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February 22, 2009

Friedman Figuratively Speaking

I love Thomas Friedman.  I was first exposed to him when he was the NY Times Jerusalem bureau chief and wrote a terrific book on the Middle East, From Beirut To Jerusalem.  Since then, he's become more famous and influential in economic matters through his book, The World is Flat.

So I was perplexed and dismayed when I read his editorial in today's NY Times:  "Start Up The Risk-Takers".  In it, he suggests a silly stimulus idea - "Call up the top 20 venture capital firms in America, which are short of cash today...and make them this offer:  The US Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way."

There are numerous reasons this is a dumb and impractical idea.  Friedman threw out another dumb idea a few weeks ago in an editorial titled "The Open Door Bailout".  In this article he opines:  "I would have loved to have seen the stimulus package include a government-funded venture capital bank to help finance all the start-ups that are clearly not starting up today — in the clean-energy space they’re dying like flies — because of a lack of liquidity from traditional lending sources."

Government funds for the VC industry is simply unnecessary.  At $30 billion per year, there is no lack of VC capital being deployed in America.  The bottleneck in the VC-entrepreneurship equation isn't in the inputs of capital, it's in the outputs.  The lack of exits and the dearth of the IPO market is what needs to be fixed to open the floodgates of innovation. 

But then I thought - let's not go overboard with our criticism by taking Friedman literally.  The guy's a huge fan of global entrepreneurship (I loved it when he referred to the worthy work of the global non-profit, Endeavor, as the "best anti-poverty program of all").  His heart and priorities are in the right place.

So before folks get up in arms about "bailing out VCs", let's take Friedman's comments figuratively.  He's dead on when he points out that entrepreneurship is what is going to get us out of this mess.  The government shouldn't focus on silly notions of VC subsidies that nobody wants.  Instead, the policy agenda to foster entrepreneurship and the flow of capital to entrepreneurs is very clear.  The National Venture Capital Association (NVCA) laid it out nicely in a crisply worded memo to the Obama transition team.  Policy makers need to focus on three things:

1) Reform Sarbanes-Oxley.  We need to fix this terrible piece of legislation which has created a terrible IPO bottleneck.  If VCs can't get good companies public, they will dramatically slow down their investment pace.  In my view, this is the single largest issue in hindering American entrepreneuship.

2) Increase the number of H1-B Visas.  This was Friedman's main point, by the way, in his earlier editorial when he called for the VC bailout, so let's give him his due as he's been beating the drum on this important issue for years.  Let's allow ourselves to continue to be a talent magnet for the world's best talent.

3) Keep capital gains taxes low.  The government should look elsewhere for incremental revenue sources.  Gas taxes are smart because they have the dual benefit of reducing gas consumption (Governor Deval Patrick is appropriately pushing this forward in Massachusetts).  Increasing capital gains taxes will reduce productive capital investment and should be avoided like the plague.

So let's not slam Friedman, but instead let's harness his passionate support for innovation and entrepreneurship and, as Rahm Emanuel famously observed, not let a good crisis go to waste.

By the way, I'm now using Twitter with great enthusiasm.  You can follow me at www.twitter.com/bussgang.



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Interesting write-up. But why do you think Friedman's advice shouldn't be taken? What he stated is brilliant.

Last year, I posted a question on Linkedin wherein I referred to Obama's earlier question on Small Business. Here it is: http://tinyurl.com/d3u68x

In any case, I think you should eb careful with who and why you call someone dumb, especially when your opinion may seem very self-serving and one-sided, not to say short-sighted. And no... I don't fall in the bracket of the point of topic.

I guess you mean it well.

It's naturally American to appeal to revolutionary innovation - it's worked well in many situations in our history. But there are some situations where evolutionary re-invention is more appropriate. The VC model - fund startups/entrepreneurs and wait for the disruptive technologies - worked for the Internet/Web. But this is because another robust communications infrastructure (the public switched telephone network) existed that could support the population and serve as a base for the Internet.

But our present energy and transportation challenges are fundamentally different. They require more evolutionary systems thinking than revolutionary innovation. It's naive (and dangerous) to think we can just throw out systems that serve 300M people - no matter how inefficient and creaky they are - and hope that brilliant entrepreneurs develop magical new energy sources and means of transportation that a) work and b) immediately scale. Otherwise said, do we plan our energy future around biofuels that don't yet exist, or get down to the dirty work of making each piece of the system we have as efficient as it can be?

The John Doerrs of the world - no matter how attractive their stealth battery startups might sound - are the wrong people to dig us out of this mess. We need the Norm Augustines and Fred Smiths for this one.


Jeff - right on with your comments. We need to simplify the process of raising capital and driving the companies into the public markets. Also it should not be a penalty to have invested in venture oriented projects - capital gains should be low to stimulate this activity.

Solution for reducing Sarbanes-Oxley Regulations and capital gains taxes: use on them the ban saws that Cub Scout dads struggle with to carve wood blocks into Pinewood Derby cars!

Unlated to this insight that perhaps only Jeff will understand, The Recovery Act American Recovery and Reinvestment Act (ARRA) of 2009 that just became law has a little know provision that reduces the capital gains rates for “qualified small business stock” issued between February 17, 2009 (date of enactment) and the end of 2010!. This fits your goal of lower capital gains taxes, although like all tax law provisions is complex.

The Act increases the exclusion on the gain from sale held more than five years from 50% to 75%. This provision is under Section 1202 of the tax code, uses a 28% capital gains rate that applied when the original exclusion was adopted back in 1993. Therefore, the end result is a 7% capital gains rate for sales of this type of stock. For more details on this topic, search for QSBS on www.myStockOptions.com

Cub Scout Dad not skilled enough to use ban saw, although does know tax code.

I read your blog in no purpose,I am so interested in it.

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