
A Stimulus Plan For Venture Capital? No Thanks. - gibsonf1
http://www.avc.com/a_vc/2009/02/a-stimulus-plan-for-venture-capital-no-thanks.html
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nostrademons
I wonder if the general problem now is that there's too much capital sloshing
around the global financial system for the investment opportunities available.
Kinda ironic, since the immediate problem is that banks are undercapitalized,
but they wouldn't have made the bad loans if they didn't have spare cash and
too few legitimate lending prospects.

Anyone ever play Civilization? There's a problem that occurs once you built a
manufacturing plant, research lab, and stock exchange (or whatever the
terminal improvements are) in every city: there's nothing left to build! So in
Civ1, I'd start building city improvements I didn't really want, just to sell
them as soon as they're finished and pad the treasury. The computer gamer's
equivalent of Keynesian ditch-digging. In Civ2/3, they added a
"Capitalization/Wealth" improvement that does this directly, so I just select
that, set science to 100%, and watch the cash pile up. Ironically, this always
seems to happen right around 1980 in game time.

In a computer game, extra cash is good, because it's just a way of keeping
score. But in the real world, extra cash drives prices up. Cash itself is
useless (except in times like the present situation), so companies try to
invest it in ever-marginal investments. But companies want a return on their
investment, and eventually there's _no way_ you can justify the prices paid
for these marginal investments, so prices come crashing down to earth in a
financial crisis.

~~~
lacker
If there was too much capital sloshing around, it would be easy for companies
and individuals to get loans. But it's not.

~~~
nostrademons
What if the limiting factor isn't the amount of capital itself, but rather the
ability of the managers to determine whether a firm is likely to generate a
return on that capital? An information problem, not a money problem.

I think this hypothesis might even be testable:

1.) If there is simply too little capital to go around, then interest rates
should rise accordingly. Individual firms know the returns they can get on
capital; they bid up rates accordingly, and the limited supply of capital goes
to the most productive firms.

2.) If there is too much capital and managers cannot discern where to put it,
and they _realize_ that fact, then you'd see cash pile up while
companies/individuals can't get loans. This describes Berkshire Hathaway over
the last 5 years, and a couple of the better VC funds, but not really the
economy as a whole.

3.) If there's too much capital sloshing around, managers have imperfect
information about where to put it, and they _don't_ realize this, then they
will invest in poor prospects, those firms will be unable to pay back the
loans, and they'll go bankrupt - soaking up the capital in write-downs. Then
there's a temporary shortage of capital while everything gets reallocated and
people work off the debts (or write-downs) they just incurred.

#3 sounds a lot like the world we live in. :-)

I have some ideas about how Google could help with this - probably not fix it,
as that would require the ability to see into the future, but do a better job
than the global financial system is currently doing. Ask me about it at work
sometime. :-)

~~~
thaumaturgy
Bingo!

Although this describes something of a subset of the current economic
situation, I think it's still safe to say that there is a lot of money
available for "the next Google" (or Intel, or...). The problem isn't the
money, it's figuring out who the next big players are going to be.

I mean, hell, is this not directly demonstrated by the entire YC process?
Here's a model in which there's a very reasonably-sized fund available, and an
entire business set up around trying to determine who's got a good potential
product, and who hasn't, and then assist the ones that maybe have a chance.

------
pg
I agree that the top VC firms are a narrow channel that already has enough
money in it. But on the other hand the number of startups is certainly
constrained by the amount of funding available. Which means that if there were
another way to get money to them besides the top VC funds, it would increase
the number of startups.

Of course, if the government tried such a thing it would almost certainly
screw it up. But it's possible in theory.

~~~
fredwilson
paul, you innovated with a new form of venture capital called ycombinator.
you've figured out how to get the right amount of capital to a new class of
entrepreneurs and the results speak for themselves. you've attracted a bunch
of copycats, some who will do good things and many who will not.

that's the kind of thing that i would like to see more of. we don't need more
money flowing into the existing system which is at capacity and has been for
years.

~~~
jacoblyles
Do we know if Y Combinator is profitable yet? One quality that is likely to
limit copycats comes from the fact that it is not like a VC. It is not out
there with prospectuses advertising its performance to the deep pockets.

If the YC model is indeed profitable, then it might be time for an
enterprising financier to go out, raise a fund, and do it ten times as big. Of
course, the success rate will be somewhat lower, since the personal attention
and advice that YC gives its companies just won't scale.

If the model is profitable, I would guess there would be private money to be
had. I just don't think anyone knows how profitable the model is yet. It is
still new, risky, and unproven.

Just because some guy with a ton of domain knowledge can earn a decent return
off a few dozen companies a year doesn't mean it will work at scale.

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indiejade
Friedman does make some good points though:

 _Our motto should be, “Start-ups, not bailouts: nurture the next Google,
don’t nurse the old G.M.’s.”_

The capitalist way is to reward risk. However, banks are notorious for not
giving out non "asset-backed" loans. And even with the billions of bailout
money received, they aren't exactly taking risks by investing in the
innovators; they're even _more_ risk-averse.

So how does an entrepreneur who is bursting with good ideas surpass this
obstacle?

I think that people -- for example, those who lost everything in one of those
natural disasters during the last 8 years -- who have nothing (no assets, so
to speak) are in the prime positions to innovate.

Maybe what we need is a stimulus plan more to reward non-asset backed risk
takers . . ..

~~~
chollida1
> However, banks are notorious for not giving out non "asset-backed" loans.

I wouldn't say notorious, that has a negative connotation. All jokes about the
current situation aside. Banks aren't supposed to make risky loans, they
aren't supposed to lose their capital. All loans they make should be
guaranteed by something, even if it's just the word of a wealthy individual
like a parent cosigning a loan for a child.

~~~
indiejade
True, true. What I was thinking (but didn't expound upon) was tangible vs.
non-tangible asset loans. The "word of a wealthy individual" in your example
would be the latter. Most intellectual property would also be the latter.

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rokhayakebe
Maybe not a plan for vcs, but I am all for the government setting up a 20B
dollar fund to purchase from startups. In fact there is a need for it.

Selling to the government is extremely hard or nearly impossible if you are
two guys with a software that could benefit the Department of Defense. The
fund could ease the process.

~~~
cjenkins
Interestingly enough, there are already requirements on federal agencies to
purchase from small businesses.

<http://www.sba.gov/contractingopportunities/index.html>

I'm not sure how much gamesmanship goes on with larger companies using smaller
ones as a pass through, but 23% of federal spending is supposed to be targeted
towards small businesses.

Another program that might be relevant would be the <http://www.sbir.gov/>
program(s).

~~~
omnivore
They only target companies that are really good at wading through bureaucracy
and who target themselves almost exclusively at government.

~~~
ori_b
That may be the case (I don't know) but sending more funding towards buying
from small guys won't fix anything if the barrier to entry is bureaucracy.

The solution is to fix the bureaucracy, not to throw more money at it.

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MaysonL
Does anybody remember ARPA? That's where government's "venture capital"
investments should go.

