I wrote a quick blog post awhile back after Thomas Friedman’s op-ed in the Wall St. Journal. Mr. Friedman essentially said that if government really wanted to spur innovation and progress, that we (the royal “we”) should be emulating the venture capital model of a small group of knowledgeable investors making strategic equity investments in promising new start-ups that are executing on innovative and disruptive ideas. I still like the line of thinking. I’m not passing judgment on the how or who, I just like the idea.
Today in the PEHub daily newsletter, Dan Primack takes a swing at a Federally backed VC fund-of-funds. Take a minute to read the article (and the flow chart).
This is where I get sideways with the VC + Government idea. My experience with the prior wave of SBA-backed VC funds is nearly universally bad. To me, this was a way for fledgling VCs that couldn’t raise institutional capital, to lever up their individual investors commitments and get them a “big boy” fund. This is bad on several levels and in nearly all cases I’m familiar with produced a flop for the individuals, the government, and the companies.
Mainly, I think the bar that VCs have to hurdle in order to raise an institutional fund is there for a reason. It separates the wheat from the chaff in a way that no other model currently does. It forces the team to have certain performance characteristics, have a sound strategy, and it gets them the kind of commitment that doesn’t balk when markets fluctuate as the always do. Its a basic check and balance to ensure that only the best survive and that the rewards accrue to the consistent top performers. Isn’t that what operating and executing in the high-velocity world of venture capital and disruptive innovation is all about?
The creation of a Federal fund-of-funds will obviously push a whole bunch of capital flows into alternative investments. This will result in a spike of investment and startup activity some of which will be good – and of course some of which will be bad. The rule of unintended consequences suggests that most of this will flow to mediocre VCs and mediocre startups while at the same time hamstringing the companies and investment firms that truly have innovative and disruptive ideas. A classic example of where the ideals and reality part ways.