Madrona

Geoff Entress

Great columnists know how to spark discussion, something Thomas Friedman certainly accomplished when he proposed that government stimulus money should go to the top 20 venture capital firms instead of the auto companies. On TechFlash and other blogs, some readers applauded the idea of rewarding innovation while others pointed out flaws in the concept.

But what do venture capitalists and angel investors think? I emailed several Seattle area investors this morning to get their take. The reactions-- from Ignition's Brad Silverberg, NWVA's Tom Simpson, Rolling Bay's Geoff Entress (pictured) and others -- might surprise you. Nearly every VC disagreed with Friedman's proposal in some way.

Brad Silverberg, Ignition Partners: 

"Friedman is a smart guy and well intentioned here; dumping more good billions after bad into failing industries is a bad idea. But I don't think the answer is to dump money into VC, either. In general, there is too much money already in VC.

After a bunch of firms raised $1 billion funds in the early 2000's, they found out it was too hard to invest that money well in early-stage companies, and their next funds were much smaller. Giving a startup too much money is a sure path to failure. Most of today's startups require less money, not more, especially at the beginning."

Tom Simpson, NWVA: 

"I agree that devoting more capital to emerging businesses is a very worthwhile initiative given the current economic environment. My question is where those dollars would be targeted for investment. I sense that many VC funds are already flush with cash. Yet, they are being very cautious in identifying and making new investments.

Accordingly, just like what has happened with TARP, it is not clear to me that additional cash would stimulate a higher level of investment. Moreover, the top 20 VC funds don’t need to raise money from the US government, nor would they want too adhere to the restrictions (salary caps) that would be associated with taxpayer money.

Alternatively, I would suggest any such program be targeted at regional venture capital funds. For example, local candidates may include funds like Fluke or Buerk Dale Victor that invest in a broader array of businesses (retail, consumer, manufacturing, distribution, etc.) and in smaller dollar amounts.

There are many emerging companies outside of tech that are rapidly growing and don’t need the minimum level of investment otherwise mandated by the top 20 VC firms. Many of these companies need an equity infusion, but the sources of equity capital catering to such businesses are severely limited."

Andy Sack, Founder's Co-op:  

"$20 billion on the auto industry is definitely a waste. I think Friedman's point is directionally correct even if the specifics of his proposal are wrong. Giving $20 billion to the top VCs will only serve to make the VC partners at those firms mega wealthy off of management fees and would lead to an even larger supply of over-funded start-ups to nowhere... Not more Googles.....(Or Amazons given we're in Seattle).

I'd rather see the $20 billion go toward: 1) A tax credit or investment match that stimulates business investment -- what about lowering cap gains to 10 percent. 2.) Energy research the likes of which Friedman (has) talked about before. I'd like to see NASA stop trying to shoot for the (moon) and rather work on energy-related technologies."

Geoff Entress, Rolling Bay Ventures: 

 "Although I completely agree with Thomas Friedman that we need to be funding innovation rather than keeping dying industries on life support, I also agree with the comments from Fred Wilson and others that the answer does not lie with the VC industry, but rather with giving angel investors an incentive to keep supporting startups at the top of the funnel.

Angels, traditionally providing the early life blood for innovation, are quickly becoming an endangered species. Tax breaks to support investment would go a long way."

Greg Gottesman, Madrona Venture Group:  

"I agree with Thomas Friedman's premise that we should focus a portion of the stimulus money on sources likely to produce a new generation of innovative companies. The best way to do that, in my opinion, is to fund research more aggressively at our great research universities like Stanford, MIT and the UW.

This type of investment is unlikely to have immediate-term impact, but it would have the greatest long-term benefit for our country in terms of creating new technologies and industries. I don't think funding the top 20 VCs is a realistic alternative. Most of them do not need more capital and would not want the oversight that taking significant taxpayer dollars would (and should) require."

Ron Howell, WRF Capital:

"I think the government is at its best when it provides services that are uniquely functions of government: roads, military, fair playing field for a capitalist-based economy. I don't think it's a good idea to have the government giving $20 billion to the venture field any more than I think it's a good idea to reward bad design and management in the auto industry.

Venture capitalists have raised their money from sophisticated investors that have a risk budget into which their allocations to VCs make sense. The government would do well to change the tax breaks for companies trying to transition from private to public over giving money to VCs."

 UPDATE: Bill Bryant, Draper Fisher Jurvetston: 

"Thank god Friedman isn't heading up TARP. While we can debate whether the auto industry is worth saving, one thing that venture doesn't need is an extra $20 billion to 'invest.' Access to capital is not the issue. What we need are entrepreneurs working on breakthrough technologies (not 'financial engineering') that will transform existing industries and create brand new ones that did not heretofore exist.

I'd much rather see money flowing to research institutions (universities, government labs and private think tanks) in support of truly fundamental research that will help America reestablish itself in the decade starting 2010. Otherwise, our future is going to look an awful lot like the Back to the Future world where Japan is today."