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

9 Comments

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  6. James February 23, 2009

    Would an Xprize type of solution funded by the government work? Where the prize is substantial for the object they wish to have? Say $2 billion USD for a car that goes 100 mpg and sales at least 5,000 cars?

    Then VC’s might fund inventors in the hopes of getting a slice of the Xprize.

    Reply
  7. Ted Dintersmith February 24, 2009

    Thanks, Bill, for the clear comments on Friedman’s ill-advised suggestion. More investment capital and fees is the last thing our industry needs. And, by turning our focus to capital, Friedman distracts attention from the core issues affecting innovation in the US today — under-investments in core R&D, poor math and science education, brain-dead immigration policy, over-regulation of newly-public growth companies, distortions and volatility in demand for clean tech products and services, and the almost complete disintegration of the public market path for our best young private companies. Those are the problems we need to focus on.

    Reply
  8. John Sharp May 7, 2009

    Great point Bill – “if you want to help the green technology sector focus on the demand side, not the supply side.”

    The government will spend trillions of dollars this year on everything from new light bulbs to new roads to health-care facilities to jails to jet fuel.

    Yet how much of the current multi-trillion dollar budget falls under a “must buy green mandate”?

    If the government were to announce that even 1% of this spending must follow new energy-efficient or climate-friendly guidelines, that would shovel $36 billion into the green sector and satisfy Friedman, VCs and entrepreneurs alike.

    Consumers might also enjoy sitting under some CFL bulbs the next time they go to get their licenses renewed.

    Reply
  9. Иван Иванов December 12, 2009

    Согласен с автором . У меня такое же мнение :)

    Reply

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