A Stimulus Plan For Venture Capital? No Thanks.
avc.com
avc.com
Anyone ever play Civilization? There's a problem that occurs once you built a manufacturing plant, research lab, and stock exchange (or whatever the terminal improvements are) in every city: there's nothing left to build! So in Civ1, I'd start building city improvements I didn't really want, just to sell them as soon as they're finished and pad the treasury. The computer gamer's equivalent of Keynesian ditch-digging. In Civ2/3, they added a "Capitalization/Wealth" improvement that does this directly, so I just select that, set science to 100%, and watch the cash pile up. Ironically, this always seems to happen right around 1980 in game time.
In a computer game, extra cash is good, because it's just a way of keeping score. But in the real world, extra cash drives prices up. Cash itself is useless (except in times like the present situation), so companies try to invest it in ever-marginal investments. But companies want a return on their investment, and eventually there's no way you can justify the prices paid for these marginal investments, so prices come crashing down to earth in a financial crisis.
I think this hypothesis might even be testable:
1.) If there is simply too little capital to go around, then interest rates should rise accordingly. Individual firms know the returns they can get on capital; they bid up rates accordingly, and the limited supply of capital goes to the most productive firms.
2.) If there is too much capital and managers cannot discern where to put it, and they realize that fact, then you'd see cash pile up while companies/individuals can't get loans. This describes Berkshire Hathaway over the last 5 years, and a couple of the better VC funds, but not really the economy as a whole.
3.) If there's too much capital sloshing around, managers have imperfect information about where to put it, and they don't realize this, then they will invest in poor prospects, those firms will be unable to pay back the loans, and they'll go bankrupt - soaking up the capital in write-downs. Then there's a temporary shortage of capital while everything gets reallocated and people work off the debts (or write-downs) they just incurred.
#3 sounds a lot like the world we live in. :-)
I have some ideas about how Google could help with this - probably not fix it, as that would require the ability to see into the future, but do a better job than the global financial system is currently doing. Ask me about it at work sometime. :-)
Although this describes something of a subset of the current economic situation, I think it's still safe to say that there is a lot of money available for "the next Google" (or Intel, or...). The problem isn't the money, it's figuring out who the next big players are going to be.
I mean, hell, is this not directly demonstrated by the entire YC process? Here's a model in which there's a very reasonably-sized fund available, and an entire business set up around trying to determine who's got a good potential product, and who hasn't, and then assist the ones that maybe have a chance.
Of course, if the government tried such a thing it would almost certainly screw it up. But it's possible in theory.
that's the kind of thing that i would like to see more of. we don't need more money flowing into the existing system which is at capacity and has been for years.
Of course, this is assuming they are honest about having to reluctantly turn down high quality applicants each year. I'm sure the relatively small number of mentors would become a bottle neck at this level, though.
If the YC model is indeed profitable, then it might be time for an enterprising financier to go out, raise a fund, and do it ten times as big. Of course, the success rate will be somewhat lower, since the personal attention and advice that YC gives its companies just won't scale.
If the model is profitable, I would guess there would be private money to be had. I just don't think anyone knows how profitable the model is yet. It is still new, risky, and unproven.
Just because some guy with a ton of domain knowledge can earn a decent return off a few dozen companies a year doesn't mean it will work at scale.
I think there are far more important things on the list of stuff that new startups need, like business guidance and planning, structure, strategy. There are so many avenues right now for "cheap" startups -- using AWS, for example -- that I just can't see that throwing more money at the problem will help at all.
And, even in the case of "expensive" startups -- those that need serious capital for manufacturing or prototyping -- they need a strong business plan and a solid structure before they need money.
I suspect that pouring money into the startup sector would have a result very similar to the dot-com boom and bust cycle, and we don't need another of those right now.
Our motto should be, “Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.”
The capitalist way is to reward risk. However, banks are notorious for not giving out non "asset-backed" loans. And even with the billions of bailout money received, they aren't exactly taking risks by investing in the innovators; they're even more risk-averse.
So how does an entrepreneur who is bursting with good ideas surpass this obstacle?
I think that people -- for example, those who lost everything in one of those natural disasters during the last 8 years -- who have nothing (no assets, so to speak) are in the prime positions to innovate.
Maybe what we need is a stimulus plan more to reward non-asset backed risk takers . . ..
I wouldn't say notorious, that has a negative connotation. All jokes about the current situation aside. Banks aren't supposed to make risky loans, they aren't supposed to lose their capital. All loans they make should be guaranteed by something, even if it's just the word of a wealthy individual like a parent cosigning a loan for a child.
Almost. A lot of banks took lots of risk - too much risk. Eventually the risk has to be managed, and if it's managed poorly we get what we have today. The capitalist way is to reward the providers, not the risk takers.
I've been thinking about this a lot lately ... business has been good to me, and I'm on my first "cusp" -- the point where I've got too much business to handle, but not enough resources to expand -- and so I've found that I'm starting to get ahead of myself in thinking about what's going to happen next.
The thing about good ideas is, they're almost worthless by themselves. They're only one part of a much larger formula involving things like hard work, dedication, focus, and good teams.
The funny thing about more money is, it doesn't really make any of the other parts of the formula any easier. A little, maybe -- I'd love to have just a few thousand dollars extra to cover my first employee's paychecks and do a little marketing -- but it's not going to make sure that I keep working hard, or that I stay focused on the task-at-hand, or that I remain dedicated to my purpose.
So, to get back to your question, an entrepreneur needs to write down their good ideas, when they have them, and then remind themselves to get back to work, and realize that funding is just one minor obstacle, and solving that one won't make their business much more viable.
Selling to the government is extremely hard or nearly impossible if you are two guys with a software that could benefit the Department of Defense. The fund could ease the process.
http://www.sba.gov/contractingopportunities/index.html
I'm not sure how much gamesmanship goes on with larger companies using smaller ones as a pass through, but 23% of federal spending is supposed to be targeted towards small businesses.
Another program that might be relevant would be the http://www.sbir.gov/ program(s).
The solution is to fix the bureaucracy, not to throw more money at it.
So you get a grant to work on some subcomponent of one of the major defense contractors (Raytheon, Lockheed, etc). Then you turn around and subcontract that piece right back to the defense contractor, up to 50%. Then you take the remaining work and give it to ex-Defense employees who become your employees for a bit.
So the small business wins b/c they get some % profit plus can do work at a high dollar amount per hour. The big defense contractor wins b/c they get essentially free R&D work on their subcomponent.