Gov't Bailout for VC's?

Not something I'd imagine we'll be seeing...

http://online.wsj.com/article/SB123595208950605121.html

OPINION: INFORMATION AGE
MARCH 2, 2009
Too Risky for Venture Capitalists
Why proposals for a government bailout were roundly rejected.
By L. GORDON CROVITZ

With industries from autos to banking begging for taxpayer handouts, what would you call an industry that says thanks, but no thanks? Crazy, but like a fox. Even for venture capitalists, some ideas are just too risky.

Hundreds of the country's venture capitalists this past month blogged against or otherwise rejected proposals that the U.S. government fund early-stage investing. They dismissed a recent column by Tom Friedman in the New York Times that urged bailout funds for venture capitalists. "You want to spend $20 billion of taxpayer money creating jobs?" Mr. Friedman wrote. "Fine. Call up the top 20 venture capital firms in America" and invest the money with them.

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.

Taxpayer money would bring other unwanted side effects. As Bill Gurley of Benchmark Capital in Silicon Valley put it on his blog, "If American citizens were truly appalled with John Thain's bathroom and the GM executive's private plane, then they should find plenty to abhor in the well-compensated VC community." Congress would no doubt hold hearings on the "obscene profits" earned by the founders of the next Google.

If policy makers want to help entrepreneurs and their investors, there's no mystery about what's needed. Immigration needs to be reopened. Venture capital is still available, but the U.S. is now a laggard in the other half of the equation, which is making sure the entrepreneur's sweat, energy and risk-taking can ultimately pay off. Sarbanes-Oxley helped kill the market for public offerings, which had been a lucrative step for successful start-ups. Income taxes are going up, not down.

And the U.S. capital gains tax rate of 15% contrasts with the 0% rate in Hong Kong, Singapore and even Germany, where there's an understanding that these investments are made with income that's already been taxed once.

This no-bailout-please episode is a wider reminder about the downside of Washington picking winners and losers. Government spending almost always distorts markets. John Maynard Keynes included among his prescriptions a do-no-harm fiscal stimulus of simply paying people to dig and then fill in ditches. Venture capitalists have now reminded us that throwing taxpayer money at an industry is more likely to be a kiss of death than to transform frogs into princes.

Innovations supported by venture capital in technology, health care, education and other promising but risky industries are at the heart of our economy, too important to be dictated by nonmarket forces. Other industries now lobbying for their own bailouts should weigh more carefully the risks that come with taxpayer involvement. The lesson of accepting government involvement often is something ventured, nothing gained.

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