Tuesday, March 3, 2009

Let's Not Pretend There's No Problem and There's Nothing We Can Do About It Anyway

I don't agree with government sponsored venture capital, as I've said before*. So I wasn't enchanted by Tom Friedman's NYT Op-Ed proposing that the government give bailout money to the top VC firms to invest. On the other hand, I thought it a constructive proposal, an addition to the debate. One of the primary concerns with the various government rescues is that the government will buy things for inflated prices and then, having bought them, won't know how to run them. Friedman addresses this by proposing that the government hire the VC firms to do it.

There are a ton of practical problems with this. But I applaud Friedman for floating an idea. A lot of commentary I've read, though, is like Fred Wilson's:

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.
This almost perfectly illustrates my complaint that we ignore our own flaws while easily seeing others'. The venture business is a piece of the finance system--the system of turning savings into investment. Fred can't possibly be arguing that the finance system is serving society well, so I assume he's arguing that venture capital is systemically apart from the rest of finance.

It's not.

There are more cogent commentaries, like Roger Ehrenberg's quoting of Matt Harris' criticism of and constructive alterations to Friedman's idea. I don't agree with Matt, but he and Roger are on the right track: early stage investors need to put up some ideas.

The current Panic highlights how finance can be used either to create growth or to finance consumption. There needs to be some of both, but current events show that in the last six or seven years finance has overfunded consumption to the point of crowding out growth financing. As the part of the finance industry that finances growth, we can't just say that the other part (the part that finances consumption) was wrong and out of control and needs to be reined in and leave it at that. We need to figure out how we can do more and better and what we need the government to do to support us in that. If it's not money we need, then what? There will always be competition between these two types of finance for investable money: what can we do to win more often?

Here are my ideas.

Really bright, tech savvy, self motivated risk takers are the bottleneck in the venture creation business, not money. This is why Friedman's idea won't work (and, I think, the root cause of the conditions that Fred describes when saying it won't work.) To increase the formation of more early stage companies we need to increase the number of these people. There are two ways to do this: (1) make people smarter and more tech savvy, and (2) lower the risk to individuals of starting a new company and failing.

My specific prescriptions:

(1) We should pay for college, for everyone. This would be the best use of government money ever. If the US did this and did it right, we would remain the global tech powerhouse for the next century.

(2) Universal health care. Health insurance is expensive. It's one thing to not have it when you're young and single, it's something else when you have a family. Working out of your garage for a year while living on your savings is an acceptable risk, not being able to pay your kid's doctor bills is not.

In general, I think we need to support company creation by enabling the company creators, not the financiers. I may be wrong about my specific ideas, of course, so I'd love to hear other constructive opinions.

* As a follow-up to that post, I'll note that Owen Davis--who is running the NYC Seed Fund--allayed much of my cynicism about that project: he's smart, independent and will definitely make a difference in the NYC early stage community if given enough and continued support by his backers. I can't imagine a better person for the job. The fund should be thrilled to have him and work hard to keep him, IMHO.


John K said...

Well, Obama is trying to pass #1 and #2. However I don't think the college education route really makes much difference for most entrepreneurs. Furthermore, college education will become less and less useful as more people flow into it, and it will become more and more expensive as the govt. subsidizes it even more.

On healthcare, Obama is missing, big-time the opportunity to decouple health insurance from work benefits, though. I think the demonizing of wealth accumulation probably negates any benefit to the entrepreneur that more portable healthcare would provide. I've also seen that a lot of the young innovators / entrepreneurs are the same people that really don't want insurance.

And I think the massive injection of research money into universities is probably more helpful from an innovation / startup POV than the general "go to college" or "universal healthcare" type benefits.

Most of all, right now, the incentive to work hard and earn is being reduced both by increased tax burden and the incipient inflation from the massive printing / borrowing of money Obama's budgets call for. Moreover, the consumer market is simply going to shrink for many things over the next 3 years.

Finally, any ventures that depend on re-inflating credit bubbles - either consumer or financial probably aren't helpful or likely to succeed..

Jerry Neumann said...

I'm trying to think of ways to broaden the allure of entrepreneurship from the entrepreneurs of today (who I agree don't need any more education and believe they would win in any fight with Nature so don't care about insurance) to some broader pool of people. The pool would definitely broaden if there were more education and fewer student loans. I also think the entrepreneur pool could skew a little older if health insurance wasn't such a concern. You're right, though, that making insurance portable would be the easiest way to achieve this; I favor universal healthcare, but probably for other reasons.

I'm not so enthralled with tech transfer and so not so convinced that funding more university research would create more opportunities. Much as I hate to say it, defense spending seems to have a better record here. Maybe because it's directed at real and known needs. I also believe that the number of available opportunities for new companies isn't the bottleneck: the internet has just begun to change our society, we've got a long way to go!

Jonathan said...

We need more schools like Babson.

Jerry Neumann said...

I did the Omnicom senior management programs at Babson... nice place. Don't know much about them otherwise, though.

John K said...

"I'm trying to think of ways to broaden the allure of entrepreneurship from the entrepreneurs of today (who I agree don't need any more education and believe they would win in any fight with Nature so don't care about insurance) to some broader pool of people."

You know, this is not hard. A simple message would be: You can make build wealth, and ensure your security better by starting a business and hiring people.

The obvious policy choices to encourage small business formation:

- Reduce income / cap. gains taxes
- Reduce liability
- Reduce barriers to hiring
- Reduce regulations making it hard to run a small business.
- Create tax incentives for capital expenditures.

Now, these are all obvious, and I don't think many would argue against them. I don't think you need more education or more tech-savvy entrepreneur types.

And the internet obviously makes a lot of things simpler for small business - payroll, ecommerce and marketing to name a few. Which does broaden the potential pool.

Make it clear that the path to wealth involves adding value and running a business, and tons of people will do that.

The fact is, the Obama plan is very much counter to every one of those things that would incent people to form businesses.

His plan is telling people clearly that now is NOT the time to try to create business, generate extra income or hire people.

If anything Obama's plan is telling people to get a government job, and pray for creation of a new bubbles (i.e. education, healthcare) or re-inflation of the old bubbles (housing, debt).

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