Return on Venture Money is Not the Bottleneck

I think the bottleneck to increased startup formation is people, not exits or tax rates.

If exits were the problem, then LPs would stop putting money into venture funds as expected returns diminish. Fred Wilson (and many others) have said that lack of money is not the problem. I believe them. So exits can't be the problem (For startup formation, that is. Exits are certainly a problem for the VC funds.)

From the point of view of the money, lowering capital gains taxes--much as I personally enjoy lower rates--is not going to increase the rate of startup formation. As previously noted, there is already plenty of money looking for a home with the current returns. Increasing the returns would only draw more money into an already overly funded pool.

From the entrepreneur's point of view: while I hate to depart from economic orthodoxy and I do believe that incentives matter, I don't think that the entrepreneur we want to encourage (the one creating a large company that employs a lot of people, not home-based businesses and restauranteurs) thinks much about the after-tax difference in the amount of money he'd make in a success. Ventures are generally binary: the company fails or the company succeeds. In a success the entrepreneur hopes to come out of it with quite a bit of money, and whether it's $10 million or $12 million is not really the point. The change in after-tax return is completely swamped by whether there is a return at all.

Advertising in a Downturn: Other Opinions

I get a lot of hits from people searching for "marketing in a downturn" or "advertising in a downturn." I haven't blogged on that for over a year because there's no point in trying to predict the present.

But for all you searchers, here's a great resource: the FT's Advertising in a Downturn page. Supports my contention that putting marketing money to work when times are bad is a great investment. I know I said it a year ago and god help those who took my advice then--especially the car manufacturers--but I still think I'm right.

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.

Rent vs. Buy

Saul Hansell's article in the NYT, Why Are iPhone Users Willing to Pay for Content?, tells the obvious part of the story:

Apple has created an environment that makes buying digital goods easy and common. With an infrastructure that supports one-click purchases of songs and videos, it was easy to add applications in the same paradigm. Paying for software, especially games, is not new to Apple customers. So when you see the iPhone manual or the Frommer’s Paris guidebook, it feels natural to click. (And of course, your credit card is already on file with Apple.)

But Lauren Rich Fine's article in PaidContent, Micropayments? Won’t Work, makes the crucial, non-obvious point:

When someone buys a song, that person keeps it forever and plays it many times. News is fleeting, it changes by the second.

I would take it another step. People are clearly willing to put up cash for purchases that seem like one-time investments. Buying a $2.99 iPhone app that I end up using for a couple of days is far more palatable than paying $1/day.

How to Levitate

I was reading Bill Tancer's book Click last night. I generally hate this sort of book. So practical. But Tancer's smart and had access to a ton of data, so whatever.

At one point, he lists the top ten "how to" queries in the US for the four weeks ending 12/21/2007:

1. How to tie a tie
2. How to have sex
3. How to kiss
4. How to lose weight
5. How to write a resume
6. How to levitate
7. How to draw
8. How to get pregnant
9. How to make out
10. How to make a video

He then completely ignores this truly interesting and unexpected insight into the American psyche: that we all wish we could levitate.

I learned to levitate from Henry Sugar, natch.

i2pi

My old friend Josh Reich finally launches out on his own with i2pi, a data consultancy. I've worked with Josh for some five years now and he has the most analytical firepower of anyone I've ever met. Plus he has some really out there geeky hobbies that never cease to amuse me.

If you have data, need data, want to make sense of data or just plain like data, Josh is the person to call.

When I Was

Listened to the Kevin Kelly econtalk podcast the other day. Eh. One thing he said that struck my fancy was from his Edge.org answer to "What Are You Optimistic About?"

Moving back into the past has never been easier. Citizens in developing countries can merely walk back to their villages, where they can live with age-old traditions, and limited choices. If they are eager enough, they can live without modern technology at all. Citizens in the developed world can buy a plane ticket and in less than one day can be settled in a hamlet in Nepal or Mali. If you care to relinquish the options of the present and adopt the limited choices of the past you can live there the rest of your life. Indeed you can choose your time period. If you believe the peak of existence was reached in Neolithic times you can camp out in a clearing in the Amazon; if you suspect the golden age was in the 1890s, you can find a farm among the Amish. We have the incredible opportunity to head into the past, but it is amazing how few people really want to live there. Except for a few rare individuals, no one does.

While only vaguely interesting as an observation, it clicked with my recurring thought that living in the NJ suburbs was like living in the 1950s. This then prompted this list of places I've spent time, and when they are in the 20th century.

1990s	Silicon Valley
1980s	New York
1970s	Los Angeles
1960s	San Francisco
1950s	New Jersey
1940s	Chicago
1930s	Tomorrow
1920s	Miami
1910s	Poughkeepsie
1900s	Boston

I refuse to discuss or defend my choices--especially the scurrilous ones--on the grounds that they are obvious on their face. But I am willing to entertain alternative answers.