You Can’t Separate Government from Venture Capital
peHUB is hosting a cleantech event in Boston later this month, with a focus on helping investors and executives navigate Washington D.C.’s regulatory and financial landscape. We’ve got a great panel but, truth be told, one of the first cleantech VCs I reached out to turned me down flat. His brief email reply was as follows:
“Thanks, but no, not my thing, getting money from governments. Others are more expert and better at holding their noses.”
I didn’t think too much of his response at the time, except that it further confirmed libertarian sentiments that he’s expressed elsewhere. But then I (finally) got around to finishing Josh Lerner’s new book Boulevard of Broken Dreams, which focuses on the historical relationship between government, entrepreneurship and venture capital. One takeaway was that the VC – and others who think like him – are ignorant of the role that government has played in the VC industry’s formation and sustenance.
For example, Lerner writes about how the rise of Silicon Valley was largely on the back of U.S. military contracts, particularly at pioneering companies like Federal Telegraph, Magnavox, Fairchild Semiconductor and Hewlett-Packard.
Moreover, the federal SBIC program helped build the Bay Area and Route 128 ecosystems that enabled VC-backed companies – and VC firms themselves – to thrive. Finally, the Labor Department’s 1979 clarification of the “prudent man” rule enabled pension fund managers to begin investing in high-risk asset classes like venture capital (not to mention that most or today’s large VC firms receive tons of their own capital from public sources).
To be clear, Lerner’s book is not a wet kiss to Washington or state governments. He finds plenty of faults, and spends most of his time uncovering lessons that should be learned. But he also acknowledges historical realities, which conflict with the notion that venture capital’s “thing” doesn’t involve government involvement on the financial or regulatory fronts. Failing to recognize that history may lead to failing your portfolio companies and, ultimately, your investors.
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Aspect Investments said on October 14, 2009
Anyone that that thinks that the govt does not have a part to play will not be in business for very long. Im sure small VCs do not have to be that concerned with the role of the Govt, but every big deal that goes down has to be approved by the powers that be. Nothing is done without their approval. Why do you think businessmen donate so much money to political parties? Because they support their policies. Think again.
VC Michael said on October 14, 2009
While research contracts for developing DARPA-like technologies are great, that is not where the VC’s have problems. It is not primarily libertarian, we love government money when it does not try to predetermine markets. The recent broadband stimulus is a perfect example of government bringing an entire fiber-to-the-home industry to a halt for a year with a $5.2 billion promise and a botched “contest†that drew 7x the number of applications and could not be processed by the bureaucracy. This froze all spending, not just imposing a government schedule. All the key players stopped in January 2009 and are still waiting for clarity for the rest of 2009 as to where serious funds will flow: an illustration of why only 10-20% of the larger stimulus has not been spent. Central direction by bureaucrats will not work, in micro or macro economics. Politicians fear misallocation via “projection†of their own corruption, and private markets need to have funds made available freely and quickly. These have to be channeled, but they cannot be second-guessed, the “unjust enrichment†provisions alone create some of the worst suspicions and regulatory entanglements. Lines of credit for specifically allowed/subsidized purchases and salaries would be much more efficient ways to get the job done. In the early days of Silicon Valley, government put money into lots of projects with little supervision: practically capitalist in its nature, much of the early stuff was defense-inspired, and while secrets were kept, action and responsiveness was rapid and risk-friendly, almost capitalistic.
Another BIG reason to not take government funds: government ownership strings on capital purchases and a 10-year provision where you cannot sell the company without repaying your grants because there is the suspicion again of unjust enrichment … government distrusts private industry even more than capitalists are dismayed by uninformed government red tape.
Mano said on October 14, 2009
Agree with VC’s response; what HP, Honeywell, IBM and a host of others did with govt support is very different than what you are trying to promote now . . how to kiss ass
Judith Iglehart said on October 14, 2009
I agree. Let’s also remember that the Bayh-Dole Act passed in the 1980s allowed universities (with major funding since 1945 by the federal government under NIH, NSF, etc)., to retain title to the intellectual property developed on site. This bill allowed universities to patent and license on their own, and fueled the high-tech industry. So, when someone scoffs at the federal goverment, please remind him or her that the US is the envy of the world in technology transfer and that transfer was paid for by the taxpayers from basic to applied research. Without billions of dollars in funding by the federal government awarded to research universities and federal laboratories, there would be a different VC industry today. The intellectual capital in California and surrounding other major research universities fuels the VC industry. Thank you.
Johnny Keynes said on October 14, 2009
You are doing nothing more than setting up your VC as a strawman in order to preach your views to your readers. If what you published above is the entire response, your VC simply stated his preference for not getting in bed with the government. He does not say there is no role for government, he does not say there never has been a role for government. He simply expresses his preference not to take government funds. That’s certainly his right, is it not? Getting involved with the government in a significant way requires a whole set of skills, knowledge and experience that maybe this particular VC does not have and, therefore, he avoids an area he does not know very well. All firms do this to one degree or another. To call others ignorant because they don’t want to attend your event is…well…ignorant.
Dan Primack said on October 14, 2009
Johnny Keynes,
No Johnny. What he implied was that he doesn’t encourage his portfolio companies to take government funds, and that — if they want to — he won’t/can’t help out. That is doing a disservice, particularly in a cleantech sector that, in many ways, is like the IT sector fifty years ago.
To be clear: This post has nothing to do with the VC attending/not attending my event. It was about a certain libertarian strain in some investors that is at odds with their own industry’s history.
VC-Brazil.com said on October 15, 2009
In Silicon Valley in the 1970s the government needed the products/services of these companies and purchased them. While it helped to have the defense department as an additional customer, HP et al would likely have survived and even thrived without it.
What is happening in cleantech is different: without government, much of the cleantech industry could not exist. For example, the economics of alternative fuels do not (yet) work without massive subsidies or regulatory mandates. So, while I think the analogy to the Valley in the 1970s is off, any VC in cleantech that doesn’t want to be involved with government is deluded.