Please, Economic Stimulus Plan - 10,000 Startups with $1B

This is a post echoing what a variety of people have been talking about for the last few weeks - I don’t have a lot  to contribute, but am compelled and felt worthwhile to echo other people’s voice here.

On Februrary 21 2009, Thomas Friedman of the New York Times wrote “Startup the Risk Takers” where he said:

“Reading the news that General Motors and Chrysler are now lining up for another $20 billion or so in government aid — on top of the billions they’ve already received or requested — leaves me with the sick feeling that we are subsidizing the losers and for only one reason: because they claim that their funerals would cost more than keeping them on life support. Sorry, friends, but this is not the American way. Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis.”

Further, Friedman points out that how such bailout money should be spent on: “imited financing, for a limited time, targeted on an industry bristling with new technology start-ups that, with a little push from Uncle Sam, won’t just survive this crisis but help us thrive when it is over. We need, and the world needs, an America that is thriving not just surviving“.

While I sort of understand the government using tax payer’s money to bail out financial institutions because we can not afford the collapse of the financial service industry, I do not see the strategic importance of the auto industry in this day and age. Why not fuel the $20B to new promising areas that would create lots of new jobs and lead to future prosperity?

Interesting, in response to Friedman’s post,  Fred Wilson of Union Square Ventures says “No Thanks”. Fred writes “The venture capital business, thankfully, does not need any more capital. It’s got too much money in it, not too little. Just ask the limited partners who have been overfunding the venture capital business for the past 15-20 years what they think. You don’t even need to ask them. They are taking money out of the sector because the returns have been weak.”

I appreciate Fred’s point of view from a VC’s perspective and would agree that giving $1B to the top 20 venture capital firms is not a good idea either (as suggested by Friedman’s original article), I think Friedman’s main point is valid: send money to those who create our future, not to bail out “giant wealth-destruction machine in history”.

As an entrepreneur, I certainly see Fred’s point that there are too much VC captial. But on the other side, I aslo see lots of startup companies that, with a little bit more money, can survive and thrive. I have seen various startups being caught in this economic situation, not because these companies are weak, but because of the ripple effect: limited partners in VC firms are getting burned; VCs are re-adjusting to a new reality of “longer fund cycle” and “portofolio companies need more than expected cash to reach exits”. As a result, VCs are finding their fund is not enough to cover the needs of portfolio companies. VCs are conserving their own fire power on “only the few highly promising portfolio companies”.  Some of the VCs even asked money back from their investments so that they can pour some more cash into selected companies.

(Jeff Bussgang has a good post “Why “Flat Is The New Up” and VC Funds Are Under-Reserved” that helps one understand why VCs have to conserve cash, and may not be able to continue to fund some existing portfolio companies).

The net result is that a variety of companies, close to profitability or well on the way to profitability, are being caught in the middle. A lot of these companies are good companies - they may not be the next google, but they can certainly create jobs and reach profitability, if they don’t lose the needed “little push” prematurely. In other words, they may not be “wealth creation tools” that Fred is talking about in his response, but they are perfect small businesses that the country needs.

Programs like techstars (http://www.techstars.og) and MIT VMS (http://vms.mit.edu) create tomorrow’s companies with zero or little financial resources. How about dropping a tiny drop of the stimulus fund into similar programs, or other ways to help build, grow and sustain small businesses?
Though there are a lot of VC capital in general, VC capital only flows into these who are likely to become the next Google. That is not to say that these companies who are not going to become Google are not valuable. To the opposite, they are extremely valuable to the society. They can create millions of jobs, help our economic recovery, and most importantly, help secure our future. They may not be the kind of companies that fit the VC model, but our country and our society should certainly welcome them, love to have them, and when they need a little bit push,  please don’t just walk away from them.

So please, Economic Stimulus Plan,  you can create or boost 10,000 startups with $1B. A lot of them will fail and a lot of them will survive. But none of them is going to be “giant wealth destruction machine” and each of them is going to  help build our future.