Blogger: US should fund research, not venture capital

Venture investors say no thanks. Venture capital may be the one industry that isn't inclined to line up for a government handout. Last month, New York Times columnist Thomas Friedman suggested the government would do well to give $20 billion and give it to the top 20 US venture capital firms to produce the next wave of innovative big companies - and possibly generate returns for the taxpayers. (Friedman was contrasting this to the idea of doling out another $20 billion to General Motors and Chrysler.) Bloggers, including Michael Feinstein of Waltham-based Sempre Management, responded.

Venture capital is a business that can't scale with more dollars. No matter how vibrant our economy is, there are only so many ideas that are worth funding each year. Having more money available doesn't mean that more ideas are worth funding. Quite the opposite: having second and third-tier ideas funded as well as top-tier ideas dilutes the market opportunity for everyone. It forces every start-up to raise more capital in order to compete. It lowers the financial return for the entrepreneurs and for the investors. And, as venture returns are lowered, limited partners begin to scale back their commitment to venture capital for the long-term. So, a flood of government venture money in the short-term can lead to a scarcity of private venture money in the long-term.

Most top VCs will agree that there is too much money in the industry. If you look at venture returns, you'd conclude that perhaps half of all venture funds should go away. So, putting more money into venture capital clearly isn't necessary . . .

So, can the government do anything to help new technology business grow? Well, I don't think that real early-stage businesses can bail us out in the short-term. [But the] government has a great role as a funder of primary research. Clean energy is one obvious place for this type of funding, but it can be done across many sectors. It was government funding that got the Internet started (with or without Al Gore). Government funding through organizations like the NIH still funds many of the initial developments in biotech.

Only the government can justify the initial research funding that may have no economic return. This investment will instead help create research positions at our universities and will, ultimately, lead to companies spinning out of those schools.

I wouldn't mind some overspending on basic research that may lead to the next big thing. thefeinline.com

Rocket fuel for energy start-ups? Rob Day, a principal at @ventures, a Wilmington company focused on clean tech, wondered whether the federal government might have an impact by giving very young alternative energy companies an assist with small amounts of funding.

There's always a perception gap about what the role of venture capital is - politicians seem to believe that the role of venture capital is to promote jobs growth and innovation, but most VCs promise their LPs that it's all about the financial returns and nothing else. The great thing about venture capital is how often all those goals overlap. But they don't always.

I personally would like to see government figure out a good way to step into the seed stage gap in cleantech: With technologies that would take a longer time to develop than most, VCs would be able to stomach, government seed grants/loans to help get the companies to a fundable point. You wouldn't want to, or even have to, put massive amounts of money into each company. At $500,000 per start-up, you could get 2,000 start-ups off the ground with a $1 billion commitment. I see great companies all the time that are too early even for my early-stage venture firm, and that really only need a small investment to get themselves to the next level. cleantechinvesting.greentechmedia.com

Three better ideas. Jeffrey Bussgang at Flybridge Capital Partners, a Boston venture capital firm, argues that while he doesn't want to see the government getting involved in venture capital, "entrepreneurship is what is going to get us out of this mess." What can the government do to support entrepreneurs?

The policy agenda to foster entrepreneurship and the flow of capital to entrepreneurs is very clear. The National Venture Capital Association (NVCA) laid it out nicely in a crisply worded memo to the Obama transition team. Policy makers need to focus on three things:

1) Reform Sarbanes-Oxley. We need to fix this terrible piece of legislation, which has created a terrible IPO bottleneck. If VCs can't get good companies public, they will dramatically slow down their investment pace. In my view, this is the single largest issue in hindering American entrepreneurship.

2) Increase the number of H1-B Visas. This was Friedman's main point, by the way, in his earlier editorial when he called for the VC bailout, so let's give him his due as he's been beating the drum on this important issue for years. Let's allow ourselves to continue to be a talent magnet for the world's best talent.

3) Keep capital gains taxes low. The government should look elsewhere for incremental revenue sources. Gas taxes are smart because they have the dual benefit of reducing gas consumption (Governor Deval Patrick is appropriately pushing this forward in Massachusetts). Increasing capital gains taxes will reduce productive capital investment and should be avoided like the plague. seeingbothsides.com

Have you seen an interesting item on a local business blog lately? E-mail kirsner@pobox.com.