A VC - Latest Comments in A Stimulus Plan For Venture Capital? No Thanks.

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Thu, 26 Feb 2009 20:53:21 -0000

agreed

Re: A Stimulus Plan For Venture Capital? No Thanks.

Jeff Wetherbee — Thu, 26 Feb 2009 12:02:02 -0000

Tom Friedman's thesis is correct. I disagree as to whom should get the money. I think it should go to the seed or early stage investors. The big VCs like to wait until the later or mezzanine stage which really doesn't help the new technologies off the ground. There is sufficient empirical evidence to support this
idea. Let's put some heavies in Washington to put some weight behind this idea. There are so many great ideas out there now which can't get funding to move forward. Even in alternative energy.

Re: A Stimulus Plan For Venture Capital? No Thanks.

Rick — Thu, 26 Feb 2009 10:55:37 -0000

Guest post: Medical device entrepreneur argues for feds to play venture capitalist
February 25th, 2009 by David E. Williams of the Health business blog

Rick Lifsitz is a serial entrepreneur. Over the past 15 years he’s helped build three companies from the ground up. He’s directly responsible for the creation of hundreds of jobs and many millions of dollars in shareholder value. His latest venture, HyperMed, provides imaging technology that addresses vascular medicine’s most vexing problems. The technology reduces costs and improves patients’ quality of life. Yet the squeeze on venture funding is forcing HyperMed to put on the brakes right at the time that it should be ramping up spending and employment.

Rick echoes Thomas Friedman’s argument that the federal government should consider providing venture funding to companies like his. I’ve posted his thoughts below.

In a New York Times Op-Ed (Start Up the Risk-Takers), Thomas Friedman calls for investing stimulus money in fast-growing startup companies with bright futures rather than funneling ever increasing sums to preserve old-line industries. He highlights an issue that I believe has gone unaddressed by the Obama Administration and could have long-term negative repercussions on the growth of medical device startup companies such as my company, HyperMed.

The stimulus bill creates positive incentives for small businesses, but medical device and other capital-intensive startup companies won’t benefit. Most startups that are developing revolutionary technology are cash intensive in the first three to four years. Tax incentives mean nothing as these companies make no profits during the development phase. Yet, it is precisely during this time that startup companies are hiring extensively, innovating, investing in capital and developing their patent portfolios to build long-term advantage. Regrettably, the traditional mechanism to fuel this growth - the venture capital industry – is “broken” due to a lack of investment from its largest patrons – pension funds and university endowments.

As a serial entrepreneur on his fourth startup business, the current economic climate is unlike any I’ve experienced. Rather than investing in new companies that could stimulate job growth and revolutionize the country’s position in health care, current venture capitalists are battening down the hatches, pushing companies to reduce headcount and spending and shutting down companies that will require significant investment to become cash flow positive.
Some of this activity is probably warranted but it is the death knell for innovative companies that will dramatically alter the landscape of many industries critical to the future competitiveness of the United States.

If our government is serious about its intent to change the health care system, it needs to do more than just invest in electronic medical records. It needs to provide investment dollars to startup medical device companies that can help in disease prevention and ensure that existing, expensive treatments are cost effective. As Mr. Friedman points out, with the current venture capital markets in turmoil, the government needs to offer investment capital to startups.

I disagree with Mr. Friedman that the distribution mechanism for this should be venture capital firms, but I do believe that a small group of successful entrepreneurs should be put in charge of reviewing plans and making direct investments in firms that will further the country’s strategic imperatives. Entrepreneurs have a far better sense of the critical success factors for startup companies and won’t be biased by the conventional wisdom/constraints of venture capitalists. (In fact, it is to the advantage of today’s venture capitalists to constrict the dollars flowing into venture capital in order to maximize their returns on existing investments). Whatever the distribution mechanism, however, time is of the essence. Many startup firms have already cut critical staff and many are running on fumes. The human capital will take years to reassemble for many of these companies, leading to delays in innovation.

I know this from personal experience. In the last two weeks, our firm, HyperMed, Inc. has had to slow its growth strategy and cut critical programs. We’ve developed a non-invasive imaging technology to provide early diagnosis of limb-threatening diseases in diabetics and those with peripheral vascular disease before they result in amputation. Annual health care spending on patients with diabetes and peripheral vascular disease exceeds $120 billion in the United States. While we aren’t curing diabetes or peripheral vascular disease with our technology, we are enabling physicians to intervene earlier in the treatment of these patients, reducing the overall cost to the health care system and improving the quality of life for potentially hundreds of millions of patients afflicted by these diseases. In addition to the physical and emotional toll, one below the knee amputation costs over $40,000 to Medicare or the insurer and then adds another $300,000 in long-term care costs.

While private investors make a good return by investing in our company, the Government (Medicare) gets an even higher return through cost avoidance.

The technology has already shown promise in other important areas of medicine such as re-sectional breast cancer, shock, and diabetic foot ulcers and pressure ulcers.

Just as the development of widely accepted cholesterol measurements enabled the growth of highly effective statin medications, our technology is already being used as a benchmark to judge the efficacy of new drug and device therapies to treat the root causes of these diseases. This could lead to an entirely new set of therapies that would dramatically reduce the cost of treating the large and growing population of diabetics and vascular disease patients.
Our company is only one of thousands that can provide outstanding economic returns to the government and significant cost reductions in today’s health care spending. If properly funded, we will also double our employee base each year – providing well paying jobs with full health care benefits.

The future of job growth and revolutionary technologies lies with startup companies. The sooner we can get back to focusing on the opportunity at hand and not fighting for a piece of the shrinking and elusive venture capital pie, the sooner America can begin to pull itself out of this recession.

At HyperMed, we welcome a public-private partnership that properly allocates the true benefits of our technology. We are more than happy to provide the government with an equity stake in the company on the same terms as any other investor.

Richard A. Lifsitz
Chief Operating Officer
HyperMed, Inc.

Re: A Stimulus Plan For Venture Capital? No Thanks.

David Bloom — Wed, 25 Feb 2009 18:52:53 -0000

Give that money to the SBA. They have rigorous programs in place that have plenty of transparency and accountability built-in. The money would flow quickly from the SBA to banks and then to small businesses who can deploy capital fast- the very definition of shovel ready. Any bank that doesn't lend their quota would be suspended from the SBA program, but most would jump at the chance to add government-backed loans to their balance sheet. With $100k SBA loan my small company would hire a out-of-work developer and an interactive marketing agency. That's at least one person- probably more- paying taxes instead of receiving unemployment.

Re: A Stimulus Plan For Venture Capital? No Thanks.

markslater — Wed, 25 Feb 2009 12:18:50 -0000

whoa - big news! buried deep in the disqussion

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Wed, 25 Feb 2009 11:55:29 -0000

Me either

Re: A Stimulus Plan For Venture Capital? No Thanks.

Greg — Wed, 25 Feb 2009 11:52:04 -0000

Fred, keep in mind that this was a political speech designed to boost the confidence of the American people (and markets).

As an aside, I was at the gym during the speech (Crunch in NYC near Union Square) and almost everyone on a cardio device - regardless of age - was watching. People are scared.

Keep the great blogging up. I never fail to learn something.

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Wed, 25 Feb 2009 11:20:18 -0000

That may be happening with twitter

I am not entirely joking

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Wed, 25 Feb 2009 11:08:23 -0000

I am hoping we don't get to the last commenter. If we do, then I'm done too.

Intellectually the tax spending thing is hard to resist

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Wed, 25 Feb 2009 11:07:30 -0000

Ted - you are so right about all of this. Clear, succinct, and right on. Thanks for stopping by and sharing this.

I'd be curious what you thought of the President's speech last night

Here's what I thought

http://www.avc.com/a_vc/200...

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 20:47:15 -0000

That's a great line

I'm so stealing it from you at some point

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 20:41:16 -0000

Yes, but in addition to money, these "gap" deals need entrepreneurial
management talent and that's harder to come up with than money sometimes

Re: A Stimulus Plan For Venture Capital? No Thanks.

markslater — Tue, 24 Feb 2009 13:19:49 -0000

JLM - Primack covered that some time back if i understand your comment - i think OHIO went through the ringer.

Re: A Stimulus Plan For Venture Capital? No Thanks.

markslater — Tue, 24 Feb 2009 13:16:50 -0000

when are we going to see a business model built out in the open? your seeing other parts of what used to be behind a company's walls coming out (see boxee effort and wiki on the Hulu situation)

there is a great story (i think i read it from Dave Winer about 5,000 people collectively landing a plane based upon averages - if he reads this he might link to it (sorry i haven't) - question being - how far away are we from 'crowdsourcing' a business model? the reason i ask this is that i was in a discussion around an amazing idea, that i think would fit perfectly with this approach.

Re: A Stimulus Plan For Venture Capital? No Thanks.

jakemintz — Tue, 24 Feb 2009 12:58:24 -0000

I think we half agree and half disagree. I think the economics of many of these technologies make enough sense over time that an investment in accelerating their development (creating demand now) will pay a large return in the long run. Regardless, that is not really the point I was trying to make.

Our federal and state governments have decided it wants more renewable energy, it is helping the industry through programs like tax credits and renewable portfolio standards. One of the things Friedman wants with $20B to 20 VCs is to better support this industry. My argument is that there are a lot of things the government can and should do to stimulate clean tech before directly investing in clean tech companies. Many of the actions I would like to see do no more than level the playing field with traditional energy sources or remove unnecessary uncertainty. Two examples:

First, let's look at the production tax credit for wind which is a federal program to subsidize a wind farm once it is up and running (production). The problem is that for the entire history of the program (including now) the tax credit only lasts two years and is often not renewed right away. Many people believe this tax credit is doing more harm than good because there are many wind farms that are economical today without the tax credit that wait around until the tax credit is renewed to be built. The ones that do rely on it have to scramble to fit in the two year window. The uncertainty this program creates is unnecessary. It should either be made long term or taken away so it can be modeled in financial plans. Here is an example you will probably like because it shows the government is spending money on a program that may be less effective than no program at all.

Let's look at geothermal energy for another example. There are gigawatts of installed geothermal around the world that prove it as a reliable source of energy and suggest what the technolog will cost at utility scale. Based on these installations experts believe that there are locations in the world that have such easily accessible heat resources that power could be generated for less than the cost of generating coal. The problem is that since the amount of capital sourced for this industry pales in comparison to that of coal, bankers don't understand it as well as thus the cost of capital is much much higher. This creates a catch-22 where geothermal could compete with the cost of coal at a large scale and similar costs of capital, but it can't get that cost of capital until it has proven that it can compete with coal. My suggestion was that if this serves the greater good (and creates jobs) I would rather see the stimulus be to give a federal guarantee to the loans and reduce the cost of capital so geothermal can be proven as a low-cost renewable source of energy. Yes, there is still risk, but there are a lot of smart projects that have a reasonable chance of success but compete on a very uneven playing field.

Re: A Stimulus Plan For Venture Capital? No Thanks.

dremoran — Tue, 24 Feb 2009 12:01:21 -0000

Below are some of the reasons for pushback to Friedman's post, along with my humble two cents countering each:

1) The venture capital industry does not need a bailout, especially the top 20 firms.

* True. But Friedman’s post is not about bailing out VCs. It’s about the wisest allocation of $20 billion. The only statement he makes that could potentially be misinterpreted as a suggestion the VC industry needs a bailout is regarding LPs having trouble keeping their funding commitments. This is a well-known fact and does not suggest the VC industry is in dire need of a bailout.

2) The top 20 firms don’t need help raising money.

* Usually true. But that doesn’t matter. I don’t need help opening a door but I do appreciate when someone holds a door open for me.

3) There is already a glut of capital in the VC system.

* Perhaps true over the entire industry, but not necessarily at the top. Several prominent firms are raising annex funds or are concerned about their levels of dry powder. Kleiner, Bain Capital, Onset and Battery are just a few of the firms that fit this description (though it is a seed fund, First Round is also raising an annex fund). Admittedly, the $20 billion Friedman writes about is a large amount for the VC world, given the average amount raised annually by the industry over the past four years is $30 billion. However, Friedman used this number because that is the latest amount under consideration for GM and Chrysler.

4) Government money would lead to reckless investing.

* No way. The best VC firms enjoy that reputation because they invest judiciously in companies that exhibit strong upside potential. These VC firms then nurture these companies with industry connections and a Board presence. I cannot imagine Sequoia making imprudent investments just because it received a large injection of investable capital. These firms aren’t the nouveau riche types. They’re not like hip-hop stars who blow all their money on cars and yachts the first chance they get.

5) Government money would have lots of strings attached.

* Possibly. Given the restrictions placed on banks receiving TARP money, this is a safe assumption. Yet it is not certain. Besides, LPs invest in a VC fund under the premise that the partners will invest that money within parameters defined in the fund’s charter. These parameters can be broad or specific, and there are always exceptions, but general partners are accustomed to considering the charter before making an investment. Furthermore, from an administrative perspective, it is much easier to have a small number of LPs in a fund. Having the government as a fund’s sole LP would be far easier to manage than a roster of hundreds of LPs ranging from institutions to wealthy individuals.

In conclusion, Tom Friedman made a statement that speaks highly of the venture capital model and the role venture capitalists play in driving the country forward. As a taxpayer I would be delighted to be an LP in the country’s best venture capital funds, including USV. ;)

Re: A Stimulus Plan For Venture Capital? No Thanks.

sigmaalgebra — Tue, 24 Feb 2009 07:07:53 -0000

Brad Feld wrote that Fred's post was great but that the many comments were still better: He has a point; this is an exceptionally well informed and articulate list of commenters.

For 'stimulus' there is potentially a big problem: The US and/or much of the rest of the world might go into a second Great Depression with another rise of some aggressive, authoritarian, militarism like Fascism, maybe in Eastern Europe, start WWIII, lead to total nuclear war, and kill a few billion people, or maybe everyone. That would be some SERIOUS 'global warming'. The situation is DANGEROUS. This time until we actually get at least the US economy solidly on the way back up, we are at a significant risk of losing it, ALL of it.

From 1929 until people started serious shooting in 1939, for the whole 10 years, the US and the rest of the industrialized world kept making silly, optimistic statements about "just around the corner" when even Betty Boop cartoons explained the answer: Spend MONEY, LOTS of money, NOW. Or, for a second grade answer, a lot of money was destroyed and needed to be replaced. Or, for a third grade answer, in a credit economy, deflation is a disaster. So, once the shooting started, we did spend money and got the US economy going again in, supposedly, just a few months.

If we had done something similar in 1929, then we could have saved the pains of the Great Depression and some of the horrendous problems we are STILL suffering with: The 1930's caused some nearly humanly intolerable stresses in the US 'social capital'. E.g., my mother was just terrified about money every moment of her life. My wife's mother was even more stressed out, passed the stress down to her three daughters whose lives were SERIOUSLY affected. The fears ended up fatal for my wife. Depression, economic and clinical, is SERIOUS stuff.

Many people are being seriously hurt NOW. Just from the example of what happened in Michigan in the early 1980's, we can be sure that the current stresses will result in much higher rates of infant mortality, abortion, domestic violence, divorce, alcoholism, clinical depression, crime, and suicide. Yes, our failures are killing babies and wrecking families.

We got out of the last depression by suddenly spending money for military equipment that was nearly all worthless in just five years. Lesson: It's possible to get out of a depression by spending money on projects with no lasting value at all.

So, the money doesn't have to go for really good purposes. It's sufficient just to SPEND it. Or, "Depression is the easiest problem in the world to solve: Just spend money.".

Besides, even if the first place a dollar gets spent is nonsense like a $1 M office MAKEover, the carpenter, truck driver, electrician, etc. that get the money spend it in their usual places, about as efficiently as we can expect.

"But, but, but, if we just spend money, then that will be inflationary?" Not NOW. The idea is to stop DEFLATION, which is DANGEROUS.

I'm all for finding good uses for the money, but so far likely so much time has already gone by, say, since the bankruptcy of Lehman on September 15, 2008, as we argue about just how much for just what, that we have taken longer to do the turnaround than we did motivated by the shooting in 1939. We can, we SHOULD, get the turnaround FASTER. Or, should we prefer some more shooting?

One recipe is for Bernanke just to print up $1 T or so, load it onto Air Force One, fly across the country, and SCATTER it. My recipe is to scatter, say, $400 B a month each month until the new unemployment claims fall back to where they were, say, two years ago. Better uses? Okay, but we have to get it DONE, real soon, now, y'hear?

Yes, education and research are valuable, perhaps in the long term among the most valuable. Yet, these two connect from poorly down to not at all with information technology venture capital! I.e., do some good original research in, say, computer science that gets a powerful, valuable, new solution to an important problem in, say, larger server farms and networks, and the venture capital people will pass it off as a 'science project'. Or, nearly no one in the venture community will fund or even consider research results, and research itself they won't fund at all. It's incongruous that the venture community will praise education and research but ignore or even laugh at the results.

Sure, it's possible eventually to see that research can be taken seriously in the biomedical part of venture capital but not the information technology part. Then can guess that the venture community understands Markov and that in information technology the research and the business success are conditionally independent given some running prototype software, some founders with good business experience, and some happy alpha level customers. So, let's be more clear: What's valuable is not education or research but prototype software, team experience, and alpha level customers, and that has some congruity.

For Friedman, long ago I concluded that he just writes stuff but doesn't support his points at all well, not even up to common high school term paper writing standards, and should be ignored. Maybe people who agree with him find him comforting.

But giving money to entrepreneurs SHOULD be more productive than just scattering it out of an airplane.

Another point: How can venture capital have enough money for the whole country when venture capital is highly concentrated in just Silicon Valley and Boston with honorable mention for Seattle, Los Angeles, Boulder, Chicago, New York City, DC, and Austin and where mostly venture partners want to be within a 1 hour drive from their entrepreneurs? There are graduate schools, software experts, and Internet access close to nearly every town of the country.

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:43:12 -0000

I've got a lot of stories. I should blog them more

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:41:10 -0000

Yup, we are in total agreement on this

Spend it on the raw material for VC, instead of VC proper

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:37:09 -0000

That's my take as well, funny line about the "turn bubbling up"

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:35:10 -0000

So true

I am working on mine right now in anticipation!

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:33:12 -0000

We need a secondary market for private company shares

That's the only way we are going to eliminate the early exit that destroys
value for everyone

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:31:09 -0000

Great points

Being an angel is at some level a labor of love

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:30:10 -0000

We have language in our docs that protects our portfolio companies from FOIA
requests

We are fine with our performance being "outed"

As it should be

We need more transparency in this world

But our companies don't need their details being outed just yet

Re: A Stimulus Plan For Venture Capital? No Thanks.

fredwilson — Tue, 24 Feb 2009 06:26:10 -0000

Yup, UTIMCO

I have not been following the bonus controversy

But I can tell you that they are very smart and decent people over there