The notion of getting a “bailout” has, by now, become embedded in American culture, emboldened no doubt by unprecedented federal support for troubled companies like AIG. So far the rationale has been to protect companies that are “too big to let fail.” There are some things that are “too small to let fail,” too — the young enterprises which are the entrepreneurial backbone of our economy.
As Americans, we hold our tradition of entrepreneurship dear. Decades of growth have been fueled by innovators and have spawned entirely new industries, high-value jobs and stock market gains. Yet one result of the financial crisis is that the current wave of these innovations will inevitably be slowed — or withheld from us as consumers, investors and perhaps even employees entirely — by the lack of adequate investment sources.
Many of these companies are now facing serious cash shortages and some outright failure, not for lack of entrepreneurial promise but for lack of dependable funding from venture funds. These budding enterprises are typically underwritten by venture funds that invest in young, high-potential companies and hope to see a return as the companies mature. But these funds are experiencing a capital drought of their own. Their principal investors, high-profile pension funds and endowments, are reeling from losses, markdowns and greatly diminished equity portfolios. As a result, some institutions are beginning to retrench on honoring capital calls and rethink their commitment to the investment category including venture capital.
Additionally, the lack of a viable IPO market is a difficulty. Public markets are a crucial capital source for these enterprises and an exit for the venture funds. Today, there is no viable public market access and none is likely soon.
Some inappropriate ventures will fail, but many could succeed. Those that do offer the promise of many desirable attributes — new technologies, new products and new efficiencies — all nice things to have on an accelerated timeframe in an economic downturn. There is also job creation, economic activity and perhaps an exciting story or two to breathe some life back into the IPO markets in the not-too-distant future.
I suggest that we place a few stimulus chips on the best of these young and soon-to-be cash-starved enterprises, rather than bet everything on outdated industries or new infrastructure. An agency could consider taking over venture fund commitments from legitimately cash-constrained institutions or making “side-car” investments alongside venture funds with promising investments. Meaningful taxpayer protections are not that difficult to devise, and the benefit is injecting some fiscal acceleration into this important entrepreneurial sector. Further, with the right kind of protections, a taxpayer might get a decent return on their invested tax dollar.
No jets full of entrepreneurs or venture capitalists are flying (or driving) to Washington to make the case for this particular form of stimulus. But think about it for a moment: in a few years, would we be better off with some of our tax dollars invested in a few years’ vintages of U.S. entrepreneurs, or in Detroit or a bridge?
UPDATE: PricewaterhouseCoopers reports “first-time financings dollars dropped in the fourth quarter to $1.1 billion, down 28 percent from the prior quarter, the lowest level invested since the first quarter of 2004. The number of companies receiving venture capital for the first time in the fourth quarter also dropped by 17 percent from the prior quarter to 236, the lowest number in three years.” (View Q4 / Full Year 2008 MoneyTree Report, PDF)
Photo credit: D.B. Blas