Thomas Friedman really kicked a beehive with his recent thoughts about diverting bailout money in the direction of startups, via venture capital. Venture capitalists didn't like it. Pundits didn't like it. Others thought the specifics were wrong. We all sortof believe intuitively that there are a lot of problems propping up failed or failing businesses, but people in our industry can't seem to agree on what should be done.
I reacted very negatively to a point or two in Fred Wilson's post. Specifically, that bailout money would almost exclusively go to the inefficient and to weaker entrepreneurs. The implication is that venture capitalists are 100% efficient at picking out great ideas and great management teams. I don't buy it. It's a generalization to assume that the best deals get adequate amounts of funding to make their ideas work. Many great business ideas fail or never get a chance to get off the ground because they lack access to capital, and/or lack access to talent who can turn a dream, a prototype, or an early version into reality. Sure, the valley of death is a necessary phase in the growth of a company, but capital can help early-stage companies accelerate their growth at a time when we really, really need it. Fred also points out that the top entrepreneurs wouldn't take government money. I don't buy that either. I don't know many entrepreneurs at all who would refuse a cash infusion from just about anywhere in the present environment.
Fred is right to point out that VC doesn't need bailout funds. Many of them do just fine without government intervention. But early stage entrepreneurs seem to be wholeheartedly in favor of it, especially as evidenced by a number of Facebook groups that have popped up in support of diverting bailout funds to startups. Of the current 312 members on the list, I know of at least a half dozen people who have exited their startups for millions of dollars in their careers. These aren't weaker entrepreneurs... they are successful folks who join the Facebook group to publicly show their support of early stage entrepreneurship and the use of bailout money to kickstart promising ventures.
Don't get me wrong... this post isn't intended to bash Fred... I generally love his insights into early stage ventures and the venture capital business. But I think in this case, he's a little too close to the VC side and a little too far from the day-to-day hell of trying to finance a startup in the current environment. If a lot of startups fail over the next 2-3 years, it won't be because the ideas are bad. It will be because access to capital is severely limited relative to what it has been for the last 15 years.
I thought Don Dodge's response was considerably more measured and startup-friendly. First of all, let me say that I didn't meet him while I was at Microsoft... but he did have a great reputation. Like other folks on Dan'l Lewin's startup engagement team at Microsoft, he has a great sense of what startups need and I really enjoy reading his occasional insights from my RSS feed. In his blog post re: bailout money for startups, he espouses a combination of funding for incubators, job creation programs for service businesses, and tax credits for investment. It's a great post and I hope those of you in decision-making roles in government internalize what Don has to say.
Our new President spent a lot of time on the campaign trail talking about change. He also talked about helping create new engines for job growth. Well, we're here. In many cases, we're operating on shoestring budgets and we're making money stretch as efficiently as we can. While bankers give huge bonuses to themselves and while inefficient businesses throw more good money after bad, we're out pursuing efficiencies and new product ideas that will create the next wave of jobs and economic growth. Give us a boost. It makes a lot more sense than propping up inefficiencies that can't last.