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.
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.