. “disruptive” in the very progressive sense
How about using government funds to create a different class of venture fund (if this is actually different), where the businesses are exciting and viable, likely to create jobs but dont have the obvious potential returns required by a typical venture fund? The gray area between “lifestyle” and IPO where growth is organic rather than explosive and where returns might be in the form of dividends or other appropriate mechanism rather than a clear exit.Another way to put those funds to work is to extend the already great SBIR program. Mandate more govt departments to spend a proportionally larger amount with start ups, or even create a new band for start ups, separate from SMEs (which I find a distortion as it lumps together 2 guys in a garage with a company of 100 people and several million in revenue). This is not then a “hand out” and the tax payer effectively gets something immediately in return for their money while the start up gets revenue, a sale, a blue chip customer, experience and a little more credibility.
There are a lot of good ideas out there to extend the funding for basicresearchThe gray area between lifestyle and IPO might be better served bytraditional bank lendingWhich of course is non-existent right nowThe gotham gal had a rant on thathttp://bit.ly/GKEmT
Thanks for the link to gotham gal’s post. Misery loves company, and my experience over the past few months perfectly mirrors her comments. My company is still in startup stage (ie, not yet profitable) in the high end driver training market. I reached positive cashflow in early summer, just in time for the storm. I have a proven program, my same store sales are increasing or holding steady, and I wasn’t even able to get a line of credit to weather cashflow problems. I need modest funding to scale up and haven’t been able to find it anywhere.By the way, I love following your posts — they seem to generate fantastic insights in the comments that follow.
Yeah but I bet 100k of working capital funding would be more helpful than this blog right now!!
Bill Gurley – a Benchmark partner – and an occasional blogger had a similar view of the world in a recent post here:http://abovethecrowd.com/20…Good stuff – both of you seem to have the same idea.I would disagree in one form – which is that as long as the power in the VC world is concentrated in the hads of perhaps the top 20 firms and the rest of the VC world is under water and struggling to raise capital – we will all miss out on some interesting opportunities – because not every good idea under the sun will make its way to those top 20 firms. It would be interesting to see some sort of plan whereby VC’s could opt out of the plan – if they didn’t want to live within the constraints of a government plan – but others who aren’t really competitive with the top 20 could get funding for ideas that aren’t likely to bubble up to the top 20.Thoughts?
I think the SBIC program could be re-energized to do some of what you wouldlike to see happen
Bill is one of the inspirations for this blogBack in the 90s, above the crowd was one of my must readsI am so glad he still posts occasionallyHe’s a great writer and a great VC
I don’t universally endorse Friedman’s aproach, but if the fundamental thought is that the government is playing a role of an uber VC, people like Doerr and Gallogly had a say and some of the next-generation people in the top 10-20 VC firms saw an opportunity to branch out on their own, why couldn’t that be vetted further? And as someone who has been in the marketing sector for a Top 10 firm for over a decade, if someone approached my industry with $$$ looking to inspire new entrepreneurs, I’d certainly look deeper into it.Viewing it as a tweak the current VC business is flawed. Viewing it as a way for the government to empower smart VC thinkers in a new way is not.
Another way I hope the government will help new ventures is by removing unnecessary obstacles or creating demand for new products in new industries like clean tech. It takes billions of dollars and many years of permitting to build utility scale renewable energy power plants. How about government backed loans for pilot plants and streamlined single source permitting? Renewable portfolio standards create demand but there are many other ways the government can reduce the uncertainty that plagues these ventures. Finally extending the solar investment tax credit was great but wind is set to expire again at the end of the year. Has venture capital ever developed and grown companies in such a capital intensive industry before? Semiconductors wasn’t this bad at the outset and that is the closest I can think of.There is plenty of money in VC already, I think the best way for the government to invest in the future is to make future demand less risky. Send price signals and define demand and entrepreneurs will scramble to fill the void. Hopefully Steven Chu, Obama’s Secretary of Energy who was formerly at Lawrence Berkeley National Laboratory, will be successful at navigating politics to create a better environment for investment in these technologies in addition to increasing funding for research.
Right on. Stimulate demand for new technology. Gurley’s post (linked to in this thread by harry demott) talks about that too
I agree with ‘removing obstacles’, but I disagree with ‘creating demand’. The first is government getting out of the way, as it should. The second is government distorting the marketplace. Also, I completely disagree with you on “renewable energy power plants”. That’s a recipe for failure. We’re basically taking a new, unproven technology and trying to place it in an established market to compete with established technologies. This strategy guarantees a 97% failure rate.Renewable energy is disruptive and as such it only has a chance if we deploy it bottom-up, in a disruptive fashion. Give me the energy independent building and screw the goddamn utility
I think we half agree and half disagree. I think the economics of many of these technologies make enough sense over time that an investment in accelerating their development (creating demand now) will pay a large return in the long run. Regardless, that is not really the point I was trying to make.Our federal and state governments have decided it wants more renewable energy, it is helping the industry through programs like tax credits and renewable portfolio standards. One of the things Friedman wants with $20B to 20 VCs is to better support this industry. My argument is that there are a lot of things the government can and should do to stimulate clean tech before directly investing in clean tech companies. Many of the actions I would like to see do no more than level the playing field with traditional energy sources or remove unnecessary uncertainty. Two examples:First, let’s look at the production tax credit for wind which is a federal program to subsidize a wind farm once it is up and running (production). The problem is that for the entire history of the program (including now) the tax credit only lasts two years and is often not renewed right away. Many people believe this tax credit is doing more harm than good because there are many wind farms that are economical today without the tax credit that wait around until the tax credit is renewed to be built. The ones that do rely on it have to scramble to fit in the two year window. The uncertainty this program creates is unnecessary. It should either be made long term or taken away so it can be modeled in financial plans. Here is an example you will probably like because it shows the government is spending money on a program that may be less effective than no program at all.Let’s look at geothermal energy for another example. There are gigawatts of installed geothermal around the world that prove it as a reliable source of energy and suggest what the technolog will cost at utility scale. Based on these installations experts believe that there are locations in the world that have such easily accessible heat resources that power could be generated for less than the cost of generating coal. The problem is that since the amount of capital sourced for this industry pales in comparison to that of coal, bankers don’t understand it as well as thus the cost of capital is much much higher. This creates a catch-22 where geothermal could compete with the cost of coal at a large scale and similar costs of capital, but it can’t get that cost of capital until it has proven that it can compete with coal. My suggestion was that if this serves the greater good (and creates jobs) I would rather see the stimulus be to give a federal guarantee to the loans and reduce the cost of capital so geothermal can be proven as a low-cost renewable source of energy. Yes, there is still risk, but there are a lot of smart projects that have a reasonable chance of success but compete on a very uneven playing field.
Thank you. Dumping more money into the same structures, the same incentive systems, the same uses, is not the answer.Instead, how about streamlining the legal processes behind creating businesses? Or reducing other transaction costs to starting new ventures?
While I don’t really disagree with you, I do think there is a valid counter argument based on changing the investment target.VCs only end up funding 10% or less of the deals that cross their desk. That leaves a lot of businesses and ideas unfunded. Some times it’s because they don’t really have viable businesses or management teams, but many times it’s simply because they don’t fit the current VC trends or have potential returns that don’t match the VCs target for successful exit.Why not use government funds to invest in SOME of these businesses – the ones that do have good (if not stellar) prospects and are likely to employ a growing number of people. A good example would be service-oriented businesses, an area typically shunned by VCs because of they don’t “scale” as well. Because service-oriented businesses require a lot of manpower, they take more time and effort to ramp up – but they also employ a lot of people. In the end, that’s really what the government funds should encourage. A wildly successful VC-backed company has 500 people and $1m revenue per employee. A successful service business might have 5,000 employees and only $100k revenue per employee. As an example, there is a local startup here in Atlanta that is building a consulting business to help companies move their IT infrastructure into the cloud and to cloud based services like Google Apps. It’s a market that is clearly ripe, especially based on the the cost savings that companies can recognize moving to the cloud. They’ve been trying to raise funding to scale up the business and hire more consultants, but I suspect it’s a deal that no traditional VC would be interested in since even if profitable, the chance of a huge multiple exit is low.
Yup. That makes some good sense. As I said in another comment the sbic program, where the govt provides leverage for private capital, could work really well for this class of companies
Just change two words and we’re in complete agreement: “Please leave [ALL] business alone.”…..and…..”Let the market work but lubricate it a bit with tax credits, particularly for [ANY SECTOR].I can’t imagine any entrepreneur (unless they are horrible) actually wanting the government as an investor…especially after the shameful congressional tar-and-feathering of bank and automotive CEOs.This government is dedicated to punishing productivity and incenting irresponsibility. Not who I want in the boardroom.
Exactly! I want to clip the Fred-isms below and substitute [any noun] for “venture firm”. Apropos the moment, wether meltdowns or hurricane rebuilding on the government’s dime and insurance — moral hazards in ANY sector are going to ensure adverse selection. To wit:”….The top [ANY NOUN] don’t want, don’t need, and are never going to take government money. The same is true of the top entrepreneurs.The worst [NOUNs], on the other hand, will gladly accept government money
Mad libs for political discourse. I love it. Ever notice how its always “Don’t intrude on us…..but DO intrude on them….THEY need it!!!”
You guys are on to my establishment limousine liberalism! I’m going to have to choose my words even more carefully now
I think it works well for “banks” doesn’t it?
which government exactly? i mean bush did nothing to ‘incent irresponsibility’. and Obama’s ‘punishing productivity’.
The federal one
great we agree!
completely agree
They should give some of that money to developers who want to create products that the VCs won’t fund. I speak from experience. Couldn’t get the VCs to fund blogging or RSS in 2000. As much as I love you guys cause you use the tools nowadays, you’re using the tools that were leading edge 10 years ago. We need the money to fund the tools you’ll be using 10 years from now. VCs never ever do that.
BTW, I’ll never forget how Friedman once wrote that podcasting just popped up out of thin air, isn’t the Internet wonderful. What a dork. This shit is hard work, requires lots of iterating, trial and error, learning and going back to the drawing board.That’s why I was objecting to your line that invention always happens simultaneously and there aren’t any new ideas. There are lots of times when people understand how the world is going to shape up before everyone else does and we don’t have ears to hear that. We have to hear the things we want to hear, so everyone waits until everyone else figures it out. The trick would be to figure out how to shorten the loop, to learn to listen. The reason you’re seeing what you’re seeing is cause that’s what you *expect* to see.
That’s very true dave
And, yet, somehow….those technologies made it and thrived in the free market without the forced investment of the citizens’ tax dollars. Amazing how that works out…..all the time.
and you can’t understate the impact of timing dave. Nearly every prominent 2.0 platform or application today had its start in a separate incarnation years before. Timing has played a huge part in the evolved versions gaining traction where the predecessors wandered off in to purgatory.
Andy they would have done a lot better with financial support, and it allwould have happened sooner, and we might have avoided the dotcom bust. Idon’t know what your background is or your involvement in those technologieswas, but I’ve run professional development teams with QA, docs, support, andlevels of engineering. Doing it with a skeleton crew yielded some prettyinadequate results and put a lot more pressure on me than I should haveaccepted. I won’t ever do it again.In other creative businesses they fund things long term, and we need to dothat too in tech.
I think you are underestimating the value of 1st gen failures. Bad ideas need to fail and great ones need to climb walls of seperation.I agree that it would be better for tech to have longer-horizon investments flowing in (and I think it will, by necessity).I’m just very uncomfortable with the Fed Govt picking the winners and losers instead of the marketplace.My background is similar…skeleton development crews on low levels of cash and a lot of hunger. 2 exits later, I wouldn’t want it any other way. 🙂
Okay maybe we’re getting closer to understanding each other. I wish I had avideo of the pitches I made to VCs re blogging. The ideas would eventuallyget hundreds of millions of dollars behind them, so I think from an investorpov they got validated. They were very hard times Andy, and believe me, thetech suffered for it, came out weaker. It’s impossible to say how it mighthave turned out, but I look at a venture like Pixar and wonder why wecouldn’t have that kind of long-term vision here. I don’t want Federalmoney, but (as I’ve said to Fred many times and many other VCs) youshouldn’t just eat the seed corn, you should plant some too. 🙂
So, you like betaworks as much as me 🙂
they might not have done better with financial support, when govt intervenes by printing money and gives it to someone it runs the risk of making everyone pay for it through higher prices. so if the technology sucks than we as a society get crappy technology coupled with higher prices.the dot com bust only happened because of the dot com bubble, which happened because govt printed too much money and distorted the analysis of otherwise astute investors. then govt tried to intervene by stopping the dot com bust by printing more money. this created the housing bubble. in addition to politicizing money govt intervention distorts the analysis of otherwise astute investors and is the primary reason financial markets have gone from being an engine of growth in a capitalist society to a speculative casino that distorts investments and misallocates resources to sub-optimal ventures that the market would have wisely avoided govt not intervened to create faulty incentives. increases in central planning only exacerbates this problem.
I am sympathetic to your view dave but what about angels and programs like betaworks and ycombinator?I particularly like the idea of giving tax credits to angelsI worry that the govt (other than DOD) can’t seed innovation any better than VCs and likely will be worse
Fred,From my perspective as an entrepreneur with intelligence, drive, and some good ideas that has also been turned down many times by investors, I would welcome ANY program that would increase the number of investments being made. How many investments did Union Square Ventures make last year? And of those, how many were with NEW entreprenuers that you’ve never worked with before?You’re right about not making poor investments in weak teams or ideas but the companies that are spawned from those disappear quickly. What would be the overall harm in opening up the venture funds to the masses instead of the select few entrepreneurs that know you or have had previous success?
Part of the abnormal psychology of being an entrepreneur is to realize in the money game that the whole world can tell you “no” if you simply have the perserverance to find one source of funding who will tell you “yes”. You can’t get elected President with that logic but you can start, buy, grow a business that way.The most important thing about the game is to get INTO the game and that takes money. And entrepreneurs have to be able to raise the dough! It is an essential in the skill set for success.What does not kill you makes you tougher — an entrepreneur has to be tough.I have raised over $1B in my life, never lost a penny of anybody else’s money and I still feel like a begger when I go out to raise money. Even when I’m wearing a better suit. I still have the same sense of excitement when I get the funding. It is almost like the fountain of youth.An investor once asked me why I was asking him for money as I could fund the entire deal myself. I told him: “I want the validation of knowing there is at least one other person on the planet who thinks this thing is going to work.” He laughed and gave me the money.
I was a bulge-bracket stockbroker for 10 years and could never get over the idea that my job essentially boiled down to institutional begging.The key problem with begging is that you have no control over your own destiny.That’s why I stopped.
I think we made around eight or nine new investments last year and the majority were with entrepreneurs we have never worked with beforeBut I certainly understand where you are coming from
Well said. It’s getting tiresome to hear all of this talk about bailouts and how the government needs to do x, y, and z. It seems to me that pouring more money into lots of things in this economy is like pouring kerosene into a fire. That said, it would be nice to see VCs who understand that no one — rich or poor — truly benefits from an economy that’s eroding, and a society that has no future. Areas like education — which set the stage for the future — seem as if they could really use the deft management and operating efficiencies and sense of urgency that VCs can help foster. Every startup that gets funding doesn’t have to be another Web or technology company does it?.LAG
Yes and no. We are looking very seriously at education but it will be web services focused on education
Entrepreneurs that are going to make it, are going to make it regardless of VC industry trends and preferances. I am horrified at the idea of government backed VC funds as the investment decisions will be driven by everything *except* hard nosed decisions about what is likely to be profitable. If the government wants to throw money down the drain, fine, but let’s not pretend that it is “VC” money.As several people have noted, there are existing programs that could use additional funding. In addition to the ones mentioned, I would suggest the SBDCs:http://www.sba.gov/aboutsba…The SBDCs exist to help anyone that wants to start a company, from tech entrepreners to home repair operations and everything in-between.
I agree with you completely.There is one similar area in which the government could have an immediate and dramatic impact on job creation — increasing the funding and dramatically raising the funding restrictions for the SBA’s existing programs. Most SBA lenders run out of dough half way through the 2nd quarter. This is a simple fact.Good deals, great deals, sit on the bankers’ desks for 9 months and then get funded the following FY. Why not just slap this program with the government’s Gold Card and flush out the pipeline?This would also have the benefit of using some of that TARP money in an effective and auditable manner.The 80/20 rule is the real world. Only give additional money to the top 20% of the banks whose SBA underwriting has resulted in the lowest default rate. This gets the kindergarten T ball silliness out of the equation. It is time to start using performance as a discriminator on who gets money. In a long drive contest, bet on the guys who can at least stroke it 300 yards. Owning a Big Bertha and wacking it 300 yarsds are different things. We need to start paying attention.Remember that most SBA loan requests are from folks who are currently running a business and likely a profitable business, so the start up risk is, if not eliminated, certainly dampened — one of my favorite new concepts — the dampening of extremes by market forces and limited intervention.Almost every SBA loan request is based upon buying equipment or hiring new folks. These are very, very “stimulative” things.In addition, the government is using their (our) credit so this approach could be really inexpensive, quick and the returns could be world beaters.And remember the administrative network to make this approach work is already in existence. So, the dollars remain worth 100 cents when they get to the marketplace. All that really has to happen is to change a couple of words in the current enabling legislation and we are in business.These jobs are likely to be the kind of jobs which will actually impact unemployment in the trenches where things are the most dangerous and uncertain.When you are the only guy in the gym who can benchpress 400 lbs, participate in a game in which being able to benchpress 400 lbs dramatically increases the probability of success! Play to your strength. Only the government really has credit just now.
I remember there was chatter from the Obama team after the election about helping out the SBA program. Did any of that make it into the stimulus package or has there been recent chatter about it? For better (probably) or worse I am living in a bubble right now (grad school) and haven’t been able to keep up with what’s going on with the economy.
Fred, maybe you can think about the capital necessary to execute on Steve Waldman’s “afterthought.” http://seekingalpha.com/use… First, need some assets to data tag; second, need capital to pay for the tagging; third, need an exchange upon which to trade them. Thoughts?
Fabulous idea. What we need is the CarMax of busted real estate securities. The challenge is going to be to unravel the securities and figure what is really deliverable. This is why some of these derivatives should not have been allowed in the first place — you cannot really deliver the collateral in the event of a default.
I don’t think its a capital thing as much as access to the data
That’s good to hear. As far as access to data goes, of course everything has a price. However, it’s too bad that the gov’t continues to hold out the possibility of paying more for the instruments than they might be worth were the data made accessible. If holders can get more for “selling” the instruments than they could get for selling the data, they have no reason to make the data accessible.The SEC talked about making ABS data transparent at its Dec. 17 meeting, where it mandated comparable data tagging for U.S. GAAP — http://sec.gov/news/speech/…. Since then, however, I’ve heard little from Congress or the Administration about following through.Of course, the government could always mandate making the data accessible, or create some carrot or stick to seed the cloud. Having spent the past 12 years trying to get gov’t types to think creatively, however, I’m not too optimistic. Smarter folks like you and your commenters will need to lead the way.
Right as usual, King Friday!
I have run programs for entrepreneurs through the Kauffman Foundation for ten years. In my opinion, giving stimulus money to VCs won’t help, because the lack of funding (especially outside Silicon Valley and NYC) occurs at the earliest stages — the seed stage or the prototype stage. Most of the companies I see are not suitable for a VC investment even if it fell out of the sky on them. They’re not ready. That’s why YCombinator and Techstars have been so successful in their little niches; they weed out the good startups and put some muscle behind them. However, they only concentrate of software (or at least I think they do) and there are many other kinds of companies: clean tech, medical devices, hardware, etc. that require a bit more. Having just listened to Marc Andreesen on Charlie Rose, I think he’s right: the sweet spot for funding is $200k-$1.5mFor true innnovation, I think SBIR grants are a real boon, and their scope should be enlarged and expanded. For later stage companies,, SBA loans are also good, although as one commenter already said, they always run out of money in Q2.
Francine – this is exactly right
Maine has a seed capital tax credit which has been useful to our fund raising effortshttp://www.famemaine.com/bu…
That’s the kind of thing I’d prefer to see than direct govt involvement
In you care for internaional comparison, tax credit for entrepreneur is the plan adopted by Christine Lagarde, French Minister for Finance.
I’m not sure anyone would place high odds of a government-sponsored venture fund actually finding it’s way to innovation (certainly not me), but without question there are better uses of public dollars than bailing out the auto companies. In his article he also said, “Let Creative Destruction Happen.”I very much like Friedman’s article because it calls attention to the relative lack of resources for entrepreneurs and innovators everywhere, and let’s face it, growth and resurrection will come from startups. Relative in the sense that not only are there fewer funding opportunities now for seed deals than there were 8 months ago, but also relative in the risk/reward equation.It’s not that we need more dollars into the venture industry, but we do need more dollars into the seed/A segment and infrastructure, exactly where the risk/reward is now so profound (thanks to capital efficiency and broadly, the web). We need less concentration of capital, not more. More seed deals (thousands) done per year, by a broader set of players.At True, we’re advocating that we all work on this ecosystem so that aspiring entrepreneurs are structurally encouraged to make the leap and try. This is in the best interests of the country and the world. Angel tax credits, a revived SBA and other ideas are exactly the types of things that we want to further.
Yes, exactlyMaybe I shot the messengerNot what I intended
C,mon Fred!Don’t ya want a few billion bucks tied to every kitten, butterflies, and rainbow, congress critter to jumpstart businesses? And having them hold hearings on why you spent that money on the 20 inch monitor instead of the 17?Ya need to lighten up. Tom Friedman was the same guy to declare The World is Flat. I am pretty sure Galileo solved that question a couple of centuries ago.The best thing for Tom is to get a dictionary and look up Venture and Capitalism, and string them together.
Amen!
Swing and a miss, Tom! I’m a big Tom Friedman and he’s on the right track but having the government putting money into the top venture firms makes no sense for many of the reasons above. There is no question that clean energy is the biggest economic opportunity of this century. One problem, however, is that the venture capital industry is structured for projects that will need $10-50M and have an investment life of 5-7 years. Most clean energy projects require many hundreds of millions and 10-20 years to produce a return. The upside is colossal but you need the right investor to make these sorts of bets. The government is the right investor. What we need is very simply to increase our national R&D budget from the $25B/year level (which, tragically, its has been at since 1980!!) to the more appropriate number of about $200B per year. This sort of investment in basic research is what drove our success in the 20th century through an ecosystem of universities, national labs and places like Bell Labs and IBM Yorktown Heights. That ecosystem has been starved for decades now. This ecosystem creates the innovations that venture capitalists later take to market. The pipeline is dry. We don’t need more resources to take technologies to market, we need more technologies in the first place. This is an appropriate role for government money and the infrastructure is already there (its just underfunded). And, don’t get me started on H1B visa restrictions in the stimulus bill. Tom Friedman got that one right.
The H1B visa thing is a travestyThank god tom and others are pounding the table on thatWe need way more immigration
“It’s got too much money in it, not too little. Just ask the limited partners who have been overfunding the venture capital business for the past 15-20 years what they think. You don’t even need to ask them. They are taking money out of the sector because the returns have been weak.”…. I a strongly agree that this money should NOT go to VCs.However, playing devils advocate for Friedman, this isn’t about ROI – this is about innovation.Far too many VCs expect a 10x ROI… a 1x ROI would be fine for government backed startups.The key point is to further innovation.I think the money would be wasted though…. If you don’t trust the bankers in AIG then you shouldn’t trust the VCs as they are just as prone to corruption.
I don’t think VCs are corruptThey may be stupid, arrogant, stuck in the past, rich, fat, lazy, and anynumber of other thingsBut I’ve been in the business for 22 years and I’ve never met a corrupt VCDoesn’t mean that there isn’t any corruption in the VC business, but I thinkit’s not prevalent
You’ve never met William “Boots” Del Biaggio III? Courtesy of your friend at the NYT:http://bits.blogs.nytimes.c…I am very much against “group guilt”; in every group there are good guys and bad guys; saying a “group is corrupt” is unfair.However, pretty much as pedophilia is more prevalent among catholic priests than the general population, fraud and corruption are more often found in the financial management class (not only VC). The conditions are conducive, the oversight is lacking…here’s a good $0.02 on that:http://www.nytimes.com/2008…
i have to believe there will be additional cases. But as an asset class, that i have dealt with extensively and as compared to others, VC’s come out FAR FAR cleaner IMO. We are going to probably see some turd bubble up but every class has its underbelly, i could be wrong but i dont believe its big in this one as Fred has said. It will probably come from where the Hedgies played VC.
That’s my take as well, funny line about the “turn bubbling up”
Also remember that the money for any government investment would by definition come from profitable (i.e. tax-paying) businesses. There may be a few super-smart people in government who know which risky investment is good for the long term (hydrogen? solar? tidal?) but if they guess wrong, they’ve turned good money into bad.The other problem is accountabilty. Hard to tell if that big fancy new solar investment is being made because it’s a good idea, or because Senator so-and-so needs to reward a friend. This is especially true on projects with long time horizons, where politicians can push off real scrutiny for decades.
The idea that the current VC model is “working pretty well” is ridiculous. You are right that giving another $20B to the big firms would not be helpful; they can’t effectively deploy the money they have. Give the $20B to The Funded community; we’ll build some great companies that might not have the potential to get to billion dollar valuations in five years, but they will immediately create high-paying jobs in forward-facing industries.
Well that’s not what friedman proposedA community powered VC firm is an interesting ideaI’m not going to do it because I think you need to manage the investmentsactively and I am not sure how a community does thatBut I’d be all for someone trying that
I think we need community based angel programs. I don’t have a lot of cash at this point, but I certainly don’t want it to sit in a savings account. I wish there was a way for me to be a “micro-angel” and I’d be happy to let someone more experienced manage it.
when are we going to see a business model built out in the open? your seeing other parts of what used to be behind a company’s walls coming out (see boxee effort and wiki on the Hulu situation)there is a great story (i think i read it from Dave Winer about 5,000 people collectively landing a plane based upon averages – if he reads this he might link to it (sorry i haven’t) – question being – how far away are we from ‘crowdsourcing’ a business model? the reason i ask this is that i was in a discussion around an amazing idea, that i think would fit perfectly with this approach.
That may be happening with twitterI am not entirely joking
whoa – big news! buried deep in the disqussion
I simply cannot take seriously anything this man writes anymore, after reading this hilarious smackdown:http://www.nypress.com/arti…Highly recommended reading, guarantees you a healthy dose of laughter!The man is not as bad as Bill Kristol, but he is wrong. Often.
I am wrong a lot tooMy measure of a man or woman is if you are right at least 51% of the timeAt least he takes positions
His job is to take positions, and it is my right to dismiss him if he has shown to be consistently wrong. Your job is to make good investments, and it is your LPs right to dismiss what you have to say if you have shown to be wrong consistently.Saying “at least he takes positions” is the same as if someone said about you “at least he’s making investments”… That’s just not good enough.Speaking of pundits, Chris Hedges has been rihgt about a lot of things. His latest is utterly depressing, you can’t believe how much I wish he is wrong about it:http://www.truthdig.com/rep…but then you read about 130,000 on the streets in Dublin and begin to wonder…
No revolution ever got started on a full stomach and while the economy is not doing as well as some would like McDonald’s is seeing record profits, so there are not yet enough empty stomachs to start a revolution. The Big Mac may have to be renamed “The Peacemaker”?We are still not even to the level of unemployment as we had experienced in the early 1980s — not legging for more action but we are way premature comparing these events to the Great Depression — we are still dealing with a garden variety recession from a domestic employment perspective.On the other hand, we have had a systemic failure of our banking system.”Hey, Timmie, does this dress make my ass look fat?””No, but you do look kinda insolvent, babe! Might want to rebuild those balance sheets and get rid of some of the toxic crap, whadda ya say, doll?””Oh, Mr Geithner, I love it when you talk dirty!””Well, you ain’t seen nothing yet, you little minx!”If we could survive the civil unrest of the VN War, then we can survive the mortgage crisis. And remember the VN War protestors were younger and fitter. I remember the 82nd ABN confronting the protestors on Key Bridge in Georgetown and it was an uncertain outcome for a bit. [Always take the 82nd and give the points, for my money!]But if there is to be civil unrest, then I am willing to throw my hat into the ring to sack the Capitol — hell, I was a Ranger.I think it’s going to be OK and you know what, I think maybe there is starting to be a glimmer of hope out there. We have taken every shot the economy can throw at us (nationalize the banks?) and we still have a sense of humor.
Yous sure have a sense of humor jeff. And my money is on the airborne ranger too
well, I guess the whole point is that if you have to deploy the airborne against your own countrymen you are in pretty deep shit-ola to begin with…
Actually, the US has quite a history of civil unrest. Not that it amounts to much but it is a very big country.We never have civil unrest during the winter months — too damn cold.It has almost become a tradition to riot during the Republican convention every 4 years. It never happens during the Democratic conventions because the Republicans can’t get off work.Do you know why they use Airborne troops to quell riots? Cause paratroopers are trained and used to fighting surrounded. The leg infantry would panic. LOLStill, we have been changing governments for a long, long, long time without a single shot being fired and not a tank in sight. Pretty impressive track record for a bunch of revolutionaries, eh?I doubt we have much to worry about in this mess.
OK, JLM, you managed to put a smile on my face, too, with this upbeat comment.Now, on a more important subject: is that Kevin Durant kid something, huh? I don’t follow college hoops, but for a couple of years now he’s been my favourite pro. Partly because we share the same initials, and partly because he played in Seattle, where I used to live, but mostly because he is freakish good. When everything is said and done he will be the best thing to come out of UT, ever.Cheers!
KD was so good in college — nat’l POY as a freshman. He had it all and could take over a game at any time. Can you imagine if he had stayed for 2-3-4 years? Poor Coach Barnes.They said he was too delicate to be a good pro — huh? He gets 25-40 every night. I guess you don’t have to be too rugged to light them up from 35′.He seemed to be just the nicest and best well adjusted young man when he was in Austin. He is supposedly finishing up his degree during the off season — in finance! Go figure.I wish he were playing in Boston, San Antonio or LA just for the exposure.Best thing to ever come out of UT? Really? Hmmm, Farrah Fawcett went to UT! If you are too young to remember her, I will give you a hint — she invented nipples! LOL
The best thing to come out of UT is Union Square Ventures.Back in 2003 we were trying to raise 100mm with a focus on ’emerging lighweight web services’. Web was a four letter world and lighweight meant we were lightweightsNobody was buying the pitch even though I’d been in the VC biz for 17 yrs and Brad has over 10 yrs under his beltWe had the returns and over 100 deals between the two of us but nobody caredBut UT’s endowment mgmt company listened thoughtfully, liked us, and stepped up for 25mmThe rest is history. I love UT and always will
Did this come out of UTIMCO? Have you been following the UTIICO bonus controversy?I don’t know where they were headquartered in 2003 but they used to be in the Colorado Building. I renovated the Colorado Building and the one across the street the 15-story Norwood Tower. I restored the Sampson Building at the corner of 7th and Congress. I built One American Center the 32-story building at 6th and Congress and renovated the Littlefield Building on the opposite corner (my favorite restaurant in downtown Louie’s 106). Ahh, those were the days. Though I am out of the business now, I still get a thrill when I drive by and remember those days.Maybe UTIMCO is in the Frost Bank Tower at 4th and Congress?When I first got into the real estate biz in Texas, I worked for the guy who founded Evergreen Capital which ultimately became Austin Ventures. The best “deal guy” I have ever met then or since. I actually think he invented cable TV. This guy could go into a convent and come out w/ a pocketful of panties. I took the postgrad course in deal making from him and it was the best education I ever received. He was and is truly remarkable.Austin Ventures used to be located in the Norwood Tower. I knew all of those guys when they were investing in programmable thermostats. I guess Joe Aragona was the national VC industry group President a couple of years ago.We used to all play basketball at lunch time at the Metropolitan Club in One American Center. The real estate guys beat the VCs for the club championship.Now I understand why you love Austin. Makes sense.When I renovated the Littlefield Building and put Louie’s 106 in on the ground floor, I “suggested” to them that they have paper table cloths rather than linen at lunch time. Why? So, the big time VCs and real estate deal mavens could map out deals on the table top as they ate. It worked like a charm and I still have some of them in a file. Hell, you probably did that yourself.This explains why I found your website and why I enjoy it so much. Kismet!
no way! thats a great story fred.
I’ve got a lot of stories. I should blog them more
Yup, UTIMCOI have not been following the bonus controversyBut I can tell you that they are very smart and decent people over there
that’s a great story, Fred. I lived in Houston for eight years; not many people on the costs know it, but the Houston-Dallas-Austin triangle is quite sophisticated technologically. Some great medtech/biotech companies have come out of H-town and Austin is an IT/semi hub…
i have to say, that had me ROFLMAO. i have read freidmans books and have enjoyed them. But this analysis shed a whole new light.i mean this is brutal stuff”2. I wish I had the balls to first spend six long years madly cheering on an Iraq war that not only reintroduced Sharia law to the streets of Baghdad, but radicalized the entire Islamic world against American influence—and then write a book blaming the spread of fundamentalist Islam on the ignorant consumers of the middle American heartland, who bought too many Hummers and spent too much time shopping for iPods in my wife’s giganto-malls.3. To review quickly, the “Long Bomb” Iraq war plan Friedman supported as a means of transforming the Middle East blew up in his and everyone else’s face; the “Electronic Herd” of highly volatile international capital markets he once touted as an economic cure-all not only didn’t pan out, but led the world into a terrifying chasm of seemingly irreversible economic catastrophe; his beloved “Golden Straitjacket” of American-style global development (forced on the world by the “hidden fist” of American military power) turned out to be the vehicle for the very energy/ecological crisis Friedman himself warns about in his new book; and, most humorously, the “Flat World” consumer economics Friedman marveled at so voluminously turned out to be grounded in such total unreality that even his wife’s once-mighty shopping mall empire, General Growth Properties, has lost 99 percent of its value in this year alone.So, yes, Friedman is suddenly an environmentalist of sorts. “
While I may be missing something in translation, I think Fred may be missing the forest for the trees a little here. Anyone who has an understanding of the venture capital business knows that there is already too much money in the venture capital asset class chasing too few exits…but I do not think that is what Friedman meant.I think Friedman is advocating putting capital in the hands of entrepreneurs (not necessarily VCs) instead of putting it in the hands of GM, where we all know it will be lost. As Jon Callaghan astutely noted, the seed stage market is extremely quiet right now and has a dearth of appropriately capitalized institutional investors playing it in that space even in better times.If the government pumped $1B into the hands of entrepreneurs it would in no way increase the number of exits, but it would create work and increase the pace of the creative destruction so desperately needed in media, clean-tech and the auto industry. The only losers in that equation are the insolvent companies being propped up and VCs who might even face increased competition for good deals. While your view of the VC business working pretty well comes from your perspective at usv (which has a fantastic model), plenty of venture firms are in need of a fundamental makeover.As for a government sponsored Venture fund, I know quite a bit about that topic from having spent many years at In-Q-Tel. Without getting into too many specifics, I know that it CAN work. In fact, even with its issues it delivered far more value than most government programs at a fraction of the cost.
It would be interesting to hear how In-Q-Tel workedIt is a great example of a govt venture program that did work well
The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the “innovation sector”. That money will go to bad investors and weak entrepreneurs and management teams for the most part. It’s a problem of adverse selection.Wow Fred, a really great articulation of the pitfalls of stimulus handouts. Friedman’s heart is in the right place as you note but like most he seems to think VCs have been raking in fistfuls of money and only need more capital to rake in more.
Incentives pull in talent, hence the smartest students in America funneling to the finance capitals of our country to hit it big the last 20 years instead of government and energy.We need smart young people with guts to solve government and energy problems with new technologies like smart grids and social media.As a younger entrepreneur, getting VC money is a daunting mountain to even begin a climb.If there were more money in the system, and it was attainable for a <25 entrepreneur, you’d see more of us trying to pioneer new industries and reinvigorate old ones with new technologies. More of us would be creating new economic systems instead of being plugged into old ones at entry level positions.More access to capital for younger entrepreneurs is something that needs to happen. If incentives are easier to attain, we’ll see more and more young, fresh talent in entrepreneurship. More business systems will be built, which creates new jobs to manage.We just need more entrepreneurs and the current model doesn’t fund enough companies IMHO.
True, but programs like ycombinator and techstars are very focused on the young entrepreneur
We need more of those Fred. Or models like Rob Monster’s here in Seattle. Young entrepreneurs need more access to capital to build real companies, not just cool web apps w/o revenue models. We have the time, the guts, and technological know-how. Getting the business part right takes some time but it’s generally a pretty linear process so a saavy young entrepreneur can build a a real business around new or existing technologies with 18-24 months of run rate.More companies need to get funded, driven by younger entrepreneurs, and coached by their investors/advisors.
Chris, ahhh, to be 25 again. If you can’t get the money, you’re not an entrepreneur. Entrepreneurs are the guys who actually get the money to fund their ideas. The others are called “innocent bystanders”.Raising money is probably the critical skill for an entrepreneur.I’ll tell you the secret — get a tin cup, a pair of really good knee pads, rub diesel on your nose every night to toughen the skin and perfect your 30-second elevator pitch and then go get them. Pitch your deal 4 times a day every day and keep a log of every reason why someone tells you no. It will come in handy to perfect and refine your pitch. When you make your first $1MM, look back at your notes and have a good laugh. Don’t become discouraged. Nobody cares anyway.Keep doing it until one person on the whole planet tells you “yes” and then you will be an entrepreneur.Good luck. I am not mocking you.I have raised over $1B in my life and I have never become comfortable begging for money. But I have become much, much, much better at it — hell I’ve become a master of the black art truth be known — but I have never really liked it. I still recoil at the prospect of being a beggar. I truly hate it.Welcome to the real world and truly, good luck. I was just kidding about the diesel on the nose but it can’t hurt! LOL
JeffI gotta meet you. You’re killing me with these comments. You live in texas, right?
Austin, TX — Hook ’em, Horns! The only place in TX I would ever really want to live.I get to NYC fairly often. I love NY. I’ll call you next trip but it is not likely until the spring (up there).I am not allowed to leave TX until after the NCAA tourney — doctor’s orders. Well, Dr J that is.My wife just bought an apartment in NYC. I keep telling her there’s a recession going on and she just keeps telling me this is her personal stimulus plan. She made a very, very good deal. She claims it will not be ready until July.
This is great. You’ve got a place in NYC and my favorite place to visit isAustinI sense a f2f meetup happening shortlyMaybe we can go bass fishing with Ben Kweller in Austin
The musician?
Yup. He’s in nyc this week and we’ll see him. He moved from nyc to austin last year. He’s the bestIf you like country/folk/rock check out his new record called changing horses
I’ve raised over $1M so far hustling to all corners of the country. Getting my ass knocked down so many times in the process! I kinda like it though, puts hair on the chest :)In general, barriers to funding–both perceived and actual–should be lowered for the younger generation of entrepreneurs.
Congratulations on your success though I am a bit concerned that female entrepreneurs may not be as high on the ancillary benefits as you. Hair on the chest bit, ya know? Bit sexist?Big secret: it’s easier to raise $10MM than it is $1MM.There is more money loose in the world looking for a home (short term funding interruptus excepted) than ever before, the channels of distribution are more efficient, the communication mechanism is more open and the return expectations are more rational. The methodology of “pitching” is better known and more disciplined. There are more folks rooting for you to win.Hell, they even invented an entire company dedicated to bringing beggars (that would be guys like us who want money) and funding sources together on every street corner in America — STARBUCKS!I am willing to bet that more deals are getting done at Starbucks than ever got done on the fairways, greens and tee boxes of the old boy network. Even at $4 for a freakin’ latte, it’s cheaper plus no sunburn.It seems like the big barriers to funding are really inexperience (which is simply a latent birth defect which almost always disappears with the passage of time) and balls (technical finance term).Get in the game and start kissing frogs. Kiss frogs until your lips are chapped. Then use chapstick. Repeat. Reapply.The methodology to raise money today is the best it has ever been. I bet half of the damn Internet is dedicated to making marriages between money and users of money. If those liars, cheater, stealers at Stanford Capital can fleece folks for $8B, think what a nice kid from Stanford University can do!If you’re a young entrepreneur, go get an old guy with gray hair to partner up w/ you to provide “gravitas”. Pretend you know what that means. LOLBTW, the old guys don’t get much in the way of ownership, they just like being back in the game.
JLM, this is true. Sales is key. However, business acumen is better. Show revenue and a profit on a shoe-string budget and the knee pads can go to the VC guys. Especially in this market. Being a hustler and practicing your elevator pitch four times a day is time you could be learning php and jquery so you can pay your developers less and do the de-bugging yourself or…..use those sales skills and elevator pitches on your customers.Chris, get customers and revenue, and ask all of your uncles and everyone you’ve ever known for $5-10k , show $100k of revenue and something that can scale, and all of a sudden guys like Fred will be practicing their elevator pitch on you.
You are absolutely and totally right. Nothing sells like results. Even better is the 9th deal you’ve worked on when everybody made it to the pay window on the first 8!You are 100% right if not more!
So trueI am working on mine right now in anticipation!
Hey Fred,Great thread going here.As I said on my blog about Friedman’s proposal, while I largely agree with Fred that the top VC firms do not need and probably would not take government money, I bet more second and third tier firms in need of capital, or young promising firms without a track record, would consider taking on the government as an LP–especially if it came with no strings attached.We’re not that far away from this right now. Many venture-backed startups have already said they would take and apply for various bailout funds. Wireless provider Clearwire is an obvious beneficiary of the $7 billion in broadband grants, and many clean tech startups are going to tap into the tens of billions in bailout funds dedicated to smart grid and renewable energy.Even if the plan doesn’t fly, I applaud Friedman for making a creative proposal and focusing the discussion on the need for supporting the new, rather than bailing out the dinosaurs.Here’s a link to the rest of my post, “Start-ups and VCs to the Rescue”:http://tinyurl.com/cb4a3kWhat do you think Fred? Maybe we should take survey of VC firms via your site or TheFunded?
I don’t think vcs read thefundedI don’t
Oh, they do! Trust me!
Fred is right, we dont need mrore VC money, but….Why not just let investors in early start ups convert losses directly into tax credits?This has always stumped me. Let even the smallest investors into start ups, let them count some decent percentage of losses directly off their tax bill, and define “start-ups” very strictly – including a demand that breaking-even happen soon. You are no longer a start up (for tax credit purposes) if you don’t break even in 12 or 18 months, etc.I’m not sure that an over-abundance of early money for small crazy ideas is ever a bad thing…. see Y-C etc, but the idea makes even more sense for inventors, older guys, the smarter guys who cant live in dorms. The immediate need for revenue generation, means that many smallish services will be created survive (folks wont be able to do too many things at once), and that will drive openness and inter-operability.This would let the VC continue to think big, and support the ones that need more time, but would create a hyper-entrepreneurial playground underneath them – exactly what this country needs.
Consumption has declined so rapidly that all businesses — start-up, established, big and small — find themselves with cost structures and supply chains that have been designed for levels of consumption that we valid 6 to 9 months ago. The job elimination we’re currently experiencing is a by-product of trying to size expenses to current consumption. It’s a logical and necessary activity. More capital will help spur some job growth, faster deployment of capital will spur other job growth: tax credits that reflect the decline in consumption and stimulate companies to maintain employment levels without compromising near-term earnings are very effective tools. Tax relief across the board, accompanied by a decline in government spending (Ha!), would be a significant stimulus.
Good idea. The government is never going to let tax policy favor a single group — hence the public beheading of the hedge fund managers who got a piece of the equity (formerly taxable as a capital gain if the appropriate holding period was respected).Why did this happen? Because the dumb asses couldn’t resist comparing Florida estates and yachts as well as having their Nantucket homes in interior design publications.That’s what really impacts tax policy — envy. The top 1%, the richest, etc? No, the guys who could not keep their wealth a secret and had to trumpet it loud and far. Oh, yeah, the dumb as a rock trophy wives and their freakin’ birthday parties. Sheesh!Remember the VCs get to deduct their losses completely, so you are just talking about what happens to their winnings.This is exactly why capital gains tax rates should be dropped to 0%. It is a tax mechanism with which the electorate is familiar and it does not overtly favor a single class of investor.Most important reason — there are damn few real capital gains out there just now, right? The impact on the Treasury would be negligible.Agitate for this to become a reality because you know it will work. You are right!
In Austin too. We oughta meet and shoot the shit.
I’ll buy you a Green Mesquite BBQ but only if you are a good shot. 512-656-1383 (9:00 – 5:00 PM)
I am all for zero cap gains tax rate but I don’t think carry on OPM’s money (my greatest source of income/wealth btw) is cap gainsYou gotta be risking your own money to get cap gain treatment
Agree w/ you completely on an intellectual level as it relates to OPM and “carry” v actual investment but the argument and underlying logic comes unraveled a bit when you consider that you are actually putting in or investing “expertise” (the service partner tax concept) and that the actual ownership vehicle is, in fact, common or preferred stock.Expertise has been acquired at some considerable cost — education, experience, luck, brain cells. It is not free. It is real IP. And the investment of expertise has an opportunity cost associated with it.My BS meter trends just a bit toward capital gains treatment also because the risk of a complete loss is present which is not typically a feature of ordinary income. Ordinary income is taxed at a higher rate because, in part, the check clears. Capital gains treatment is appropriate, in part, because there is a risk of total failure, there is no assurance of making anything.The receipt of the stock (“carry”) can be construed as a taxable event albeit at no real value if there is a preference in front of you and the stock is deemed worthless when initially received by virtue of the preference. This taxable event can be further compartmentalized by an 83b election thereby clearly converting the character of your holding from ordinary income to capital gain. Still worthless nevertheless.It’s kind of difficult to discriminate between the taxation of appreciation on equity when everybody has the same piece of paper particularly in the face of an 83b election. And when someone has held the stock for a protracted period of time.This comment has absolutely nothing to do w/ management fees which clearly should be ordinary income.Believe me I am not getting ready to hold a benefit for VCs and hedge fund managers — my original comment is that they drew too much attention to themselves.
Spoken like a VC. Or spoken like someone who doesn’t want salary restrictions, transparency, accountability, or any of the fun stuff the rest of society must face.
I’m fine with all of that. Some of it is coming to VC anyway. The new regulations imposed on hedge funds will also apply to VC funds. You’ll know who our investors are and what our returns are. You already so since some of our LPs are required by foia to disclose that info
Fred, what about actually letting regular investors (not just accredited) carry losses as tax credits, before VC even get into the picture. I’m suggesting that thousands of small “start-ups” be incentivized to launch and race towards break even, and the failures get written off the investors’ tax obligations… and then the VC take over… they look at the companies that need more time, and/or want to grow bigger.There are plenty of friends and family SMB plays that would see the light of day, and if say 60% of a failed investment was money friends and families would have paid in taxes, we see a massive new wave of entrepreneurism take root.
I’m with you. Sounds like a great idea to me.
There is an interesting controversy as to public endowments transparently revealing their investments in VC firms and thereby revealing the nature of the VC’s actual investments and performance.The VCs initially were reluctant to accept funds from public endownments which would otherswise reveal what the VCs thought of as confidential and proprietary information.I can see both sides of the argument. What do you think?
We have language in our docs that protects our portfolio companies from FOIArequestsWe are fine with our performance being “outed”As it should beWe need more transparency in this worldBut our companies don’t need their details being outed just yet
JLM – Primack covered that some time back if i understand your comment – i think OHIO went through the ringer.
This isn’t a political comment on its own (consider it an observation of Fred’s various political musings).Fred will often make comments that make me believe that he thinks that tax cutting at the upper income brackets is a stimulative act (angel investors in this case). However, Fred also was a big supporter of President Obama, who has made comments to the effect that the upper income earners can afford to pay more taxes.I’m not making any kind of judgmental assertion about either side, but I would be interested to read if Fred ever has time to put together a good post that details his thinking on the topic.
I’m sure I’ve tackled this in various posts, surely I did in my posts about why carry should not get cap gains treatmentI think income should be taxed progressively (top earners should pay higher rates)But I think cap gains (which you only get by taking risk with your after tax income) should not be taxed much, if at all
Right, so I guess it goes back to Buffet’s point that he is effectively taxed at a lower rate than many of his employees because his income is almost purely capital gains.Because most of the upper income earners get there through activities that are typically taxed at capital gains rates, advocating lowering of tax rates on that activity is akin to lowering taxes on the upper tax brackets. This makes sense, and I think you are drawing an intelligent distinction that is often ignored by those who are always for tax cuts no matter what the cut is.But it does beg the question, if zeroing out capital gains is stimulative, wouldn’t reducing income taxes for other upper income earners also be stimulative? Doctors will many times take the excess proceeds from their salaries and invest them in things that would generate capital gains. They get favorable treatment on the way out, but not on the way in.Obviously taken to its absurd level, this would mean that nobody would ever pay any taxes, which also wouldn’t work.
These are all good pointsIf it was really up to me, I wouldn’t tax income or cap gains, I’d tax spendingBut that is very regressive unless there is some way to only tax spending beyond the bare minimum needed to live
I swear it’s not my goal to keep commenting until I’m the last one.But I think you just solved the credit crisis.Tax spending, which will discourage consumption and encourage saving (if you want to kill something, tax it, if you want to encourage it, subsidize it). It will re-capitalize our financial institutions as they would be flush with fresh deposits. In the short term it would have an adverse impact on the economy, but long term would result in interest rates coming down (the banks can’t just take deposits forever without loaning money), as the banks would have to compete to loan money again.Let’s call this the cold turkey plan and expect that our nation would go through many of the same side effects coming off of being consumption based as a heroine addict would coming off of the smack.In the meantime, you would have a new economic/financial ecosystem spurred on by low income/capital gains taxes that would be creating jobs like crazy.Hell, it might be so good, it would overheat again in a few years and create a bunch of huge asset bubbles.If you ever want proof that this is a nation of extremes, remember that we invented the Atkins Diet.Good stuff Fred. I enjoy your blog a lot. Keep it up.
I am hoping we don’t get to the last commenter. If we do, then I’m done too.Intellectually the tax spending thing is hard to resist
Great post, bailing out VCs wouldn’t help out the economy.Submitted to Digg http://digg.com/business_fi…
The problem with doing tax credits is that most angel investors have a vehicle where they’re injecting pre-tax money anyway. I think the government should look at fund matching or direct tax benefits to the company being invested in.
I’m not sure how you use pre-tax money to do angel investing. Can you elaborate?
Agreed. The government shouldn’t pay the VCs to be VCs.However, perhaps the government should BECOME a VC. Really they already are but the program could be expanded.A creative expansion of the SBIR/STTR grant model (http://www.sbir.gov/about/i… . Right now ~$2B a year is available through SBIR/STTR. The money is distributed using a solicitation model where government agencies publish solicitations for proposal and small businesses submit plans as application for the grants. http://www.grants.gov/Now since “stimulus-class” “real money” these days starts at the $100B mark, why not figure out a way to make $100B available through SBIR/STTR using that model. With SBIR/STTR money is offered in phases based on results delivered.SBIR awards are divided into three phases: Phase I awards are funded up to six months and $100,000. Phase II awards are funded up to two years and $750,000. Phase III awardees do not receive SBIR funding. However, Federal agencies may award non-SBIR follow-on funding for products/processes developed in Phases I and II that prove to be commercially viable.If the Government decides not to continue funding at phase 3(Series B), for whatever reason, VC’s could choose to step in.RT
Nice point about SBIRs except for one very sad fact: The SBIR program is essentially being allowed to die right now. By Congress. They are refusing to renew the program.How’s that for fostering innovation…NOT!
Typical of Friedman, actually. Comes up with half good ideas and never fully bakes them, a la The Earth is Flat.
I think there are several SV companies, Nanosolar, Sunpower, Better Place leap to mind, that could use very large investments to get to the next level in a much shorter time frame. SV VC’s could help determine which mix of these companies should be funded. Let them manage the financing of these companies with stimulus money instead of giving it to GM to prolong bankruptcy.
Excellent points, Fred … I agree with your response to Friedman’s piece on bailing out VC, but I also took a different spin on what could happen if private equity saw some bailout money: http://reiboldt.com/?p=673
One of the threads through this conversation is a (reasonably broad) consensus that some sort of tax incentive for investors in early stage enterprises would be helpful, I may have missed it but I was surprised not to see any mention made of the UK’s Enterprise Investment Scheme, which offers individual investors upfront tax credits (capped per year) and tax free capital gains after a minimum holding period. Further, the rules are quite explicit about how and when the funds invested must be used – essentially a framework to ensure funds are going into a real enterprise and not just a tax structure.I’m not a expert and so my observations are anecdotal rather than empirical (and as such subject to potentially vast error) but I believe this has been one of the few examples of government ‘economic engineering’ in the UK that has at least mostly helped without onerous unintended consequences. It’s certainly not perfect and since it was introduced it has been slowly but surely watered down.One of the issues it doesn’t solve however is the time and energy – total cost of ownership – it takes to be an angel. In my many years in the City, I knew hundreds of people who had the financial capacity to make early stage private investments and most of these who also thought it would be a good thing to add to their overall portfolio (alpha enhancing in the jargon) but exceedingly few who had the time to actually consider deals / get in the deal flow and even fewer who would then have the time or patience to actually do a deal. Capital was not the gating factor (although it may be more of an issue now!)Even for ‘smart’ financially/legally literate professionals, there is a learning curve to climb when doing private corporate investments. And yet the alternative – outsourcing (to VCs or in the case of UK EIS investments a VCT) – is not quite the same thing (in terms of risks, rewards, etc.) I think there is room for more seedcamp, y combinator type entities that could maybe help bridge this gap and perhaps there are ways in which governments could help prime this particular pump without getting into the business of picking winners itself.
Great pointsBeing an angel is at some level a labor of love
Well, I agree and disagree with you. I think for the VC environment of yore where a reasonable company could get funding and then IPO and deliver value to their investors and then could go on with their business value and provide more and more value to the marketplace if they were successful, this is in fact correct. But my suspicion is that now, what makes a good VC firm and a ‘good’ entrepreneur is based on your relationship with Google, TW, Yahoo, and large acquirers. This in contrast to what entrepreneur should be looking for insofar as a VC’s ability to advise, finance, and groom a company into a long term integral value provider and profit maker for consumers and employees of that startup. Sitting front row watching how these large companies swallow up startups, and scrap them after a couple quarters, I have seen this done several times over in the past few years. So I’m not saying that we should be looking for a hand-out from the government, but I think the criteria for success for a lot of these companies is basically ROI on VC investment and the shorter the term of this return the better. No matter what the growth prospect of the startup is or the long term value they could provide consumers and employees if left stand alone, in this market I feel that VC’s are pressuring startups to turn and burn quicker than they should. And this is being rewarded, compounded, and recommended as the ‘new’ model. I’ve heard you talk about a private intermediary market for more risky investors to buy and sell shares of a startup and I think this could be the answer, though I’m not a finance guy so I don’t know the details of how this would work. As an insider I can’t get into the specifics of some examples of this but as an entrepreneur starting out who has ridden in the back seat in an acquired startup and then acquired several other startups pre-maturely, I think there has to be a better solution. I realize that the behavior of selling startups prematurely to large acquires that hack them for resources and most of the original talent flees to get value for the founders and VC’s is more a symptom than the problem itself. However, to be the ‘voice’ of the VC market, and also be one of those with the coveted relationships and inner-circle status to be able to sell to these larger companies and to recommend that we deny funding to those who are willing to stick their neck out to try to change things and do things right will only further fuel the cycle of violence.
We need a secondary market for private company sharesThat’s the only way we are going to eliminate the early exit that destroysvalue for everyone
I think Friedman and others exploring these kinds of ideas are on to something. I know that I would much rather see some of my tax dollars spent on the start ups ecosystem than on GM and Chrysler.That being said, that later part is what I think was missing out of Friedman’s column this weekend!Sending $20b to the top 20 VC firms is not the right approach for all the reasons you point out Fred, and others. Spending $20b on a plan that touches the various layers of the start ups ecosystem would be interesting to me: http://michelbastien.typepa….That would include things like tax credits for angels, tax breaks for hiring at start ups, some money to more than the top 20 firms, a simplification of the legal framework around starting businesses and patenting innovations and more…I sure would be excited if the administration brought together the brightest entrepreneur and VC minds for a conversation, to explore the viability of a plan with goals that are aligned, in spirit, with Friedman’s thesis, even if the details are quite different.Perhaps there is no hope that such a plan would emerge but I don’t think it has been properly explored and I’d hope it gets that chance!
Yup, we are in total agreement on thisSpend it on the raw material for VC, instead of VC proper
JLM: Young Austin entrepreneurs seeking grey haired old guy looking to get back in the game. Pitch: the car market is awful and backwards and we have an arb. Seeking 3MM but since 10MM is easier, why not? =)
I have all my hair and none of it is gray but I am always available. 512-656-1383
Are you interested in looking into the financial services sector? Since you don’t have any gray hair, we could use some help acquiring chapstick and knee pads. (Oh and $10mm)
Son! If you can’t figger out to get chapstick and knee pads you’ve got a lot of work to do. LOL
Fred,I agree the traditional venture business is awash with money and doesn’t want or need more.One area I’d like to see more funding applied, with professional managers, is in “gap” funds, which take promising innovations from university and national labs and get them to a VC fundable state. Most VCs won’t touch that type of raw technology, but grants are not available and the inventors are not equipped to be start-up managers. Gap funds are perfect for this, but need to be small to make small bets. Small funds have small management fees, so this is an area that gets underfunded.
This idea has been going around for a while and I believe its time has come. We need “micro-angel” or “micro-VC” funds just like we have micro-lending. Bottom up.
Amen brother!Chris McCoy, CEOYourSports Networkwww.yoursports.com
Yes, but in addition to money, these “gap” deals need entrepreneurialmanagement talent and that’s harder to come up with than money sometimes
Solid dissection of a complicated issue…
Great post, Fred.Of course all the reasons why it’s bad to pour dumb money into VCdom also apply to banking and manufacturing. The bailouts go to the losers AND make it much more difficult for the should-be winners to raise private money and to succeed. It’s a corollary of Gresham’s law that dumb money drives out smart.One quibble though: from an entrepreneur’s POV, it’s good for VCs to be what they consider over-funded – but not with government money.more riff on this at http://blog.tomevslin.com/2…
I suspect Jeff is referring to the Texas Rangers….not the baseball team…..think cowboy hats and big guns…..there is a Texas saying that sums it up : “one riot; one Ranger”
For every nasty, complex, hard-to-solve problem, there is a simple, easy-to-understand, intuitive solution . . .that’s completely wrong. Friedman just stubled across one.
That’s a great lineI’m so stealing it from you at some point
I saw the crux of Friedman’s proposal as taxpayer access to a solvent engine of value in exchange for cash to dilute business cycle risk. He woefully misspoke in suggesting that VCs need the money, which over shadowed his main point that he trusted VCs more than anyone to know where to place the money. The subsidy is really for the entrepreneur (which may flow down to customers), and de facto *administered* by VCs. This would target investment to a class of otherwise attractive enabling technologies that suffer from adjacency to down-cycle markets (retail mortgage analysis/management software, for instance).
The shame of an argument like Friedman’s is that it distracts from the core issues negatively affecting innovation in America. The last thing our industry needs is another $20 billion to invest. But we do need real changes in important areas, like investing in R&D, better science and math education, enlightened immigration policy, and more sensible regulations for newly-public growth companies. And, for clean tech companies, the best thing the Administration could do is to tax fossil fuels, providing consistent and strong market demand for alternatives. But our industry that has been awash in too much capital for a decade, and Tom Friedman is barking up the wrong tree when he calls for government-underwritten capital for the venture industry.
Ted – you are so right about all of this. Clear, succinct, and right on. Thanks for stopping by and sharing this.I’d be curious what you thought of the President’s speech last nightHere’s what I thoughthttp://www.avc.com/a_vc/200…
Brad Feld wrote that Fred’s post was great but that the many comments were still better: He has a point; this is an exceptionally well informed and articulate list of commenters.For ‘stimulus’ there is potentially a big problem: The US and/or much of the rest of the world might go into a second Great Depression with another rise of some aggressive, authoritarian, militarism like Fascism, maybe in Eastern Europe, start WWIII, lead to total nuclear war, and kill a few billion people, or maybe everyone. That would be some SERIOUS ‘global warming’. The situation is DANGEROUS. This time until we actually get at least the US economy solidly on the way back up, we are at a significant risk of losing it, ALL of it.From 1929 until people started serious shooting in 1939, for the whole 10 years, the US and the rest of the industrialized world kept making silly, optimistic statements about “just around the corner” when even Betty Boop cartoons explained the answer: Spend MONEY, LOTS of money, NOW. Or, for a second grade answer, a lot of money was destroyed and needed to be replaced. Or, for a third grade answer, in a credit economy, deflation is a disaster. So, once the shooting started, we did spend money and got the US economy going again in, supposedly, just a few months.If we had done something similar in 1929, then we could have saved the pains of the Great Depression and some of the horrendous problems we are STILL suffering with: The 1930’s caused some nearly humanly intolerable stresses in the US ‘social capital’. E.g., my mother was just terrified about money every moment of her life. My wife’s mother was even more stressed out, passed the stress down to her three daughters whose lives were SERIOUSLY affected. The fears ended up fatal for my wife. Depression, economic and clinical, is SERIOUS stuff.Many people are being seriously hurt NOW. Just from the example of what happened in Michigan in the early 1980’s, we can be sure that the current stresses will result in much higher rates of infant mortality, abortion, domestic violence, divorce, alcoholism, clinical depression, crime, and suicide. Yes, our failures are killing babies and wrecking families.We got out of the last depression by suddenly spending money for military equipment that was nearly all worthless in just five years. Lesson: It’s possible to get out of a depression by spending money on projects with no lasting value at all.So, the money doesn’t have to go for really good purposes. It’s sufficient just to SPEND it. Or, “Depression is the easiest problem in the world to solve: Just spend money.”.Besides, even if the first place a dollar gets spent is nonsense like a $1 M office MAKEover, the carpenter, truck driver, electrician, etc. that get the money spend it in their usual places, about as efficiently as we can expect.”But, but, but, if we just spend money, then that will be inflationary?” Not NOW. The idea is to stop DEFLATION, which is DANGEROUS.I’m all for finding good uses for the money, but so far likely so much time has already gone by, say, since the bankruptcy of Lehman on September 15, 2008, as we argue about just how much for just what, that we have taken longer to do the turnaround than we did motivated by the shooting in 1939. We can, we SHOULD, get the turnaround FASTER. Or, should we prefer some more shooting?One recipe is for Bernanke just to print up $1 T or so, load it onto Air Force One, fly across the country, and SCATTER it. My recipe is to scatter, say, $400 B a month each month until the new unemployment claims fall back to where they were, say, two years ago. Better uses? Okay, but we have to get it DONE, real soon, now, y’hear?Yes, education and research are valuable, perhaps in the long term among the most valuable. Yet, these two connect from poorly down to not at all with information technology venture capital! I.e., do some good original research in, say, computer science that gets a powerful, valuable, new solution to an important problem in, say, larger server farms and networks, and the venture capital people will pass it off as a ‘science project’. Or, nearly no one in the venture community will fund or even consider research results, and research itself they won’t fund at all. It’s incongruous that the venture community will praise education and research but ignore or even laugh at the results.Sure, it’s possible eventually to see that research can be taken seriously in the biomedical part of venture capital but not the information technology part. Then can guess that the venture community understands Markov and that in information technology the research and the business success are conditionally independent given some running prototype software, some founders with good business experience, and some happy alpha level customers. So, let’s be more clear: What’s valuable is not education or research but prototype software, team experience, and alpha level customers, and that has some congruity.For Friedman, long ago I concluded that he just writes stuff but doesn’t support his points at all well, not even up to common high school term paper writing standards, and should be ignored. Maybe people who agree with him find him comforting.But giving money to entrepreneurs SHOULD be more productive than just scattering it out of an airplane.Another point: How can venture capital have enough money for the whole country when venture capital is highly concentrated in just Silicon Valley and Boston with honorable mention for Seattle, Los Angeles, Boulder, Chicago, New York City, DC, and Austin and where mostly venture partners want to be within a 1 hour drive from their entrepreneurs? There are graduate schools, software experts, and Internet access close to nearly every town of the country.
Below are some of the reasons for pushback to Friedman’s post, along with my humble two cents countering each:1) The venture capital industry does not need a bailout, especially the top 20 firms. * True. But Friedman’s post is not about bailing out VCs. It’s about the wisest allocation of $20 billion. The only statement he makes that could potentially be misinterpreted as a suggestion the VC industry needs a bailout is regarding LPs having trouble keeping their funding commitments. This is a well-known fact and does not suggest the VC industry is in dire need of a bailout.2) The top 20 firms don’t need help raising money. * Usually true. But that doesn’t matter. I don’t need help opening a door but I do appreciate when someone holds a door open for me.3) There is already a glut of capital in the VC system. * Perhaps true over the entire industry, but not necessarily at the top. Several prominent firms are raising annex funds or are concerned about their levels of dry powder. Kleiner, Bain Capital, Onset and Battery are just a few of the firms that fit this description (though it is a seed fund, First Round is also raising an annex fund). Admittedly, the $20 billion Friedman writes about is a large amount for the VC world, given the average amount raised annually by the industry over the past four years is $30 billion. However, Friedman used this number because that is the latest amount under consideration for GM and Chrysler.4) Government money would lead to reckless investing. * No way. The best VC firms enjoy that reputation because they invest judiciously in companies that exhibit strong upside potential. These VC firms then nurture these companies with industry connections and a Board presence. I cannot imagine Sequoia making imprudent investments just because it received a large injection of investable capital. These firms aren’t the nouveau riche types. They’re not like hip-hop stars who blow all their money on cars and yachts the first chance they get.5) Government money would have lots of strings attached. * Possibly. Given the restrictions placed on banks receiving TARP money, this is a safe assumption. Yet it is not certain. Besides, LPs invest in a VC fund under the premise that the partners will invest that money within parameters defined in the fund’s charter. These parameters can be broad or specific, and there are always exceptions, but general partners are accustomed to considering the charter before making an investment. Furthermore, from an administrative perspective, it is much easier to have a small number of LPs in a fund. Having the government as a fund’s sole LP would be far easier to manage than a roster of hundreds of LPs ranging from institutions to wealthy individuals.In conclusion, Tom Friedman made a statement that speaks highly of the venture capital model and the role venture capitalists play in driving the country forward. As a taxpayer I would be delighted to be an LP in the country’s best venture capital funds, including USV. 😉
Fred, keep in mind that this was a political speech designed to boost the confidence of the American people (and markets).As an aside, I was at the gym during the speech (Crunch in NYC near Union Square) and almost everyone on a cardio device – regardless of age – was watching. People are scared.Keep the great blogging up. I never fail to learn something.
Me either
Give that money to the SBA. They have rigorous programs in place that have plenty of transparency and accountability built-in. The money would flow quickly from the SBA to banks and then to small businesses who can deploy capital fast- the very definition of shovel ready. Any bank that doesn’t lend their quota would be suspended from the SBA program, but most would jump at the chance to add government-backed loans to their balance sheet. With $100k SBA loan my small company would hire a out-of-work developer and an interactive marketing agency. That’s at least one person- probably more- paying taxes instead of receiving unemployment.
agreed
Guest post: Medical device entrepreneur argues for feds to play venture capitalistFebruary 25th, 2009 by David E. Williams of the Health business blogRick Lifsitz is a serial entrepreneur. Over the past 15 years he’s helped build three companies from the ground up. He’s directly responsible for the creation of hundreds of jobs and many millions of dollars in shareholder value. His latest venture, HyperMed, provides imaging technology that addresses vascular medicine’s most vexing problems. The technology reduces costs and improves patients’ quality of life. Yet the squeeze on venture funding is forcing HyperMed to put on the brakes right at the time that it should be ramping up spending and employment.Rick echoes Thomas Friedman’s argument that the federal government should consider providing venture funding to companies like his. I’ve posted his thoughts below. In a New York Times Op-Ed (Start Up the Risk-Takers), Thomas Friedman calls for investing stimulus money in fast-growing startup companies with bright futures rather than funneling ever increasing sums to preserve old-line industries. He highlights an issue that I believe has gone unaddressed by the Obama Administration and could have long-term negative repercussions on the growth of medical device startup companies such as my company, HyperMed. The stimulus bill creates positive incentives for small businesses, but medical device and other capital-intensive startup companies won’t benefit. Most startups that are developing revolutionary technology are cash intensive in the first three to four years. Tax incentives mean nothing as these companies make no profits during the development phase. Yet, it is precisely during this time that startup companies are hiring extensively, innovating, investing in capital and developing their patent portfolios to build long-term advantage. Regrettably, the traditional mechanism to fuel this growth – the venture capital industry – is “broken” due to a lack of investment from its largest patrons – pension funds and university endowments. As a serial entrepreneur on his fourth startup business, the current economic climate is unlike any I’ve experienced. Rather than investing in new companies that could stimulate job growth and revolutionize the country’s position in health care, current venture capitalists are battening down the hatches, pushing companies to reduce headcount and spending and shutting down companies that will require significant investment to become cash flow positive. Some of this activity is probably warranted but it is the death knell for innovative companies that will dramatically alter the landscape of many industries critical to the future competitiveness of the United States. If our government is serious about its intent to change the health care system, it needs to do more than just invest in electronic medical records. It needs to provide investment dollars to startup medical device companies that can help in disease prevention and ensure that existing, expensive treatments are cost effective. As Mr. Friedman points out, with the current venture capital markets in turmoil, the government needs to offer investment capital to startups. I disagree with Mr. Friedman that the distribution mechanism for this should be venture capital firms, but I do believe that a small group of successful entrepreneurs should be put in charge of reviewing plans and making direct investments in firms that will further the country’s strategic imperatives. Entrepreneurs have a far better sense of the critical success factors for startup companies and won’t be biased by the conventional wisdom/constraints of venture capitalists. (In fact, it is to the advantage of today’s venture capitalists to constrict the dollars flowing into venture capital in order to maximize their returns on existing investments). Whatever the distribution mechanism, however, time is of the essence. Many startup firms have already cut critical staff and many are running on fumes. The human capital will take years to reassemble for many of these companies, leading to delays in innovation. I know this from personal experience. In the last two weeks, our firm, HyperMed, Inc. has had to slow its growth strategy and cut critical programs. We’ve developed a non-invasive imaging technology to provide early diagnosis of limb-threatening diseases in diabetics and those with peripheral vascular disease before they result in amputation. Annual health care spending on patients with diabetes and peripheral vascular disease exceeds $120 billion in the United States. While we aren’t curing diabetes or peripheral vascular disease with our technology, we are enabling physicians to intervene earlier in the treatment of these patients, reducing the overall cost to the health care system and improving the quality of life for potentially hundreds of millions of patients afflicted by these diseases. In addition to the physical and emotional toll, one below the knee amputation costs over $40,000 to Medicare or the insurer and then adds another $300,000 in long-term care costs. While private investors make a good return by investing in our company, the Government (Medicare) gets an even higher return through cost avoidance. The technology has already shown promise in other important areas of medicine such as re-sectional breast cancer, shock, and diabetic foot ulcers and pressure ulcers. Just as the development of widely accepted cholesterol measurements enabled the growth of highly effective statin medications, our technology is already being used as a benchmark to judge the efficacy of new drug and device therapies to treat the root causes of these diseases. This could lead to an entirely new set of therapies that would dramatically reduce the cost of treating the large and growing population of diabetics and vascular disease patients. Our company is only one of thousands that can provide outstanding economic returns to the government and significant cost reductions in today’s health care spending. If properly funded, we will also double our employee base each year – providing well paying jobs with full health care benefits. The future of job growth and revolutionary technologies lies with startup companies. The sooner we can get back to focusing on the opportunity at hand and not fighting for a piece of the shrinking and elusive venture capital pie, the sooner America can begin to pull itself out of this recession. At HyperMed, we welcome a public-private partnership that properly allocates the true benefits of our technology. We are more than happy to provide the government with an equity stake in the company on the same terms as any other investor. Richard A. Lifsitz Chief Operating Officer HyperMed, Inc.
Tom Friedman’s thesis is correct. I disagree as to whom should get the money. I think it should go to the seed or early stage investors. The big VCs like to wait until the later or mezzanine stage which really doesn’t help the new technologies off the ground. There is sufficient empirical evidence to support this idea. Let’s put some heavies in Washington to put some weight behind this idea. There are so many great ideas out there now which can’t get funding to move forward. Even in alternative energy.