New York Times columnist Thomas Friedman caught a lot of flak from VCs after he suggested in a Feb. 21 column that instead of giving General Motors and Chrysler another $20 billion, the U.S. government should instead invest those billions in the country’s top 20 venture capital firms. Most VCs threw cold water on the idea. Bill Gurley, a general partner with Benchmark Capital, blogged: “With all due respect to Mr. Friedman—and by the way I am a huge fan of ‘The World Is Flat’—this is a remarkably flawed idea. Startups and VCs simply do NOT need bailout dollars.” Jeff Bussgang, a general partner at Flybridge Capital Partners, opined on VCJ affiliate website peHUB: “There are numerous reasons this is a dumb and impractical idea.” Here now is Bart Schachter’s take on the matter.—Ed.
What’s with the Tom Friedman bashing? In 24 short hours from prime-time glorious mention of venture capital in a March Sunday’s New York Times op-ed page to opinionated humiliation at peHUB. All because he dared suggest the VC industry may have a helpful role in promoting innovation in this stimulus-craving, recession-wary economy. Over the next few weeks the VC blogosphere lit up with condemnations of Friedman’s suggestions, leading him to personally respond and share his surprise at the debate apparently taking place in the VC community.
Friedman is just a writer. He doesn’t make the rules. He just reports them. Or tries to. And yes, sometimes he can be wrong, just like when we go to the movies and some teenage geek is clicking away in a basement computer trying to save Washington from imminent destruction by a rogue former Soviet Union apparatchik. You’re cheering (at least I am) when he Alt-Tabs his way from a page full of atomic codes to a CIA computer whose password he breaks from a simulated DOS-on-MAC window. Yay, brother! Technology is saving the world, but gimmee a break! Tout le monde knows that it doesn’t actually work that way, and that most laptops would be spinning their hourglass long after the mushroom cloud would cover the lower 48.
But we don’t leave the theater fretting over the incongruence of it all. They are just scriptwriters in Hollywood whose closest contact with technology was the Craigslist search for a roommate when they first got to Tinsel Town.
Now I’m not saying that Friedman is a chintzy science fiction writer with only remote knowledge of technology or policy. As other VCs have noted with great political aplomb (“I’m a huge fan of ‘The World is Flat,’ but he’s dead wrong in every conceivable way. Let me tell you the top 30 reasons he’s so freaking wrong!”), I happen to think Friedman transforms great ideas into bite size for mass audience consumption. Along the way, his layman reporting combines an artistic license with a fluid and humorous delivery which underscores his point. This doesn’t make him wrong or intellectually flawed. It makes him good.
Take “Hot, Flat and Crowded,” Friedman’s latest bestseller which successfully blends several dozen New York Times articles into what would formerly have been a published collection of several dozen New York Times articles but now is called a book. In one poignant moment, Friedman recounts a panel he once moderated (successfully blending a previous article which reported this incident and is now delivered in a book—a brilliant study of a Creative Commons license that repurposes one’s prior work several times over), where he suggested that Al Gore should apologize, yes apologize, for predicting the global climate catastrophe. The apology, he goes on to wittily remark, would not be for sounding this urgent alert, but for underestimating the effects of the global catastrophe.
The point is that a Friedman reader understands the literary tools that a great writer or speaker use in order to effectively transmit an idea. The power of persuasion, as Napoleon is probably incorrectly credited with saying, goes to those with grand and simple ideas, not to those with complex and accurate ones.
So what did Friedman actually say?
You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners—university endowments and pension funds—are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20% of the investors’ upside and keep 80 percent for themselves.
What precisely is wrong with this statement? Nothing, actually. It turns out that if your policy goal is to provide jobs, especially those with a white-collar, no-shovel-needed variety, VC turns out to be absolutely your best vehicle. Sure you can hand out the money to defunct automakers and help them fund the cost of providing cheap Walgreens prescriptions to long-ago retired Detroit workers.
Sure you can hand out billions to banks and subsidize the bonus expense of “talent” which might otherwise jump to Madoff Investments in order to keep making payments on their Hamptons chalet. But if you really care about building next-generation innovation in industries that will form the basis of the 21st century, there is simply no better way of dispensing the money than via venture capital. Its purpose, ladies and gentlemen, is to create jobs and innovation!
It turns out that if your policy goal is to provide jobs, especially those with a white-collar, no-shovel-needed variety, VC turns out to be absolutely your best vehicle.
Yes, I know the arguments. There is no lack of venture capital. Well, certainly sitting on Sand Hill Road we think they are all having cake, but if you’re a would-be entrepreneur thinking about leaving Cisco, don’t bother. Most VC firms have stopped evaluating new investments because their existing portfolio companies are heading the way of Atlantis. Tell those entrepreneurs that “good ideas will always get funded.”
There is the over-funding argument. The VC industry is suffering, as others have postulated, because there is too much money in the system, not too little. There again most agree, as I have argued before, that a liquidity crisis is the source of our ailment—not excess capital.
Back in 1999, the last year most VCs made real money, there was a lot more excess venture capital, but the abundance of exits provided success to many and nobody was complaining. Bring back the excess capital, as long as you bring back liquidity.
The “let’s scale this back to 20 firms” approach—which interestingly enough Friedman did pick up from his VC friends in Aspen—seems to be the recurring message here. Venture capitalists, it would seem, like Detroit automakers, think reducing or eliminating competition is the best way to win. Hmmm.
This doesn’t mean there are no faults in Mr. Iraq War’s prose. Take for example this statement in the same piece:
“Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring”
A quick check at Wikipedia would show Friedman that Intel was started in 1968, a booming year almost exactly midway between the 1960-61 recession and the 1973-1974 oil-induced crisis. The “data” here are, in fact, preposterously incorrect. But even if it were true, the great-companies-get-started-in-recessions narrative is an inspiring but statistically incorrect one. The fact that Facebook started during a recession does not increase its probability of success at all. Most other companies that started at the same time have failed. But it makes a great story.
After reading the first iteration of this column on peHUB, Friedman surprised the debaters by personally weighing in. He wrote:
Dear Mr. Schachter, We have never met, but I have never, ever, read someone describing what I do and how I do it, better than you have just done. Thank you. I saw all this ridiculous bashing and said to myself: what in the world is wrong with these people? I was just using the VC community as a front for the notion that if we are going to give away $20 billion, let us funnel it as efficiently as we can to the most innovative people in our economy. As a shorthand for that, I suggested doing it through the VC community, as the most efficient conduit. Hard to believe that people involved in this would be so hostile to it. Makes no sense. Anyway, thanks for your really, really thoughtful commentary. Best wishes, Tom
Bart Schachter is a managing director with Blueprint Ventures, an investment firm that focuses on capital efficient technology startups and Corporate IP Spinouts. He may be reached at firstname.lastname@example.org.