Another reason government bailouts will prolong the collapse


Watch the venture capital disappear
Thoughts on venture capitalism from the Wall Street Journal, emphasis added.

Venture capitalists certainly agree that innovators and start-up companies, not bailed-out GMs or Chryslers, will create the new jobs. They rightly brag that almost 20% of U.S. gross domestic product is generated by companies built by venture capital, such as Intel, Apple and Google. Still, they almost universally panned the notion of taxpayer support. Their real-time rejection is an excellent example of how social media -- here, the venture community dissecting a proposal online -- can now quickly take down bad ideas.

"The top venture firms don't want, don't need and are never going to take government money. The same is true of the top entrepreneurs," Fred Wilson of New York's Union Square Ventures wrote on his blog. "The worst firms, on the other hand, will gladly accept government money," which would go to investors who can't raise funds privately and to entrepreneurs whose ideas shouldn't be funded. "It's a problem of adverse selection."

Venture firms have had a hard time profitably investing $30 billion each year for the past several years. Even in the paralyzed markets of the last quarter of 2008, more than $5 billion was invested in more than 800 deals. Returns, however, have been low. Some areas, such as clean tech, look especially troubled now that oil no longer costs $145 a barrel. Another $20 billion would be impossible to digest efficiently. Instead of subsidizing the biggest venture firms, Geoff Entress of Rolling Bay Ventures in Seattle posted that tax breaks are needed for seed-stage angel investors, who "are quickly becoming an endangered species."

The idea of direct government funding is also anathema because it would undermine market discipline. Pension funds, endowments and other institutional investors keep a close eye on how their invested money is doing. Venture firms can raise new funds only if their previous performance was good.

Several venture capitalists pointed out the irony that government-funded venture capital could mean trading a credit bubble for another technology bubble. Artificially inflating the venture coffers through a government fund could risk repeating the debacle of 1999-2000, when too much money chased too few good ideas, resulting in the sharp deflation of the Internet bubble. Taxpayer funds would reduce hard-won investment discipline as cheap money backed riskier, less-promising ventures. Valuations assigned to companies would artificially rise, poorly selected start-ups would fail, and taxpayers would be on the hook.

So here's the question that no one is asking Washington. If the spending is really about recovery, then why isn't anyone talking to the people who really know money?

— NeoWayland

Posted: Mon - March 2, 2009 at 02:23 PM  Tag


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