6 ms·

A Stimulus Plan For Venture Capital? No Thanks.

42 points by gibsonf1 18y ago

rokhayakebe 18y ago
Maybe not a plan for vcs, but I am all for the government setting up a 20B dollar fund to purchase from startups. In fact there is a need for it. 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.
- deleted 18y ago
  [deleted]
- cjenkins 18y ago
  Interestingly enough, there are already requirements on federal agencies to purchase from small businesses. http://www.sba.gov/contractingopportunities/index.html 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/ http://www.sbir.gov/ program(s).
  - omnivore 18y ago
    They only target companies that are really good at wading through bureaucracy and who target themselves almost exclusively at government.
    - ori_b 18y ago
      That may be the case (I don't know) but sending more funding towards buying from small guys won't fix anything if the barrier to entry is bureaucracy. The solution is to fix the bureaucracy, not to throw more money at it.
  - antiismist 18y ago
    There's a lot gamesmanship that goes on. For some sbir grants you can subcontract out 50% of the work. 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.
- simonb 18y ago
  It seems to me the average quality of startups is inversely proportional to the money (and the ease of getting it) sloshing around the system. Having another round of circle-jerking will do nothing for long-term revitalisation of the economy.
indiejade 18y ago
Friedman does make some good points though: 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 . . ..
- chollida1 18y ago
  > However, banks are notorious for not giving out non "asset-backed" loans. 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.
  - indiejade 18y ago
    True, true. What I was thinking (but didn't expound upon) was tangible vs. non-tangible asset loans. The "word of a wealthy individual" in your example would be the latter. Most intellectual property would also be the latter.
  - alecco 18y ago
    Grameen Bank didn't get that memo.
- vaksel 18y ago
  as long as its legal to lobby congress it'll never happen. The startup system can't get the help it needs from the government since they are more less powerless. The old GM on the other hand can invest a couple mil into buying congress, because they'll get that money back with the first bill that passes in their favor
deleted 18y ago
[deleted]
nostrademons 18y ago
I wonder if the general problem now is that there's too much capital sloshing around the global financial system for the investment opportunities available. Kinda ironic, since the immediate problem is that banks are undercapitalized, but they wouldn't have made the bad loans if they didn't have spare cash and too few legitimate lending prospects. 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.
- lacker 18y ago
  If there was too much capital sloshing around, it would be easy for companies and individuals to get loans. But it's not.
  - nostrademons 18y ago
    What if the limiting factor isn't the amount of capital itself, but rather the ability of the managers to determine whether a firm is likely to generate a return on that capital? An information problem, not a money problem. 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. :-)
pg 18y ago
I agree that the top VC firms are a narrow channel that already has enough money in it. But on the other hand the number of startups is certainly constrained by the amount of funding available. Which means that if there were another way to get money to them besides the top VC funds, it would increase the number of startups. Of course, if the government tried such a thing it would almost certainly screw it up. But it's possible in theory.
- fredwilson 18y ago
  paul, you innovated with a new form of venture capital called ycombinator. you've figured out how to get the right amount of capital to a new class of entrepreneurs and the results speak for themselves. you've attracted a bunch of copycats, some who will do good things and many who will not. 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.
  - jfornear 18y ago
    If you want to see more YC-style funding and traditional VC is at capacity, can you (big VC) not take an active role by allocating some of your excess resources into YC-style firms? That could help these firms (and ultimately big VC) add more startups to their portfolios. 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.
  - jacoblyles 18y ago
    Do we know if Y Combinator is profitable yet? One quality that is likely to limit copycats comes from the fact that it is not like a VC. It is not out there with prospectuses advertising its performance to the deep pockets. 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.
MaysonL 18y ago
Does anybody remember ARPA? That's where government's "venture capital" investments should go.

42 points by gibsonf1 18y ago

Maybe not a plan for vcs, but I am all for the government setting up a 20B dollar fund to purchase from startups. In fact there is a need for it. 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.

deleted 18y ago
[deleted]
cjenkins 18y ago
Interestingly enough, there are already requirements on federal agencies to purchase from small businesses. http://www.sba.gov/contractingopportunities/index.html 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/ http://www.sbir.gov/ program(s).
- omnivore 18y ago
  They only target companies that are really good at wading through bureaucracy and who target themselves almost exclusively at government.
  - ori_b 18y ago
    That may be the case (I don't know) but sending more funding towards buying from small guys won't fix anything if the barrier to entry is bureaucracy. The solution is to fix the bureaucracy, not to throw more money at it.
- antiismist 18y ago
  There's a lot gamesmanship that goes on. For some sbir grants you can subcontract out 50% of the work. 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.
simonb 18y ago
It seems to me the average quality of startups is inversely proportional to the money (and the ease of getting it) sloshing around the system. Having another round of circle-jerking will do nothing for long-term revitalisation of the economy.

indiejade 18y ago

Friedman does make some good points though: 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 . . ..

chollida1 18y ago
> However, banks are notorious for not giving out non "asset-backed" loans. 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.
- indiejade 18y ago
  True, true. What I was thinking (but didn't expound upon) was tangible vs. non-tangible asset loans. The "word of a wealthy individual" in your example would be the latter. Most intellectual property would also be the latter.
- alecco 18y ago
  Grameen Bank didn't get that memo.
vaksel 18y ago
as long as its legal to lobby congress it'll never happen. The startup system can't get the help it needs from the government since they are more less powerless. The old GM on the other hand can invest a couple mil into buying congress, because they'll get that money back with the first bill that passes in their favor

deleted 18y ago

[deleted]

nostrademons 18y ago

I wonder if the general problem now is that there's too much capital sloshing around the global financial system for the investment opportunities available. Kinda ironic, since the immediate problem is that banks are undercapitalized, but they wouldn't have made the bad loans if they didn't have spare cash and too few legitimate lending prospects. 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.

lacker 18y ago
If there was too much capital sloshing around, it would be easy for companies and individuals to get loans. But it's not.
- nostrademons 18y ago
  What if the limiting factor isn't the amount of capital itself, but rather the ability of the managers to determine whether a firm is likely to generate a return on that capital? An information problem, not a money problem. 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. :-)

pg 18y ago

I agree that the top VC firms are a narrow channel that already has enough money in it. But on the other hand the number of startups is certainly constrained by the amount of funding available. Which means that if there were another way to get money to them besides the top VC funds, it would increase the number of startups. Of course, if the government tried such a thing it would almost certainly screw it up. But it's possible in theory.

fredwilson 18y ago
paul, you innovated with a new form of venture capital called ycombinator. you've figured out how to get the right amount of capital to a new class of entrepreneurs and the results speak for themselves. you've attracted a bunch of copycats, some who will do good things and many who will not. 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.
- jfornear 18y ago
  If you want to see more YC-style funding and traditional VC is at capacity, can you (big VC) not take an active role by allocating some of your excess resources into YC-style firms? That could help these firms (and ultimately big VC) add more startups to their portfolios. 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.
- jacoblyles 18y ago
  Do we know if Y Combinator is profitable yet? One quality that is likely to limit copycats comes from the fact that it is not like a VC. It is not out there with prospectuses advertising its performance to the deep pockets. 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.

MaysonL 18y ago

Does anybody remember ARPA? That's where government's "venture capital" investments should go.