Update after jump Two weeks ago, secondary firms began introducing themselves to Jason Rottenberg, managing director of U.S. Army-affiliated venture fund OnPoint Technologies. “We’ve heard that you’re losing your funding in the 2008 budget,” the firms said. “And we might be interested in purchasing your investment portfolio.”
Rottenberg politely responded that OnPoint still has plenty of dry powder, a strong ongoing relationship with the Army and – most importantly – no intention to sell its portfolio. Then he just shook his head, and awaited further calls. “Please tell people that we’re very much still in business,” Rottenberg asked me during a phone conversation last Friday. “This rumor has gotten way out of control.”
Ok Jason, done. And I’ll do you one better, by telling folks where the rumor came from: The White House.
No, not from W himself, but from OMB director Rob Portman. During a February 5 press briefing, Portman was discussing how the proposed FY 2008 budget proposal would terminate or reduce 141 discretionary spending programs. He then had the following exchange with a reporter (bolding is mine):
Q: 141 programs, are these the same programs this year at the same level of reduction or elimination?
Portman: They’re very similar –
Q: And if not, do you have a list of what the 141 programs are for this year versus last year?
Portman: They are different. Last year it was a little higher number. But they are some of the same programs. Some are relatively small programs. There’s a new venture capital fund that was put in legislation for — I think it’s called the Red Venture Capital Fund for NASA. We don’t think the government ought to be investing in venture capital. So we propose eliminating that program, as an example.
NASA administrators were fairly stunned to hear their little program (less than $12m requested in FY2007 budget) singled out during a White House press briefing. An agency spokesman says that NASA considered the comment to be a directive, and opted not to fight for its survival. In its FY2008 budget, therefore, NASA writes: “Red Planet Capital eliminated by Administration policy and funds redirected toward higher Agency priorities.” It’s worth noting that Red Planet managing director Graham Burnette is still holding out hope for some sort of reversal, but seems a bit resigned to the notion that Red Planet will need to find a new capital source.
Over at OnPoint, however, there was less consternation. The Army had not made OnPoint dependent on annual budget allocations as NASA had done with Red Planet. Instead, it had basically received a $60 million “endowment” that was expected to run five years before needing reauthorization. Moreover, OnPoint management was permitted to reinvest any profits generated by portfolio company liquidity.
“I don’t think it’s the case that the Army would terminate future funding for us,” Rottenberg says. “Even if that were the case, it wouldn’t technically affect us for a few more years.”
Ok, but what about Portman’s statement about how the federal government should not be investing in venture capital? Rottenberg doesn’t know. Nor do I. Nor does In-Q-Tel, whose FY2008 budget was not altered. Is it possible that Portman just opted to pick on the youngest – and therefore weakest – program? Does he even know about Onpoint and In-Q-Tel? Had he cited one of them instead, would it be terminated and Red Planet would survive?
I tried repeatedly to get comment from OMB yesterday, but hearing back from federal spokespeople is like waiting for Doc Rivers to be fired. You know it will happen eventually – and feel strongly that it should have happened already – but have no influence over its actual execution. Once it does, you’ll be the first to know (well, after me).
In the meantime, secondary firms should stop calling OnPoint. Place your calls instead to Red Planet.
OMB spokesman Sean Kevelighan just got back to me. He reiterated Portman’s central thesis, by saying: “These types of mechanisms can create conflicts of interest and market distortions.” He then added: “They should only be used in exceptional situations… In-Q-Tel met that criteria.”
In other words, the Administration will overlook “conflicts of interest and market distortions” if a program is working. And by working, it means that it’s been around long enough to work. Had In-Q-Tel been launched last year, it probably would have been chopped. Had Red Planet begun five years ago, it likely would be maintained. This had nothing to do with principle – just pragmatism. Too bad Portman couldn’t have just said as much in the first place.
As for OnPoint, none of this means much – as a new Administration will be in place by the time it requires another feeding at the federal trough.