Andreessen & Friedman: Start-ups and VCs to the Rescue!

Posted by: Spencer Ante on February 23, 2009

I gotta hand it to Marc Andreessen and Thomas Friedman—they both nailed it this week and repeated a message I’ve been preaching for the last year on my personal blog, in my book talks and in my work for BusinessWeek.

It is the idea that the entrepreneurial economy will play a key role in lifting America’s economy out of the recession. But each of them addressed the challenge in a slightly different though related way.

Andreessen broke the news during an interview with Charlie Rose that he is starting a new venture capital fund focused on investing in young and unproven companies with big ideas. I find it really fascinating that the best entrepreneur of his generation has decided to take off his operating hat to become a full-time venture capitalist.

Andreessen must believe, as I do, that this is actually a very good time to be in venture capital, as long you are able to raise money, of course. Although Andreessen has never been a professional VC, I am sure he’ll be able to easily raise a modest to large-sized first fund based on the reputation of himself and his partner, Ben Horowitz, and the fact that he’s gained a lot of experience the last few years doing dozens of angel investments. This is great news for entrepreneurs, and I can’t wait to see how Marc shakes up the industry.

One of the things I’ve been saying a lot over the last year is that one of the great ironies of venture capital is that an industry all about promoting innovation has not been very innovative itself the last 30 years. So I hope that the financial crisis will lead us to try to experiment and create new approaches that can help finance and stimulate innovation.

Which brings me to New York Times columnist Thomas Friedman. In his column today, titled “Start Up the Risk-Takers,” Friedman boldly proposed that the federal government should temporarily get into the business of venture capital and help finance a new generation of biotech, info-tech, and clean-tech companies.

“When it comes to helping companies, precious public money should focus on start-ups, not bailouts,” wrote Friedman. “You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.”

Friedman suggested a new motto for the stimulus program: “Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.”

This is actually not a totally crazy idea. While I largely agree with VC Fred Wilson that the top VC firms do not need and probably would not take government money, I bet more second and third tier firms in need of capital, or young promising firms without a track record, would consider taking on the government as an LP—especially if it came with no strings attached.

We’re not that far away from this right now. Many venture-backed startups have already said they would take and apply for various bailout funds. Wireless provider Clearwire is an obvious beneficiary of the $7 billion in broadband grants, and many clean tech startups are going to tap into the tens of billions in bailout funds dedicated to smart grid and renewable energy.

Even if the plan doesn’t fly, I applaud Friedman for making a creative proposal and focusing the discussion on the need for supporting the new, rather than bailing out the dinosaurs.

- Spencer Ante also publishes the Creative Capital blog. Click here to see more.

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Reader Comments

Marc Dangeard

March 1, 2009 04:45 PM

If the government wants to help entrepreneurs and create jobs, the money should not go to VC fund, because the VC model does not help entrepreneurs. It mostly benefits the VCs themselves, and not even necessarily their investors.
A few number:
- of the top 500 fastest growing companies for Inc Magazine list, only 6% received VC money. VC did not help the other 94% that created jobs
- the average return on investment from a study of 1300 VC firms worldwide is S&P plus 3% before VCs take their fees, and S&P minus 3% after fees. So investors on average make less than the market on VC investments. The government would not be making a good deal investing in VC funds

The only reason why things have not changed so far is that the status quo was working fine for everybody:
- VC investments are "alternative investments" for the big guys. When you manage 300B$ fund, a few millions alternative investment in a VC firm is crumbs for you, and therefore as long as the VC is a nice guy and works well with you, you have better things to do than trying to optimize this
- the VCs themselves have no reason to change a model that works for them. They get their fees and they live well from the system, why should they change anything
- entrepreneurs have no say, the ones who are in the club receive investments and have no reason to bite the hand that feeds them. The others are not in the club, and they have no control over the model.

I hope that this crisis will be an opportunity to revisit all this.
I have started Entrepreneur Commons (www.entrepreneurcommons.org) as an option to do just this.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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