Start-Up America – Will Execution Match the Vision? Let’s hope so.

In response to this research and possibly to the polls which suggest that job creation is issue #1 among voters, the Obama administration announced the roll-out of “Start-up America” yesterday with much fanfare.  Steve Case of AOL fame and Carl Schramm of Kaufman Institute will be leading this program.  There is some suggestion that significant dollars will flow toward innovation and that there may even be dollars available to match private investment dollars in start-ups.  So far though, it appears that the announcement precedes much of the detail.   A visit to the website of the program provides little detail as to what is being planned or how the program will roll-out.

Structured appropriately, Start-up America could have a real impact on innovation and job creation in the short and long term.  Structured poorly, the program could set an already shaky venture capital industry back a decade.   Some of the things that I hope the administration and the new program leadership keep in mind:

• Remember all the lessons of the SBA and the SBA-sponsored venture funds.  Debt may be a bad instrument for funds.  It creates a different risk profile for limited partners and does not give the government upside.   Also – the structure of SBA debt, then LP capital, then GP carry created a “swing for the fences” mindset for SBA-backed venture investors and drove billions in capital losses for the SBA and the demise of many SBA funds.
• Stage and capital purpose is important.   Capital needs to be deployed in critical gap areas.   Early business formation around pure academic research.   Many small seed capital deployments at the proof of concept stage.  Initiatives which drive re-commercialization of urban areas.   The secret is not to place capital at stages where it competes with private capital with the net result is to drive up valuations on a limited number of good deals.   The capital should e deployed at stages where business formation occurs and thus more good businesses are spawned which is also where risks are high and a funding gap exists.  Private capital will emerge to fund high quality start-ups once concepts have been commercialized.
• If the program involves providing capital to existing funds, it must be incremental versus windfall and must be distributed based on track record.   Funds should be required to match at least 2:1 to ensure that private investors have endorsed the track record of the investors.  Make sure the market determines investor quality.   This will also make sure that too much capital does not flood markets driving  poor investments, high valuations, and bad overall outcomes for private investors and public capital
• Don’t reinvent the wheel.  States have successfully innovated off and on for years and many of these innovations have been successful.  Despite cutbacks in funding, the Ben Franklin program and the CFA program in Pennsylvania are great examples of direct state seed funding programs (Ben Franklin) and venture fund augmentation programs (CFA).  Other states have also had successful programs which should be studied and the best practices applied
• Make returns matter.  A federal program which throws dollars at a market without a focus on return will imbalance a market and damage the ability of the market to attract private capital.   A federal program that selects funds based on track record, which shares in returns and which reinvests these returns will align with the current private capital in this sector.  Making returns matter will also have the impact of making these programs, at a minimum, self funded over time and possibly will drive increased capital over time without a budget burden.

Two early signs that this Start-up America program may be well conceived is the involvement of Kaufman – a true advocate of the entrepreneur as well as the early and growing involvement by tech corporations, many of which got their start as venture funded entrepreneurial businesses and whose involvement in the program includes meaningful financial commitments to support entrepreneurs.   If great ideas and great entrepreneurs get the bulk of the dollars and focus of Start-up America, then capital to support later stages of growth will follow.  Successfully run, this program is a bet on the American entrepreneur and the spirit which has driven success in this country since it was founded.  Poorly run, this is another government subsidy crowding out private dollars in the early stage venture sectors.   Let’s hope that the early signs are on target with where this program is headed.   Done right, this program will be good for entrepreneurs, good for the venture industry, and good for job creation.

Of course, the next initiative – Retrain America – will be required to supply the people qualified to work at the jobs created should Start-up America be successful.