Thomas L. Friedman makes a strong argument for investing in the future not the past, in this Sunday’s (February 23rd ) New York Times editorial “Start Up The Risk Takers”. He argues that putting $20 billion to work in the areas of technology and innovation with entrepreneurs who can lead us to the future is better spent tax-payer money than $20 billion spent propping up business like the auto industry that have obsolete business models.
Let’s set aside the auto industry rescue for a moment as it is not the only bailout in progress. It pales in comparison to the bank bailouts that have already been granted.
A Fund of VC Funds
Let’s focus instead on Tom Friedman’s notion of $20 billion set aside to invest in venture capital funds that in turn will invest in technology, alternative energy, biotech, nanotech and clean tech companies. The idea for a fund of VC funds is a promising one, but it is not focused enough to produce results, and here’s my reason why. Investing a billion dollars in each of 20 venture capital firms will not necessarily produce the results we want because funds at this level are often late stage funds that need to put large amounts of capital to work. Some like Kleiner Perkins Caulfield & Byers, Sequoia Capital and Benchmark are Venture Capital funds that can do both – that is invest in early stage and have the economic power and resources to invest large sums in later stage, too. Yes, Tom Friedman is right when he says that much of the capital for these VC’s came from pension funds, university endowments and the like. They are down on their portfolios too. Many are looking for sources of capital right now and not more investments. Frankly, lack of exit strategies for these investments creates a bigger downdraft now.
But let’s level the playing field a bit here. Most of the innovations in these industries promoted by the Obama administration are started very small with limited capital and an abundance of entrepreneurial risk. Small VC funds scattered across the country are the investors in these early stage companies. A smaller, more prudent capital access program is required for these funds to continue to source and identify companies at the early stage.
Invest in Early Stage Companies
In a recent blog, Alan Patricof, a founder of Greycroft Partners and one of the nation’s Dean’s of early stage venture capital, makes an elegant argument for modest and prudent investment in early stage companies. Such investments he argues produce attractive and realistic returns for investors. Not all investments need to be IPO home-runs to be profitable. In fact, the vast majority of the successful venture backed companies sell to others in their industry. Thus, filling our national pipeline with innovation in industries from life sciences to technology, energy to media, IT and much more is fueled by this level of investment.
An organization I co-founded 10 years ago called Springboard Enterprises is a venture catalyst organization that sources, selects, trains and presents fundable high growth companies to venture capitalists. Since its inception in January 2000, Springboard has screened nearly 5,000 companies and selected 380 to present to the VC community. These companies have raised over $4.3 billion in growth capital. Over a third have had positive liquidity events for investors, including IPO’s. Nearly 80% of these companies are still in business, providing jobs to people who are productive for society and pay taxes and are on a path to considerable growth.
Catalysts for Investing in Innovation
In a meeting on December 19th 2008, with the Obama transition team, Springboard Enterprises, backed by entrepreneurs and investors in our national network, put forth some recommendations. Key among them are the following:
Endorse increasing federal support for research, technology and innovation for companies and universities.
Endorse creating a national network of public/private business incubators to facilitate the critical work of entrepreneurs in creating start up companies. This should be structured to provide incentives to communities and private corporations and foundations to invest without inhibiting commercialization opportunities.
To this, I would add my modification of Tom Friedman’s concept for a fund of VC funds.
Take the $20 Billion and set it aside for VC firms investing in areas the Obama administration has identified for growth initiatives – biotech, nanotech, energy, healthcare, IT and the like.
Make it available to VC firms of all sizes with proven track records (no first time funds here) available to apply for investments innovating in these critical areas. This would be putting the tax-payers money at risk with people who know how to make risk investments and help create productive companies.
This type of investment is not the government’s expertise, but with government incentives, this is a future we can believe in.