Federal Aid to Start-Ups Seems Likely

The following is loosely based on a very good article in today’s NYTimes

WASHINGTON — After a series of government interventions in the private markets, one seemingly more astonishing than the next, lawmakers found themselves confronted on Wednesday with the question of when and where to draw the line on future aid.

But with billions of dollars in financial backing already authorized for Wall Street, and with Election Day fast approaching, Congressional leaders seemed uninterested in denying help to large employers of Americans.

Even as lawmakers in both parties unleashed a barrage of questions about the wisdom of a government rescue for the American International Group, support seemed to be growing quickly on Capitol Hill for $532 trillion in venture capital to assist the ailing start-up industry.

The chief executives of 172,972 start-ups who have been unable to get VC funding this year met on Wednesday afternoon with House Speaker Nancy Pelosi.

When they emerged, they expressed optimism that the investments would be included as part of a budget resolution that is needed to finance government operations through the end of the year.

“The support that we got was again very encouraging,” said Bob Johnson, the chairman of eSoap, a new start-up that hopes to allow web users to wash their hands and faces online. “The conversations I have had all day on the Hill have been very encouraging, very candid, very straightforward and so as we conclude the day, I would say it was successful.”

John Swanson, the chief executive of iSorry, a prospective web service that will offer automated consoling emails to losers of web auctions offering free psychological help, was even more upbeat. “It was a great day,” he said. When a reporter asked what he might say to people who viewed the investment as a bailout, he replied in a chipper voice, “I would characterize it as an e-comfort enabler in our case.”

Ms. Pelosi sharply criticized the Bush administration on Wednesday over the $85 billion bailout of A.I.G., saying it was evidence of mismanagement by President Bush. But she expressed strong support for the start-up investments, which would be used to help the companies keep employment standards and voters happy.

“We see that as a way to rebuild and strengthen the technological base of America,” Ms. Pelosi said at a news conference in the Capitol. “It would certainly help people in the tech industry, but it’s not only about the tech industry, it’s about the tech industry, the software industry, and the start-up industry.”

She added: “We consider this a major investment in innovation.”

Republican leaders, too, said they were in favor of helping the start-ups. Vice Presidential candidate Sarah Palin said at a news conference that it was up to tech executives to convince lawmakers of the validity of their hare-brained financial projection models. “They all look like hockey sticks” he quipped. “And ya know the difference between a hockey stick and a pit bull? Lipstick.”

“It’s incumbent on them to make the case to Congress that it is a wise investment of taxpayer dollars, and I think that they are on the Hill this week making that case,” said Sen. Hillary Clinton. “The reports that I have heard from my colleagues is that they have been fairly persuasive, and that on average, 10% of companies will succeed, which is a better percentage than Obama did against me in West Virginia, and look where he is today.”

The Senate majority leader, Harry Reid of Nevada, expressed his own support for aid to the start-ups at a news conference on Wednesday morning. Mr. Reid said the investments, which would cost taxpayers $532 trillion, were needed.

“I think it’s extremely important that we try to do something,” he said. “My VC friends tell me that’s their philosophy- it’s other people’s money anyway, so let’s just try something, what the heck, we’ll still have our jobs for another couple of years. These are jobs. These are widgets (whatever those are) that we should be selling — or manufacturing in America, or whatever you do with a widget – not someplace else.”

Still, some fiscal conservatives reacted angrily to the prospect of more taxpayer money being used to prop up private companies.

“The federal government’s propensity to bail out failing companies in struggling industries ought to be troubling to all taxpayers,” said Representative Jeff Flake, Republican of Arizona. “Aside from the fiscal impact of spending money that the federal government doesn’t have, these bailouts will likely have the opposite of their intended effect.”

Mr. Flake added: “Federal bailouts may stave off short-term economic damage, but the long-term economic outlook will be much worse if the market is not allowed to make its own adjustments. While the Bush administration certainly shares blame for these bailouts, this Congress may designate itself as the ‘Bailout Congress’ if we follow through on a rumored bailout of the tech industry.”

But such skepticism was likely to be overshadowed by the huge stakes in the presidential race. Mr. McCain, the Republican nominee, had seemed cool to the idea of cash for the start ups last month, and Mr. Obama has just seemed cool in general, particularly when he started busting dance moves on national TV.

Ben Wiener is founder and managing director of Portfino Equity Advisors, a botique transaction advisory services firm focusing on middle-market companies and ventures. This post first appeared at his blog.