What Is True/Slant?
275+ knowledgeable contributors.
Reporting and insight on news of the moment.
Follow them and join the news conversation.
 

Sep. 21 2009 - 12:43 pm | 9 views | 0 recommendations | 6 comments

Venture capital: Trying to prove they deserve their own bailout?

The National Venture Capital Association recently came out with numbers showing what a fabulous job- and revenue-generating machine the venture capital industry is.  (For 2008, $3 trillion in revenues and 12 million jobs–21% of GDP (!)) And I read a great take on this in TechCrunch, which said, among other things, it’s all about venture capitalists looking for government tax breaks.

What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks. After spending so much time, energy and breath in the past decade arguing that government subsidies distort markets, now the wealthy, bloated VC community wants its own handouts.

What we need to do is to apply the same rules to VC’s which they impose on their companies – force them to make tough choices and get their business models in order. And instead of giving the tax-breaks to the middlemen, let’s give these directly to the entrepreneurs who take the risks and create the innovation. It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.

via What Have VCs Really Done for Innovation?.

There’s also growing evidence venture capital has had little impact on growth, according to the author. For example, he conducted one study that showed that 10% of 549 successful company founders in high-growth industries took venture capital in their first startups. And 3/4 never accepted any VC money in any startup they founded.

The search for government assistance could be what’s really driving the findings.  But, do they deserve such assistance? Or, more to the point, would that help the economy and startups? Or would the economy be better served by taking another tack?

After all, really,  why help out VCs?  You know, a tiny percentage of startups (maybe 1%)  even get any VC money at all. And, when VCs do invest, usually they do it as a pack.  There are many exceptions, of course–insightful VCs who have famously bet on fledgling, innovative ventures and been very successful. But, too often, they go after the same companies, sectors and concepts, lemming-like (or sheep-like), a theme I know I keep talking about ad nauseum.

Better to look for ways to aid entrepreneurs and innovative small businesses directly.  And for VCs to become the backers of truly innovative efforts, rather than practicing the more typical follow the leader approach.


Comments

6 Total Comments
Post your comment »
 
  1. collapse expand

    Yeah and after listening to Obama’s speech today he seems to be supportive of this idea.

  2. collapse expand

    Do you mean that he’s supportive of giving money and/or tax breaks to venture capital or finding a way to support entrepreneurs more directly?
    I have the feeling small business/entrepreneurship isn’t his strong suit, or at least he’s taken a long time to decide what his approach to small business support should be.

  3. collapse expand

    http://www.global2biz.com
    sneaker: airmax 90, 95 etc $28-42 free shiping.
    boots: UGG etc $60 free shiping.
    Jeans : polo etc $28-49 free shipping
    T-shirts : A&f etc $11-18 free shipping.
    hoodies: 5ive etc $28-40 free shipping
    handbags: Ed hardy etc $35-68 free shipping
    Sunglasses: LV etc $8-12 free shipping
    Belts: BOSS etc $8-12 free shipping
    Caps: red bull etc $8-10 free shipping
    Watches:rolex etc $40—80 free shipping
    http://www.global2biz.com

  4. collapse expand

    Is there a nice way to call “Bull%$#@” ?

    Sometimes, rarely, one has to dispense with the pleasantries that keep us all feeling like we are polite ladies and gentlemen. Anne Field’s blog post above is such a total crock that it deserves such a response.

    Nowhere, I repeat nowhere, has there been any plea from any responsible or representative member of the venture capital community looking for a bailout from the US government. The fact that the NVCA periodically does a study to assess the positive impact of venture capital investments on the economy does not mean we, as an industry, have our collective hands out. It means that the NVCA, as our primary voice in Washington, wants to make sure the government doesn’t forget what we do, and why it matters, and in one of their fits of “fixing” something have them inadvertently hurt what already works.

    A good example of that is the current move to lash together hedge funds (which are not capital creators, nor job creators, but simply financial engineers) and venture funds into the same bucket and then regulate us as one. That may well stop the abuses of the hedge funds that assisted in our current financial difficulties, but it will also do direct damage to the venture capital industry.

    A similar move is about suddenly taxing carried interest as ordinary income. Last time I looked, if you invest in an asset (our carried interest in our funds, which we contribute cash to own) and that capital is at risk of loss and is illiquid for period of years (see: VC bubble-era funds for a real-life example), then any returns on that asset are taxed as capital gains or losses. The fact that some in the private equity world don’t actually have their personal capital at risk for long periods does not seem to faze those in Washington would change the rules and make what has always been a capital gain in venture capital an ordinary gain, just for this special case.

    So, if maintaining what has been the status quo over the last 30+ years is Anne Field’s definition of “looking for a bailout” to her maybe this isn’t a crock. But it sure is to anyone with common sense, and sense of history.

    Final crock-pot shot: Ms. Field’s piece points out that a majority of successful startups took no venture capital. True. But then she surmises that therefore venture capital is an industry than can be killed off with no material consequences (note: I did not say, “should be bailed out”). So, if she really thinks that we as a nation would be better off without the likes of Microsoft, Intel, Apple, Cisco, Google, Amazon, Amgen…..and the long list of world-leading, world-class examples of innovative, job creating, profit making, taxpaying engines fueled by venture capital, I guess that would be one opinion.

    My opinion? That’s Bull%$#@!

    More at: http://www.ovp.com/blog

  5. collapse expand

    Gerrylangelerportland: Reading over my post and your comments, I have to say, I think you’re right. In commenting on someone else’s post, I went overboard by contending that the NVCA or venture capitalists are seeking some form of government assistance. I can’t blame you for being ticked off about that.

    I do feel, however, that the venture capital industry has a somewhat inflated view of its own contributions. As I said in my post, there obviously are many many examples where VCs have backed companies that went on to make huge contributions to the economy and society. But I don’t think that’s the norm. I know you disagree with that contention.

    Also, yes, there are times when the VC approach is probably the only and best financing choice available. (Amgen would be an example). But in other instances, I simply don’t think the VC approach is the most efficient way to create great new companies.

  6. collapse expand

    Anne,

    You’re to quick to back down. Gerry Langeler commented “Nowhere, I repeat nowhere, has there been any plea from any responsible or representative member of the venture capital community looking for a bailout from the US government.” And you said he is right.

    Here is a link of a podcast you can listen to of the President/CEO of the National Association of Seed Venture Funds, Mr. Jim Jaffe saying they are seeking federal money. http://www.thefrankpetersshow.com/2009/09/nasvfs_jim_jaffe.html#comments

    Contradictory to Gerry’s post, he is obviously a representative member of the venture community, but is he responsible? Probably not.

    They can’t promise their limited partners that they are going to make a lot of money while at the same time cry for federal assistance. They are damaging their reputations and hampering their ability to raise the next fund. Federal money if achieved will be offered to the winners, who don’t want it, the losers that are asking for it are not going to get it anyway.

    The argument for Federal Money for job creation in venture startups does not hold water. When stimulus jobs are long gone, the communities will have new schools, roads, and other buildings and infrastructure to show for it. When a startup shuts down the community will have nothing to show for it.

    The argument for state money on the other hand does make sense as long the amount of money a state puts in is augmented by a large enough amount of private money that is spent within the state. States compete with each other for job creation and other forms of revenue, but it doesn’t matter to the federal government which state those jobs are created in.

    Just thought I’d back you up. There are those in the venture community asking for Uncle Sam’s help.

Log in for notification options
Comments RSS

Post Your Comment

You must be logged in to post a comment

Log in with your True/Slant account.

Previously logged in with Facebook?

Create an account to join True/Slant now.

Facebook users:
Create T/S account with Facebook
 

My T/S Activity Feed

 
     

    About Me

    It's just in the past few years that I've become interested in not-only-for-profit startups and small businesses. In fact, I can remember a time when I thought the concept of "enlightened capitalism" was simply an oxymoron. Now, I see the possibilities. Plus, it combines my own political bent with my long-time coverage of small business for such places as the New York Times, Business Week, CNNMoney.com, Portfolio.com, Harvardbusinessonline, and Fortune. Otherwise, I live with my son, a soccer fanatic, my husband, a journalist and avid rower, in Pelham, NY. My daughter, a former varsity wrestler, is away at college, studying art. You can see more of my work at www.annefieldonline.com. Or follow me on Twitter@annearfannearf.

    See my profile »
    Followers: 68
    Contributor Since: January 2009
    Location:Pelham, NY