October 25, 2014

Puh-lease, No Bailout for the VC Industry

No bailout for venture capitalistsTwo weeks ago, while talking with a friend who has a venture-backed business that is having trouble getting another round of funding, he jokingly suggested “maybe the government will bail out the VCs.”

Little did I know that others are apparently thinking this way — and that we’d start seeing trial balloons floated for bailing out venture capitalists. 

In yesterday’s New York Times, Thomas Friedman suggests giving $20 Billion to venture capitalists

Bailing out venture capitalists is a dumb idea.

That’s all we need — our hard-earned money as small business owners and taxpayers going to subsidize the investment returns of venture capitalists.  Because in the end, we have to remember that VCs are in it for an investment return.

Fortunately, one of the smartest VCs around, Fred Wilson, says “No thanks” to public money.  Basically, what he says is that only losers will want public money:

“So Tom’s idea, while it looks good on paper, is a dream. The top venture firms don’t want, don’t need, and are never going to take government money. The same is true of the top entrepreneurs.

The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the “innovation sector”. That money will go to bad investors and weak entrepreneurs and management teams for the most part. It’s a problem of adverse selection. ” 

But Rex Hammock makes the best point, by offering:

” … a note of reality to the perception that “investing in innovation” is what venture capitalists do. They’re in the business of generating a high rate of return on money they invest. *** But I’m not writing here to blast VCs, but to correct the notion that companies backed by VCs are the ones that create jobs and grow the economy and solve society’s problems. ***

Here’s the reality: The job creation, innovation and economic engine of America are not the companies that are funded by the top 20 venture funds, but the 99.999% of businesses who are run by people who could never get inside the door of one of the top 20 venture firms until long after they didn’t need money from them.”

Rex couldn’t have said it better. Don’t subsidize VCs.

I’d go a step further: let’s stop bailing industries out. Period.

And let’s definitely not confuse venture-backed companies with America’s unsung heroes: the small businesses owners who:

  • don’t get venture capital, but figure out on their own how to fund their businesses by getting customers;
  • live on tight budgets while they plow their hard-earned money back into their businesses;
  • sometimes pay their employees more than they pay themselves while they grow their businesses and create the economic foundation that this country is built on.

Look, venture capitalists play a valuable role. But venture capitalists are simply irrelevant when it comes to the vast majority of small businesses and the economic engine they create. And we definitely shouldn’t be subsidizing VCs’ high investment returns with taxpayer money, especially not my taxes as a small business owner.

18 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

18 Reactions

  1. Amen. When is enough, enough?

  2. Excellent article. Yes we should stop all bailout and remove all politicians that support bailouts.

    Yes, the single most productive industry that is going to lead us out of this recession is – the small business sector.

    Governments should do anything they can to make life easier for them.

  3. I’m no big fan of the bailouts myself. Throwing money at problems doesn’t always make them go away. I’m always dumbfounded at the governments lack of real effort to support small businesses here in America – like they can’t see the big picture. If some of these industries fall . . . the way I see it – it’ll eventually open up new and better opportunities. Out with the old . . in with the new. Its time for change.

  4. I just LOVE it when you rant.

    Am I too much of a market purist when I say I’m not a fan of bailouts for anyone. Bailing out banks and Wall Street casts doubt on the overall health of any stock that’s out there — notice the dive of the market. We can’t trust what’s out there. Bailing out VC is the same thing. It will falsly support something that was a bad decision.

    We so desperately need an economic re-set. It’s painful, but we all need to see clearly where value is and is not. And we can’t do that if our economic infrastructure is falsely supported.

  5. Yes–bailing out VC’s is a dumb idea–along with so many other entities. How does getting deeper in debt (the nation) bail out our children and their children in the years to come? Accountability is the word–the trickle down effect of this “stimulus package” will be felt by all rich or poor for years to come. Time to start sharing services to help cross promote each other’s small businesses. Let me begin with HotPluto–use my service free to help promote your business via video advertising.

    …who’s next?

  6. I say as Ivana: “I just LOVE it when you rant.” ;)

    “I’d go a step further: let’s stop bailing industries out. Period.”

    I had to rant to a degree in my latest post that I had to use a sort of strong word, Politicus Shiitake. I will contact some of you regarding a specific issue that a friend of mine has been dealing for a long time. I am trying to help this individual by reaching out to people who could support his case. Please take some time and read my post by clicking on “Martin Lindeskog” Says:

    Recommending reading material: The Bailout Index by Jonathan Hoenig. http://ahkaith.notlong.com

  7. I would agree that the government needs to just stop bailing out businesses all together. The taxes that will need to follow this spending spree are going to be extremely painful to the economy and citizens of this country. Gaining political points at our expense is getting ridiculous.

    You cannot solve a DEBT crisis by going further in DEBT. It simply doesn’t make sense anywhere but in Washington D.C.

    Great common sense post.

    Jeremy
    RefocusingTechnology.com

  8. I’m simply stunned. Stunned.

    I think any VC or startup or business owner that is contemplating these handouts has to read your latest SMBCEO post and then go attend this sort of training:

    http://www.smbceo.com/2009/02/20/this-is-no-time-for-sissies-toughen-up-with-business-survival-training/

  9. I just had to tweet this, by the way. Unreal.

  10. I just got chastised by a VC buddy of mine who suggested I read the piece by Friedman and realize that he was saying let’s put $20B into startups, into new ventures, into helping jumpstart what’s right about new businesses. Guess I’ll read more before I spout off.

  11. Okay, I’ve read the NYT piece and I have to say I think his intent was good. He is suggesting we jumpstart the good things, not the bad things. Help kickstart the next Google, don’t kick a dying horse in some old company looking for survive based on a lack of innovation.

    I want to be clear — I see many of the complications of NOT helping the likes of a GM or Ford or large company. Especially ones very near and dear to our economy. But it is hard to say which ones are important to save, or more accurately, to spend on and save those jobs. Or, if we let those companies struggle and restructure while giving money to clean tech or other inventions that have the power to revolutionize our economy and our world.

  12. This bailout plans really doesn’t have ‘plans’ to stop too. I strongly agree to your sentiments Anita. You can’t just let your hard earned money — your taxes and everyone’s taxes to be spent that way. So pathetic.

  13. TJ, the problem with saying that if you give money to venture capital firms it will go to the startups is … that it all gets mixed into the pot and ultimately the VCs will cash out with high returns if the startup makes it big, and our public money has helped subsidize their returns. If the startup doesn’t make it big, then the VCs’ risk has been lessened by having public money available and the taxpayer has shouldered some of the risk.

  14. Hi Anita, I completely see your points. And I don’t disagree with you.

    But I think the idea is sound to help jumpstart the economy with more investment in the right places — but just like with the bank infusion (that could have been handled better) and likewise with any infusion into the VC community it would have to be handled smartly.

    Perhaps a better idea would be for the government to enhance its small business grants type programs perhaps alongside various loan programs.

    Mostly, I think Friedman’s point was let’s spend money on creating new companies in hot new sectors and technologies. I don’t think he was simply trying to bailout wealthy VCs as we appear to be doing in the bank bailout.

  15. I think Friedman’s point was let’s spend money on creating new companies in hot new sectors and technologies. — this is definitely what should happen TJ!

  16. @Arthur Bland
    Thanks. I agree. What sectors do you think make sense? I see Clean Tech as a huge one. Some have claimed it will be bigger than the dotcom days, but without the bust hopefully. I listened to an interview with Friedman while in Davos and it was well done.

    I see Anita’s points very clearly, too, and agree. There has to be a way to spend smarter without making it a handout for the rich to get richer. Let’s spread it around!

  17. I applaud your commitment to giving out great information. I don’t think that we as taxpayers should be bailing out any more companies. Where is our ROI on these companies that were already bailed out. There isn’t any. Many of these companies that have been bailed out have not done anything for main street.

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