Startups … not bailouts

You can count on Thomas Friedman to write a punchy piece. In today’s New York Times article, he advocates that startups create more high quality jobs than bailouts of big car companies or road construction projects. Makes total sense. Of course, one could get into a Keynesian argument supporting higher government spending in toto. However, fact remains, that startups are the engines that create economic growth, prosperity and net new jobs. Think Google or Sun Friedman says.

Immigrant founders + free markets = Innovation.

I spend quite a bit of time in the Boston area startup community. Whether its a 15 year old in a TYE Startup competition from TiE-Boston or a first time entrepreneur, or a serial entrepreneuer, the optimism, energy and vision seems boundless. Everyone wants to change the world. One startup or venture at a time. There is no sense of self-pity or entitlement.

Yet, the single biggest roadblock is source of quality funds. I am not talking big numbers. I am talking $50K to $500K to take a shot at starting the next innovative venture. I am talking solid business models with working technology and passionate teams.  Yet they are caught in a bind … unable to access capital at costs and dilution-levels that can continue fueling their passion.

So, here are my …

3 obvious ideas:

a. First-time venture fund: If we can have a first-time homebuyer tax credit, why not a first-time entrepreneur fund? where the government sets aside $50000 per year for 2 years for each first-time founder of a startup. not as a bailout. but as investible angel capital from the government of the usa. why not? If Techstars or Y-Combinator can do it, why not the tax-funded entity called the GOTUS? $50K is enough to feed a family in most cities, while keeping the entrepreneur hungry enough to want to start a company.

b. Tax-cut for entrepreneurs: Why not? In addition to ‘increasing G’ why not ‘cut T’? Mix the left and right here. For the same 2 years, give the entrepreneurs a deep tax cut so that there is incentive and ability to reinvest for growth. Growth that can create real jobs that in turn pay taxes. Neat, eh?

c. Startup-competition: If the GOTUS can fund primary research in leading universities, why not have a true startup competition where funding can be allocated as advocated above? Mix funding with classical financing stage gates, to ensure that even this $50K is allocated based on real outcomes. No vanilla bailouts.

Why not? If innovation means truly socially disruptive practices, and these ideas are disruptive, then so be the spirit of innovation … thoughts? Comments?

Obviously,

Sai

www.obviousideas.com

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    • Ravi Prasad
    • April 7th, 2010

    Sai,
    Great thoughts. Let me throw my thoughts on each of your points –
    a. Out of personal experience, the biggest issue with startups is uncertainty. For IT startups, most of the assets are intellectual and it becomes extremely difficult to quantify these assets. Govt’s home tax credit is for 2 reasons – 1. to improve consumer spending and increase liquidity in the market and 2. to help banks reduce their unrealized losses with increasing housing market. For entrepreneurial ventures, there are divisions within govt. like DoD, FCC grants, Small Business Investments, etc… Also if you can register yourself as a Minority, then Govt. helps you with public contracts.
    b. Startups get 100% tax cut for the first 2 years and allowance to carry forward their losses.
    c. There are tons of these in Boston and New England.

    Just as an FYI, Google got its first round of funding after it had atleast 1M hits per month on their website.

    I am sorry if I sound a little mordant, but an entrepreneur needs to prove that his/her idea is worth investing.

    • Ravi,
      Great points. I dont want the US Govt to hand out bailouts to startups. You are right, they must prove themselves and cannot expect a free lunch. Also, remember there were many established experts / companies that turned away the Google guys because they couldnt see around corners.
      Point c was recommending that the US Govt itself sponsor business case and startup competitions to help fund the next generation of ventures. There are tons of those in the New England region, which itself is a fragmentation problem.
      The government funds primary research through the NIH etc.. Say, they were to take $1M from such a budget, and fund $100K for 10 startups that are selected through a rigorous case competition, that can spur more economic growth than sinking $1M into another ‘x miles’ of re-tarred roadway. Current Small Biz grants/loans dont work for concept stage ventures. Question is, what is the alternative to *not* supporting startups?

    • Ravi Prasad
    • April 10th, 2010

    The alternative is buyouts of small businesses. It is easier to raise capital for a buyout opportunity with established revenue stream than funding a new unproven concept. Also you will not be the operations guy but more of a strategic partner. The problem is not money, but the right projects.

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