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Thursday, January 1, 2009

Should The US Federal Government Become A Venture Capitalist?

To a large degree the government has already set this precedent. The recent bailout of the banking industry resulted in the government taking an equity stake in a number of banking institutions. GMAC is now part owned by the US government. During the Savings and Loan crisis in the 90's the government took equity positions in a number of financial institutions and actually received a very good return on investment. In the vernacular of the VC industry these investments can best be described as "down rounds".

Given the current economic crisis and the need to stimulate growth and innovation in the US economy the prospect of having the government proactively invest in America, with an expected return on investments, seems to be a a policy worth entertaining. This is certainly a much better way to stimulate growth and innovation then bailing out troubled businesses such as the automotive industry.

The recent economic crisis has also brought to light certain deficiencies in the US's ability to innovate, create new and forward thinking industries and to provide jobs for its citizens that have a prospect for future growth and expansion. Just imagine what would happen if the US government provided a trillion dollars of investment capitol for new and emerging companies in the areas of technology, education, health care, transportation, etc?

This may seem far fetched and Utopian or is it? Other governments have taken the lead in setting an example on how effective this approach can be. The Singapore government has several VC initiatives chartered with investing in businesses that will lead to innovation, business formation and job creation in areas that will help Singapore remain a technology leader in Southeast Asia. These programs have helped to make Singapore a net exporter of consulting services, software development and infrastructure. The economy remains robust even in this time of global downsizing.

If the US decided to go down this road they could leverage the established VC model, with some modification, to get going rather quickly.

1.) Invest in existing VC Funds - This is really no different that the way large state pension funds work today. They invest significant portions of their assets in VC funds. They have very specific ROI expectations for these investments and have a long history of investing in these funds.

2.) Investment Categories - Make strategic investments in certain areas that would have direct benefit to significant segments of the US population. Green and Clean, Health Care, Transportation and Education come to mind. The assumption being that the shear number of customers the business would impact should help to make them successful.

3.) Advisory Board - Create an advisory board of VC's, technologists, entrepreneurs, business leaders and consumers to determine how best to manage and invest the funds. There is a wealth of knowledge and experience in the US that could be brought to bare to help make the program a success.

4.) Regulation - Yes, the government will have to create a regulatory group to make sure that the money is being invested properly and abuses are minimized. The recent Wall Street, banking and mortgage fiasco proves that regulation and oversight is important whenever significant dollars are involved. The regulatory body should be comprised of government, financial, industry, consumer and entrepreneurial representatives.

5.) Set Expectations - Like any investment a rate of return and cash out term should be set for the investment.

Overall, the concept of investing in new and innovative products and services seems to be a much better idea then pulling out FDR's 1930's infrastructure New Deal initiative. That may have have been fine in the 30's but this is a new millennium and things have changed. We need to iterate and innovate quickly. Let entrepreneurs do what they do best and help lead the charge in the 21st century.

1 comment:

yamo said...

It's quite interesting that you're talking about the Government acting as a quasi-VC type organisation.
Here in Ireland we have an organisation called Enterprise Ireland, who are a Government funded body tasked with supporting Irish startups. Typically this takes the form of matching funding received at the seed/Angel/Series A stage in return for a 10% stake in the company. This makes Irish companies particularly attractive for this type of funding, as investors are effectively getting double the bang for their buck. They also provide a variety of other types of support for companies - ranging from networking events to staff members in almost all major world markets. These staff members cultivate relationships with relevant companies and individuals around the world in the hope of connecting them with Irish companies who can work with them or service a need they may have. It's not an ideal system - I would prefer to see entrepreneurs and business people acting as gatekeepers for Enterprise Ireland, rather than people who haven't run their own business and who maybe don't understand certain areas as well as they should - but it does work quite well, and it does stimulate some amount of investment in Ireland.

I'm not sure how something like this would scale up though. It's fine in a small country, but perhaps it could work on a state by state basis in the US?