Above the Crowd

Just Say No to a VC Bailout – Part 2

February 22, 2009:

While I attempted to bury this issue last week, this Sunday, Thomas Friedman again used his pulpit in the New York Times Opinion section to beg for a VC Bailout.  Last week he merely suggested that the government invest along side venture firms.  This week, he went even further astray and suggested that the government “Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way.”  As a practicing venture capitalist, I must say that this borders on silliness.

 1) The top 20 VC firms are simply not “short on cash today”.  Based on all of the knowledge I have as a VC, this is simply a false statement.  Last week he asserted that the hottest sector in the VC industry (green tech) was desperate, and now he is begging empathy for the top 20 VC firms.  I am bewildered by the objective of these statements.

2) The average VC firm collects fees of 2% on the total investment amount each year over 10 years, equating to fees of 20% of the total raise.  As a result, Friedman is suggesting the government “create” $4 billion dollars in partner fees for already well-compensated venture capitalists.  At a time when the New York Times is arguing for claw-backs on investment banker pay, he wants to load up the VC community with $4 billion in tax payer dollars for fees?

3) As we said last week, if you want to help the green technology sector focus on the demand side, not the supply side.  There is already an excess of venture capital dollars focused on green.  The key is to create an ROI positive investment for the end customer through subsidies.  Ethanol isn’t falling to succeed because of a lack of capital — it’s a problem with customer ROI.  Invest through subsidies in making the market huge and ROI positive.  Capital alone will not solve the problem as the ethanol case proves.

It is peculiar to me why Friedman is hell-bent on a VC subsidy/bailout.  The only thing this plan is certain to accomplish is to dramatically increase the annual salary of the top venture capitalists; an odd goal for today’s environment.

More from the web:

1) Fred Wilson at Union Square Ventures:  A Stimulus Plan for Venture Capital?  No Thanks

2) Earth2Tech: Why the Government Should Not Be a Green VC

3) Sarah Lacy at TechCrunch: Friedman Misses the Point and Economic Reality of Silicon Valley

4) Lots of Views in the Twittersphere

5) PE Hub’s Take

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