What productive, socioeconomically beneficial role might the venture capital industry play in the upcoming economic stimulus/recovery efforts? Read on...
In the wake of my prior post "Tranche Warfare," the nagging practical question inexorably obtains: "what now?" In "What Cooked the World's Economy?" James Lieber observes:
It's 2009. You're laid off, furloughed, foreclosed on, or you know someone who is. You wonder where you'll fit into the grim new semi-socialistic post-post-industrial economy colloquially known as "this mess." You're astonished and possibly ashamed that mutant financial instruments dreamed up in your great country have spawned worldwide misery. You can't comprehend, much less trim, the amount of bailout money parachuting into the laps of incompetents, hoarders, and miscreants. It's been a tough century so far: 9/11, Iraq, and now this. At least we have a bright new president. He'll give you a job painting a bridge. You may need it to keep body and soul together...Yes, and critics of all political stripes are slamming the perceived ad hoc, incoherent, shoot-aim-ready nature of the "federal bailout" to date (which, of course, largely predates the Obama administration, to be fair). The "TARP" program (Troubled Assets Relief Program) is increasingly viewed as the "WALP" program (Worthless Assets Lipstick Program), one seen as simply shoveling cover-your-ass taxpayer money, unrestrained, at many of the very financial industry miscreants responsible for the economic disaster within which we now struggle. Various of these entities are now deemed "too big to fail," and we simply must "socialize the losses" stemming from their aggregate venality and incompetence, lest we fall into a severe global economic depression.
(Highly recommended, if depressing reading, that entire article.)
As I write this, the salient details of President Obama's economic stimulus proposal are in heated flux, with liberals and conservatives alike sniping relentlessly from within their various ideological redoubts. Beyond respective partisan socioeconomic doctrines (e.g., ranging from the still widely disdained "socialist / command economy" position to that of the equally dubious "panacea of free enterprise"), much of the wrangling has a decidedly sophomoric "Perfectionism Fallacy" timbre (i.e., that your proposal appears to be in any way "imperfect" -- in my view -- renders it summarily nul and void; we need not even consider it).
All the predictable partisan sidelines sniping aside, it appears overwhelmingly likely that a significant quantity of (borrowed, of course) federal funds will in fact continue to be flushed forth into the economy in a frantic attempt to abate and reverse this extremely serious downturn. Will it simply comprise bailing out Wall Street and the bankers, along with iterative cash infusions into our geriatric rust belt industries? Or should we consider some additional alternatives?
A book I'm currently reading, Guy Kawasaki's "Reality Check," has triggered some thoughts in conjunction with a few other ideas that have crossed my mind recently. The other day I read this post by Ian Welsh at FireDogLake.com: "No Banks Means No Banking Crisis."
You don't need the current banks. If they won't lend, let them go under. If the Fed can lend to banks, why can't it lend directly to banks and consumers...OK. But, there you run smack into the "socialist" de facto "nationalized banking" perceptual problem. Morever, much of the focus on bailout tactics for "unfreezing the credit markets" essentially assumes a ripple-effect return to more of status quo consumerism, however the funds get injected into the economy. Those on the right argue for even more tax cuts as the primary means of renewed economic stimulus, i.e., that "allowing taxpayers to keep more of their money will enable them to vote with their wallets and thereby reinvigorate the economy in the most efficient manner, as free markets respond to fill their needs." Newly installed Republican National Committee Chairman Michael Steele recently, on CNN:
STEELE: And first off the government doesn’t create jobs. Let’s get this notion out of our heads that the government creates jobs. Not in the history of mankind has the government ever created a job. Small business owners do, small enterprises do. Not the government. When the government contract runs out, that job goes away. That’s what we’re talking about here and those 2 to 4 million jobs that are projected? Won’t happen, trust me.Well, putting aside the simplistic vapidity of that assertion (which, at its most naive, assumes that private sector jobs are permanent, notwithstanding voluminous recent evidence to the contrary), his observation does provide me an opening to proffer a potential "third way" as at least part of the recovery mix -- one that eschews both the tooth & claw Darwinian economic theories of the right and the We're-All-Victims-Who-Must-Be-Rescued silliness of the left.
I tend to agree that merely wheeling in truckloads of jump-start money anew to throw at the conventional economy simply amounts to papering over the problem and kicking the can yet again down the road. I am also dubious of the long-term viability of a "statist command economy wherein the government picks the winners and losers." However, the problem with the latter critical sentiment is that it ignores the reality of what has essentially become a megacorporate shadow government comprised of the "Too-Big-To-Fail" financial and industrial entities who've largely been "picking the winners and losers" (and overwhelmingly losers of late -- all while continuing to feather their own nests). The heartwarming Norman Rockwell-esqe notion of the lift-all-boats economic juice of entreprenurial small business Main Street -- with all due respect to RNC Chairman Steele -- seems to me vastly overblown, with regard to recent history anyway.
Is there a way out of this mess?
ENTER THE VC
So, how to spur the "New Economy" we will undoubtedly need for renewed and sustainable ecomomic growth? In a manner consistent with our "free market" values? In a manner that safely navigates the land mines buried in the mega-bureaucracy and equally bureaucratic megacorporate landscape?
Guy Kawasaki, author of the above-cited "Reality Check" and former Apple Macintosh "evangelist" (see "The Macintosh Way") is, among other things, an insightful and successful Silicon Valley "venture capitalist." Venture capital firms engage in "private equity" funding, taking stakes in companies they vet and fund. They are numerous; just a single cursory Google search yields 243 firms listed in a Google directory results page.
Perhaps the most reputable among them might be enlisted to serve a beneficial private sector role here (i.e., "public/private partnership") as federally contracted commercial recovery disbursement intermediaries, using their business model analytics and management expertise to evaluate, fund, and advise both promising startups and warranted expansion of existing companies. Some arguable upsides:
- Direct (and secondary spin-off/multiplier effect) job creation, in contrast to the hoped-for but largely speculative, loosely-coupled flow-through effect of simply funding more "demand-pull" consumerism;
- Much of the direct job creation will draw upon the depressingly vast and still rapidly growing pool of highly educated and experienced professionals of myriad stripes, for whom job searches have become largely problematic of late;
- VC's have no interest in funding dubious entities (or bridges to nowhere). They prosper only by picking winners. Many of such potential "winners" will unfortunately remain unfunded should they have to rely on banks or personal resources, and traditional root sources of venture capital funds have been severely adversely impacted along with the rest of the economy.
- Absent effective firewalls, this could end up being viewed as one more tangential avenue for de facto congressional "earmarks" and crony capitalism;
- Many VC's were for a time increasingly complicit in the "built-to-flip" mentality at the root of the "DotCom" bubble burst of 2000-2002. We would need a cardinal ethic of "build-to-hold-and-grow";
- Relatedly, within the "service sector" of the economy, we have no need of new firms that do little beyond "churning paper" within a business model principally based on on fee income, irrespective of its ostensible ROI/ROE potential. Again, see "Tranche Warfare." We have by now beyond ample evidence of the dead-end upshot of that M.O.;
- There is the potential chicken vs. egg / Catch-22 / bootstrapping problem, i.e., there actually has to be legitimate market demand, notwithstanding lingering residual romantic charms of the build-it-and-they-will-come aspect of "Supply Side" theory. Absent legit demand, you're wide open to political accusations of "make-work boondoggles" (painting bridges for Obama?) Still, smartly deployed pump-priming of sustainable, less environmentally adverse technologies and processes cannot be other than beneficial [**].
...the power and seduction of fossil fuels will be hard to leave behind. If humans were to look to biomass (all living things, but in this case particularly plants) as a replacement, we would need to increase our consumption of all primary production on land by 50 percent. We're already using 20 percent more than the planet can sustainably provide, so this is not an option...We can choose to continue to drill, mine, cut down, and grind up the planet in pursuit of short-term business-as-usual, unevenly distributed consumerist comforts, but the day of tragically harsh mass reckoning draws ever closer. The lessons to be drawn from Jared Diamond's "Collapse" are compelling in this regard. There is no shortage whatsoever of constructive and remediative work to be done in support of a sustainable and broadly prosperous future for all of humanity. But, let's not kid ourselves that an unregulated "invisible hand free market" alone will suffice to insure its emergence. Recent economic history alone refutes that assertion.
In 1961 there was still room to maneuver. In that seemingly distant age, there were just 3 billion people, and they were using only half of the total resources that our global ecosystem could sustainably provide. A short twenty-five years later, in 1986, we had reached a watershed, for that year our population topped 5 billion, and such was our thirst for resources that we were using all of Earth's sustainable production.
In effect, 1986 marks the year that humans reached Earth's carrying capacity, and ever since we have been running the environmental equivalent of a budget deficit, which is sustained only by plundering our capital base. The plundering takes the form of overexploiting fisheries, overgrazing pasture until it becomes desert, destroying forests, and polluting our oceans and atmosphere, which in turn leads to the large number of environmental issues we face. In the end, though, the environmental budget is the only one that really counts...
...By 2001 humanity's deficit had ballooned to 20 percent, and our population to over 6 billion. By 2050, when the population is expected to level out at around 9 billion, the burden of human existence will be such that we will be using -- if they can still be found -- nearly two planets' worth of resources." [pp. 78-79]
To be sure, the U.S. comprises only ~5% of world population, and the responsibility of our federal government is constitutionally bound as a priority to address the "general welfare" of our own citizenry. However, we consume about 25% of the world's resources in the aggregate, and, given that our politicians never pass up an opportunity to extol the U.S. as "the greatest nation on earth," perhaps we might start acting like it in the area of sustainability leadership, for, in the end, humanity will survive or perish as a planet-wide species.
The foregoing comprise just a few of the obvious pluses and minuses. To be sure, the Devil would be in the details. A rational and transparent VC firm contracting process, along with a just, "win-win" compensatory structure would be critical. Moreover, policy questions would extend to issues such as
- "U.S. firms, and U.S. citizen employees only?" (The public would simply not stand for taxpayer money used to further send jobs overseas);
- VC firms typically take equity positions in their client firms, but VC underwriting that used taxpayer money would beg a significant question regarding equity stakes and compensation (although, some concerns might be mitigated by "skin-in-the-game" provisions, i.e., I'm not necessarily advocating using VC's to deploy 100% federal money. Perhaps VC equity/compensation incentives could be a function of the level of their relative proportions of federal and private core fund monies allocated to client firms.).
While I cannot claim any in-depth knowledge of the VC field, I am now periphatically acquainted with a couple of the Principals and Associates in the VC firm Weston Presido. A perusal of their "Portfolio page, Companies by Sector" reveals a breadth businesses wherein people actually make things and provide real services. I don't see anything that smacks of paper-flipping. Venture capital firms like this might well provide one constructive avenue for economic recovery and reorientation. I'm sure there are numerous other VC firm examples beyond this one company with whom I am marginally familiar.
New, productive economic "golden eggs" (at the risk again reaching for the worn-out metaphor) await discovery, and are sorely needed. The question, then, is how best to establish and nurture them.
Just an idea. What do you think?
FEB 11th UPDATE
Kudos to the Mercury Rising blog for noting this:
Venture capital groups make lifeline pleaPrecisely my point.
By Martin Arnold, Private Equity Correspondent
Published: February 11 2009 21:35 | Last updated: February 11 2009 21:35
Hundreds of promising UK technology companies are expected to fail this year because of a lack of funding, venture capitalists are warning, as they press the government to finance a £1bn ($1.4bn) fund of funds to support the sector.
The financial crisis has caused investment in venture capital funds to dry up since the collapse of Lehman Brothers.This leaves many venture capital-backed technology companies facing a cash crunch this year.
Richard Anton, partner at Amadeus Capital, one of the UK’s biggest venture capital investors said: “Starved of capital, companies will go to the wall or they will be forced to cut back too far, reducing jobs and losing competitiveness.
“This question is of great importance to the UK, as these are the fast-growing companies that will create jobs.”...