Startup America…thoughts on the details

March 7, 2011

If you haven’t heard about Startup America yet, here is a link to a whitehouse whiteboard summary/pep talk.  It is great that they are focused on what really drives economic growth and jobs in the US.  Austan Goolsby is right about this being our country’s real competitive advantage (there are other countries like China and India that are coming on strong but certainly we have one of the best track records at taking innovation to market).

After watching the whiteboard summary, I do have a few thoughts about the plan and some possible pitfalls.

1.   Increase Access to Capital – Yes, but is the SBIC the right approach?   It appears that the capital will be in the form of more SBA funds for SBIC venture funds.  In the past, the SBIC structure does not seem to promote the kind of risk taking that is required to build transformative companies.  My observation is that very few SBIC funded venture funds are on the playing field right now in real venture capital.  My hypothesis is that the structure of SBICs rewards lower risk investments (much like the CAPCO funds that some states have periodically funded).  If you want to help create the next A123, Genentech, Google, my recommendation is to stipulate that this money to be invested into startups that have yet to achieve some amount of revenue and some amount of investment (and I think that these numbers should be under $1M).

One other comment, and I think the Startup America folks get this: to an entrepreneur without funding, capital seems like everything but it isn’t.  Good deals eventually raise money.  In other words, money alone does not work.

2. Reduce Regulatory Barriers – I am not sure there is really a huge issue.  For VC funded companies, regulations are rarely a problem early on. Later, if the company is really valuable, regulatory barriers are rarely an impediment.  Lots of small and large businesses complain about this but I question whether those are the businesses that grow big(ger) and impact the economy.

The exception to my comment is the FDA.  Just kidding about the link.  If you can make this part of the system work better, you will have such a large impact that you can fail on all the other initiatives.  The FDA issue is a whole blog post so I will save it except to say that it is a complex problem and I don’t necessarily agree with the complainers that seem to think we don’t need an FDA, just that we need to find a way to move things faster and have more clarity earlier.

As long as you are fixing the regulations, why not make that SBIC money easier for venture funds to get?  Maybe act like a pension fund and become an LP of venture funds that already have the right mission.

3. Mentoring  – Yes, if you have the right mentors. We have funded a number of deals out of incubators…in fact, 2/3 of our portfolio is either out of incubators or internally incubated and they all benefit from mentoring.  One caveat, please don’t assume that the Boston or Silicon Valley experts are the only mentors out there. Most of the country is not Silicon Valley or Boston and entrepreneurs that have raised tens of millions in those markets might not know how to build a capital constrained company in the the Midcontinent.  Another thing to watch out for are the professional mentor providing beltway companies that some of the agencies have used. A few years ago, I had one assigned to me after winning a Phase I SBIR … the mentor knew a lot about getting government contracts but zilch about startups.

4. Tax cuts – Two thumbs up. I have no doubt that cutting capital gains for investment into startups will stimulate investment.  My bias is to make this tax cut only apply to companies that have not raised more than some amount of cash yet (maybe $5M).  Again, reward and encourage some risk taking.  I think that VC carry should be treated the same way – lower taxation on carry for investing in real startup companies (what we would call Series A or B rounds).  Yea, I have a dog in that hunt since I am going to invest in those companies anyway and don’t really need a tax cut to do so but is sure would be nice to be recognized.

Finally, the valley of death will always be there.  It represents part of a healthy ecosystem: Darwinian selection.  The best ideas thrive and the others die and feed the survivors (with people who have learned some lessons but did not succeed the first time and ideas that turn out better the next time around).  The faster a bad plan/idea/technology fails, the sooner the team can come back with a better one.

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