Thomas L. Friedman makes a strong argument for investing in the future not the past, in this Sunday's (February 23rd ) New York Times editorial "Start Up The Risk Takers". He argues that putting $20 billion to work in the areas of technology and innovation with entrepreneurs who can lead us to the future is better spent tax-payer money than $20 billion spent propping up business like the auto industry that have obsolete business models.
Let's set aside the auto industry rescue for a moment as it is not the only bailout in progress. It pales in comparison to the bank bailouts that have already been granted.
A Fund of VC Funds
Let's focus instead on Tom Friedman's notion of $20 billion set aside to invest in venture capital funds that in turn will invest in technology, alternative energy, biotech, nanotech and clean tech companies. The idea for a fund of VC funds is a promising one, but it is not focused enough to produce results, and here's my reason why. Investing a billion dollars in each of 20 venture capital firms will not necessarily produce the results we want because funds at this level are often late stage funds that need to put large amounts of capital to work. Some like Kleiner Perkins Caulfield & Byers, Sequoia Capital and Benchmark are Venture Capital funds that can do both - that is invest in early stage and have the economic power and resources to invest large sums in later stage, too. Yes, Tom Friedman is right when he says that much of the capital for these VC's came from pension funds, university endowments and the like. They are down on their portfolios too. Many are looking for sources of capital right now and not more investments. Frankly, lack of exit strategies for these investments creates a bigger downdraft now.
But let's level the playing field a bit here. Most of the innovations in these industries promoted by the Obama administration are started very small with limited capital and an abundance of entrepreneurial risk. Small VC funds scattered across the country are the investors in these early stage companies. A smaller, more prudent capital access program is required for these funds to continue to source and identify companies at the early stage.
Invest in Early Stage Companies
In a recent blog, Alan Patricof, a founder of Greycroft Partners and one of the nation's Dean's of early stage venture capital, makes an elegant argument for modest and prudent investment in early stage companies. Such investments he argues produce attractive and realistic returns for investors. Not all investments need to be IPO home-runs to be profitable. In fact, the vast majority of the successful venture backed companies sell to others in their industry. Thus, filling our national pipeline with innovation in industries from life sciences to technology, energy to media, IT and much more is fueled by this level of investment.
An organization I co-founded 10 years ago called Springboard Enterprises is a venture catalyst organization that sources, selects, trains and presents fundable high growth companies to venture capitalists. Since its inception in January 2000, Springboard has screened nearly 5,000 companies and selected 380 to present to the VC community. These companies have raised over $4.3 billion in growth capital. Over a third have had positive liquidity events for investors, including IPO's. Nearly 80% of these companies are still in business, providing jobs to people who are productive for society and pay taxes and are on a path to considerable growth.
Catalysts for Investing in Innovation
In a meeting on December 19th 2008, with the Obama transition team, Springboard Enterprises, backed by entrepreneurs and investors in our national network, put forth some recommendations. Key among them are the following:
Endorse increasing federal support for research, technology and innovation for companies and universities.
Endorse creating a national network of public/private business incubators to facilitate the critical work of entrepreneurs in creating start up companies. This should be structured to provide incentives to communities and private corporations and foundations to invest without inhibiting commercialization opportunities.
To this, I would add my modification of Tom Friedman's concept for a fund of VC funds.
Take the $20 Billion and set it aside for VC firms investing in areas the Obama administration has identified for growth initiatives - biotech, nanotech, energy, healthcare, IT and the like.
Make it available to VC firms of all sizes with proven track records (no first time funds here) available to apply for investments innovating in these critical areas. This would be putting the tax-payers money at risk with people who know how to make risk investments and help create productive companies.
This type of investment is not the government's expertise, but with government incentives, this is a future we can believe in.
Trygve Myhren
Myhren Media, Inc.
Denver, CO
The Venture Risk Investing industry is divided into 3 distinct groups: (1) Seed/Startup; (2) Traditional VC and (3) Exit
They are systemically, operationally and attitudinally different. They have different metrics for acceptance and success; funding, oversight, sourcing, profitability and, most importantly, infrastructure.
What is needed is a Public-Private For Profit dedicated effort to work with, support and compensate the Seed Infrastructure (Incubators, Economic Development Agencies, Tech Transfers). The Public component already exists and provides the efficient sourcing, screening and post-investment oversight needed to develop Series A worthy companies. What is needed is a dedicated effort that is not geographically constrained. What is needed is a thorough Virtual Incubation system that brings both Community and Collaboration to all elements of the total Investing community.
The Venture Capital stage of the Venture Risk Investing industry has a valuable place – to expand Seed/Startup companies with money, targeted managerial talent and partnership assistance. But, the Venture Capital stage of the Risk investing industry does not innovate or create the basis for job growth.
By dedicating a private/public collaboration to increasing the value and viability of early stage companies you are also increasing their valuation for their Series A round; thereby leveling the playing field with what will be a smaller group of Traditional VC funds.
Please review the powerpoint – The START Fund -
http://www.slideshare.net/ElliottDahan/start-fund-feb2009
I look forward to all comments.
Thank you,
Elliott Dahan
Elliott(a)thegrowthgroup.com
Angel investors are the real risk takers in our economy and they support a huge number of ventures compared the the VCs. Lately, they have been moving toward a VC model and cooperating with the VCs which I believe they will discover is not a wise or profitable move. Tax benefits for them are a great idea.
We need new, nontraditional ways to fund enterprise. Small business is the key to jobs and growth.
Up to 6 million jobs and 4 million small businesses can be created by A Human Investment Tax Credit Program. This was missing from the stimulus package. One component, a jobs tax credit, became law for one year and generated more jobs in less time than any legislation in our history.
Two versions of the 2009 Report can be downloaded free at: aesopinstitute.org The full Report contains a post Keynesian economic analysis. The short version includes only what can be done and how Congress can do it. The site also contains The Brooklyn Project.
Aesop Institute intends to help launch a new institution to capitalize small business. The financial invention involved has never been tried. If it works, it can help all small firms and not only ventures.
Another someone who has a big "idea" on how to spend the American peoples money.
An even more immediate impact would be the creation of matching Federal Investment Tax credits for state investment tax credits for early stage venture funds and individual angel investors. The state of Wisconsin has implemented 25% investment tax credits for Qualified New Business Ventures, Qualifed Venture Funds and Certified Angel investors. These credits in turn have spurred the creation of a significant number of new ventures, attracted early stage investors, created new jobs, and improved the economy in WI. The state of Ohio has implemented similar programs. If these state tax incentives were matched by Federal tax credits, with the certification and management left to the states, a significant increase in early stage capital would ensue.
Imagine, you are about to invest $100K in a Qualified New Business Venture and you get $25K in tax credits from your state and $25K in tax credits from the Federal gov't. That means only $50K is truly at risk. If capital gains taxes are kept flat or reduced for early stage companies in needed areas of innovation such as alternative energy, health care and advanced manufacturing, the IRR for successful exits would be so compelling, a significant portion of money sitting on the sidelines looking for places to invest, would turn to early stage investing. This is game changing. There are proven models in states like Wisconsin. The Federal gov't and other states need to borrow a page from Wisconsin.
A few comments: The VC industry has been investing way over historical levels - $20 to $25 billion per year - for the last 8 years or so. And how much of that has been returned to investors - virtually nothing. This is an industry that needs dramatically less capital, not more. In fact it is not really an industry, but a craft. And we have way to many unskilled artisans practicing it.
With regards to stage of investing - do we really want the government telling capitalists where the best investment opportunities are? Venture capital is about as pure a form of capitalism there is - and if money isn't going to the early stages it's because there is no way to make money there - no opportunity to build successful companies...
I have a radical idea. Instead of just giving more and more of our money to businesses, let's give it to the citizens. Invest in us. Invest in infrastructure and education. Any business that receives so much as one penny in taxpayer benefit (like using "my" roads, for example) should be prohibited from taking money or work outside of this country, or from buying materials from outside the U.S. Invest in us, the people. If Thomas Friedman wants to invest in small businesses, let him. But stop taking my money to do so.
And if any money goes to any business, let's take a citizen's interest in the business, so we get back some of the profit, and we can control the insider looting.