In an op-ed post in Sunday’s New York Times, Tom Friedman rightly says we need to quit bailing out the losers and start dedicating resources to the innovators. However, he jumps the track when he says money should be given to venture capitalists to foster innovation. Venture capitalists have access to plenty of money. What they don’t have is good, shovel-ready innovative deals.
I have run programs for entrepreneurs through the Kauffman Foundation for ten years. In my opinion, giving stimulus money to VCs won’t help, because the lack of funding (especially outside Silicon Valley and NYC) occurs at the earliest stages — the seed stage or the prototype stage. Most of the companies I see are not suitable for a VC investment even if it fell out of the sky on them. They’re not ready.
That’s why boutique incubators like YCombinator and Techstars have been so successful in their niches; they weed out the silly start ups and put some muscle behind good ones. However, they only concentrate of software (or at least I think they do) and there are many other kinds of companies: clean tech, medical devices, hardware, etc. that require a bit more money to go forward. Having just listened to Marc Andreesen talking about his new fund on Charlie Rose, I think he’s right: the sweet spot for funding is $200k-$1.5m
If the government were to contribute to innovation, why shouldn’t it just provide more funding for existing programs, which now must turn down many deserving applicants?
For true innovative technologies, SBIR grants are a real boon, and their scope could be enlarged and expanded. They could be given outside research universities, and made easier to obtain (there’s a little industry of SBIR grant writers that needs to be disintermediated).
For later stage companies, SBA loans are also good, although they always run out of money in Q2, so they are unavailable to entrepreneurs a good part of the time. And SBA loans place heavy emphasis on — you guessed it — real estate, which most entrepreneurs don’t need right now.
Get the money to the entrepreneur, in the form of grants or government-backed loans (ordinary banks don’t lend to entrepreneurs during the first 3-5 years of their existence), and I will show you a way out of the recession.