Want to Startup America, fund Mega Projects and R&D not more web apps

This riff captures my initial reactions to the recent Startup America Partnership which is actively supported by popular Venture Capitalist Brad Feld and discussed by Fred Wilson in a mostly positive light.

Many acknowledge the necessity of a basic (minimal) form of governmental regulation for the systematic efficiency of capital and property exchange, myself included. There’s a strong desire for an imperfect system to properly reward real value earned. Our financial system must be constantly monitored to deter monopolistic behavior, scams based on membership (ponzi schemes), and unfair access to timely information (insider trading) amongst other loopholes. The primary focus of financial systems is to promote healthy commerce while minimizing overhead (including when/where to apply taxes). The steady flow of capital is a strong signal of economic growth and system efficiency.

Entrepreneurship and startups historically attract capital due to returns from a different profit metric than immediate returns, namely business growth.  Angels invest their own capital while professional venture capitalists raise large funds to purchase equity in untested businesses. Business owners pursue funding because they are unable to generate enough capital on their own to meet perceived market opportunities.  Partnering with outside investors enables more focused and rapid business growth, offset by the ever present risk of failure. 

The perfect place to start for exploring the history of the venture industry are two posts crafted by Steve Blank, The Rise of Risk Capital Part 1 and Part 2. They are part of a larger series The Secret History of Silicon Valley, and for anyone interested in understanding more about the vehicles for entrepreneurship and the background of our nations innovative history, it’s a must read. Steve describes early private investing in the wake of large research initiatives (I’ll come back to those in a moment). After years of government subsidies and grants the market nearly collapsed in on itself. The types of behavior and businesses being encouraged were unsuitable to survive on their own or generate adequate returns. 

Our nation’s most successful entrepreneurs performed best with the minimally regulated support from private investors. This trend has held true for decades even while private investment groups have diverged down many branches based on fund size, market needs*, and investment philosophies^.

Government’s Greatest Gift

The most beneficial action government can take to support long term growth of startup ecosystems throughout the nation are large Research and Development projects. We can connect islands of opportunity and then get out of the way. I encourage our government leaders to fund technology breakthroughs** to open up new roads, and allow entrepreneurs to build out, connect and fill those avenues with healthy commerce. I spoke to the importance and government role in making possible mega scale projects a reality, and believe it is the best way government can contribute to economic growth and stability. 

Web apps can be breakthroughs, but they don’t require massive funding, red tape, or slow changing leadership. Lightly funded civic hackers and open data groups are showing us what lean budgets are capable of. One shining example of civic data work is the Code for America organization. I’ve enjoyed learning from a few of their screencasts demos already.

*= There are many venture markets:hardware, software, biology, web & apps

^= Investor hypotheses range from spray and pray to cultivating a handful of portfolio companies. Investor philosophies are nuanced and heavily affected by:

  • belief in team, pedigree, current company history
  • product quality
  • long term vision and salesmanship. Can company leadership sell the idea of where they are headed before they get there
  • social signals such as trust and backing by fellow investors, particularly those with specialization in the same market
  • obvious market signals like traction (sign ups, engagement), revenue and positive attention from press

**= Funding breakthroughs means embracing the true value of failure, and recognizing it’s necessity in making progress

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  • http://twitter.com/sausman Stephen Ausman

    >>>The most beneficial action government can take to support long term growth of startup ecosystems throughout the nation are large Research and Development projects.

    Unfortunately the government can’t magically create resources. The only thing the government can do is reallocate funds from one area to another which is inefficient. The most efficient form of allocating resources is the market, not central planning.
    When the market allocates resources there is a much greater chance of the resources being put to good use because they are seeking to generate a profit. In order to generate a profit people must not only want something, but find the price reasonable.

    When the government allocates funds it takes money away from entrepreneurs. More often than not what the government invests in would not be bought by citizens for how much resources they actually put into it. This is completely inefficient, as we are putting in let’s say 100,000$ to get something that is worth 10,000$ to the people using it. If this were a business, they would be operating at a huge loss and go out of business. But since it is the government they don’t go out of business and continue to misallocate resources.

    In the off chance that the government uses these resources efficiently, it is certainly not because of any magical “gift” the government has. In this case, the same exact thing could have been accomplished by entrepreneurs. In fact, entrepreneurs are incentivized to seek out these opportunities because there is profit involved.

    The only investments we need the “gift” of government to pursue are those that we get less value out of than we put into. It’s hard to argue that these are good investments.

  • http://www.victusspiritus.com/ Mark Essel

    Stephen, I appreciate your well thought reply and gave a quick response on HN just now.
    For those that visit the blog I included it here as well.

    Totally agree on the efficient market thesis, but not when it comes to big research and public works projects.

    In my post I reference an earlier short essay on mega projects (link)

    Some projects entrepreneurs can’t build unless thousands of them get together. And they have resulted in very long term benefits (for entrepreneurs and society). Hoover Dam, Panama Canal, Lunar Mission, DARPAnet are just a few ideas which entrepreneurs couldn’t possibly tackle, even massive corporate IR&D budgets can’t be risked on such endeavors.